Lincoln Electric Holdings, Inc. (LECO) Earnings Call Transcript & Summary

All right. Excellent. Thanks so much, everyone, for joining. My name is Adam Seiden. I lead the U.S. machinery and construction effort at Barclays. For this session, we're really thankful to have with us joining me on stage is Gabe Bruno, most of you know, Chief Financial Officer; as well as also someone you know Amanda Butler from the IR team is in the audience there. So the format of this session is a fireside chat between Gabe and I. We certainly do invite your participation in the event here. So if you have a question, please let us know. And also, we will potentially go into the audience response system a bit later in the session here. So those ground rules out of the way. Gabe, thanks so much for being here.

That's great to be here. Adam. Thanks for hosting.

You got it. Welcome back to Miami. So I wanted to start off just to set the scene here because you were here about a year ago.

Sure was.

And where about a year ago, the expectation was first half was going to be a bit slow. The second half could potentially pick up. Now into 2025, the first half could be a bit slow. The second half could potentially pick a bit up. And there's -- of course, there could be some macro things that could be impacting that view as well. But just curious, how is this year different than last year, essentially?

Yes. So Adam, I think that's a great point of reflection -- and I think about -- well, it may seem similar in terms of the end result in terms of our positioning on our full year assumption a lot of differences in how we look at the markets. As we came into 2024, we had significant level of quoting activity, backlog orders progressively in automation. And we look to automation to be the driver of organic growth in 2024. Well, that turned pretty quickly in the second quarter of 2024. You had the whole ICE and EV and short cycle within automation, which is about 50% of our automation business, it just changed. And so our posture changed significantly as we progress into the second quarter because of our automation footprint. And then as we came into 2024, heavy industry, I mean we started seeing some of the destocking activity, but we didn't see the full impact until progressively deep into the second quarter. And then you've seen now second half of 2024, what compression looks like for us and heavy [Audio Gap] now you see that carrying forward now into 2025. So now you look into 2025 and you think about what are the key drivers now to how we look at the business. Second half of the year, obviously easier comps. So when you think about the progression in real volumes, we think the first part of the year, we're going to have continue some pressure on volumes that will continue through the second quarter. Easier comps, give you kind of a framework of a more flattening out year-over-year type comparison. So those are dynamics that are different coming into this year. When you think about like pricing, for example, we've already taken actions. We took actions in the first quarter last year, so we know kind of what the impact is. But we also have different dynamics when you look at total sales on currency. Right? Fourth quarter, the strengthening of the U.S. dollar created a whole another dynamic for us with our U.S. and international mix of business. So we talk about that, right? You see a whole different trajectory and how we look at currency. So that's different. And then acquisitions. The acquisitions that we executed 3 acquisitions in 2024 they don't anniversary into the second quarter and into the third quarter. So we're pretty confident on what those businesses are going to contribute to top line. So that -- those are the key differences in the markets today in our performance and the drivers today versus a year ago. Similar maybe outcomes and how we were posturing, we didn't believe 2024, when we started the year outside of automation to see much growth. We're hopeful in areas like general industry that we saw January turn positive PMI, but certainly no trend. So we're hoping -- we're hopeful that new orders and industrial production, in fact, continues to expand. So those are the dynamics on how we see top line activity entering this year and different from last year.

That's helpful. And we'll certainly get back to some of those end markets and so forth. So that's the top line picture maybe pivoting a bit more towards the cost side. And a very strong year in terms of your abilities to deliver decremental margins well within expectations and certainly exceeding them, I would say, from our end. So can you maybe just take us through a bit of the cost actions that have been taken, what sort of visibility that gets you for '25 to deliver the decrementals that you've talked about to the Street? And then from -- when you think about those particular cost actions, I mean, how much of those are reflective of the cycle versus things that you would have done anyway?

Yes. So Adam, think that's key for us. So when we saw the continued compression in our business, into the third quarter, we decided to pull out our playbook, we call it right, cost savings actions. And they're always categorized into temporary and permanent. The permanent actions are those things that we -- on an ongoing basis, are thinking of how we shape our business model. So those are areas in manufacturing or distribution or organizationally that we were contemplating already and it's a function of do we accelerate actions. And you see that continuing throughout the operating model posture. So that goes without saying. But the temporary actions are where we are leveraging kind of discretionary-type spending to offset the impact of demand. And that's important for us because as we see improvement in demand, those are levers that we will reintroduce. And frankly, we really executed well in the fourth quarter. I mean we knew that'd be ramping up to achieve our objectives that we had talked about during our third quarter earnings release but we exceeded expectations. And a little bit of that is just operating in the fourth quarter with the holiday schedules and the manufacturing schedules in general. But our team just did a great job in executing on the temporary side. And now we have that posture coming into 2025. So we'll hold on to those temporary cost savings actions until we see consistent meaningful improvement in the demand profile of our business. And that kind of just offsets. When you think about the margin performance, for the fourth quarter, record OP, 18.2%. The execution of our team just did a great job. And that kind of drives us into holding the line now into 2025.

Got it. So just if I could press for a second on that. So if you think about some of the things that we talked about, the comps getting easier, the cost savings having played through this year, what prohibits decrementals being similarly below 20% in the next few quarters versus where you're thinking?

On the decremental side, we'll see ourselves into that mid- to high teens. So we're postured for that. I think that the key driver -- we talked about incrementals being in the low 20s because we do assume some level of sales growth, although modest, I appreciate that. But we'll continue to perform and manage the cost of our business to meet those objectives.

Got it. So when you think through the segments a bit, on the international side, there's been a nice improvement story for some time. As you think about -- into 2025, how should we think about the spread between the margin performance in the international business versus the Americas business?

Yes. I don't see any significant changes in the spread. Within the international part of our business, we believe we have a model that can execute within that target range at 12% to 14% but we need some volume improvement. We had a relatively strong on the margin side, fourth quarter, back within the range, but we need more consistency, and we'll continue to look to shapen the model there. On the converse side, Americas, 80% of our automation business is in the Americas segment. So when you see the kind of margin improvement within the automation business on top of our core Americas Welding business, you're going to continue to see expansion in margin as well. So Americas has been performing above the range. And the automation business has just done a great job in executing along outside our Lincoln business system. And our EBIT margins within automation were 200 basis points ahead of the prior year for the fourth quarter in a pretty challenged environment. So we're pleased with the progression. So I see that gap continuing, which is not a negative on the international side. It's just that we continue to perform and extend the performance in pockets of our business that we know we have opportunity like in automation.

Got it. So you brought up earlier as far as seeing some of those macro trends be positive at ISM PMI in January, you have the one month here. So we'll see how that plays out over the next couple of months and quarters and so forth. But are there any rules of thumb? Is there anything that you're looking for in the business to solidify that some of that improvement is sustainable in the industrial market?

Yes. So the key thing, Adam, is looking at production. When you see production, a little over half of our business is consumables in that short cycle, and that's a function of industrial production. So when you see consistency in industrial production and PMI indices that then should translate into more short-cycle activity, and you'll see that in spades and consumables and that will then translate into standard equipment and so forth in confidence and capital investment. So that's pretty key for us. We mentioned in the call that distribution within the Americas segment was down only low single digits. So that's what we're looking to. So you see consistency in the short-cycle metrics like PMI, with 1/3 of our business is tied to general industry. That's going to be a key indicator to see where growth heads.

Right. And you also mentioned earlier a bit about price and having taken those actions. So just first, to be clear, those pricing actions aren't tied to any sort of related tariff impacts that may or may not be out there. And then when you think about pricing, is that spread dispersed amongst the businesses, is that tied to one part of the business versus the other?

It will lean more so on the Americas side. These are actions that we took already this year as well as anniversary-ing some of the actions that we took at the end of the first quarter last year. So we had a pretty modest impact in 2024 on pricing. The outlier there is Harris. So about 1/3 of the Harris business is more of a formula that's driving pricing. Outside of that driven by silver and copper type pricing changes. So that's more of a mechanical adjustment every month. But in general, most of that I would say, lean more so on the Americas side, I mean, a little bit on the international side on pricing.

Got it.

You're right. It does not include any actions related to tariffs.

Got it. And we'll touch on tariffs here in a sec. But if we flip to automation and be a key part of the Lincoln story, so maybe first, if you could talk through a little bit of the performance that you saw in Q4 from automation seem like quite strong. And then ultimately, where our aspirational margins in the automation business today, given the performance that now the company has put up in what was a more challenging year relative to what expectations were?

So I'll start with the margin profile. So we're about 200, 300 basis points off our corporate average target. So we've essentially doubled the margin profile within our automation business from 2020 to 2024. And one of the key drivers there is what we talked about the Lincoln business system, where over a long period [Audio Gap] integrated them all them into a consistent platform to execute. So we've got a few hundred basis points still to go in our margin profile and it gives you a sense of the opportunity there. So we're pleased, when you look at the trajectory of our business in the year, back to your first part of the question a lot of the automation projects and execution end up being a little bit more heavier weighted in the back half of the year because it's automotive content and that versus the first half. So you'll see a flip in some of the overall revenues tied to automation fourth quarter versus first quarter. But in general, we're pleased with the execution in the fourth quarter. Our automotive component within automation was actually up mid-single digits in the fourth quarter. So that was pretty positive. We pointed to some of the longer lead time types of projects, you're starting to see some positive trends there. So we're hopeful that, that leads to a continuation of investment on the automotive capital side.

Great. So maybe on that question -- or on that point specifically, that optimism that you have on automotive and some of the model launches. How broad-based is that? Is that across different regions? Is it specific to platforms that you can see and what type of visibility? How far out does that go?

Yes. So we're mostly anchored on the North American kind of commentary on that. But one of the things that we point to is that there are 2 key dates in the automotive industry where -- this is a global type of definition on program launches. So in April of October of every year. And so if you remember back in the second quarter of last year and third quarter, we saw a significant change the booking of orders relating to EV and ICE. And we didn't see that yet in the industry metrics, but we did see it a firm in October. We kind of mentioned that on the earnings call a little bit, but -- so we have visibility now to where the industry has projected out program launches in 2025, 2026, 2027, 2028. What we saw in mid-teens declines in program launches in 2025, 2026, we saw that in spades in our business, particularly progressively second quarter towards the end of the year. So when we talk about longer lead time items, we're talking about items that are really tied to 2027 launches and that. And so as we progress throughout the year, you should see a little bit more tightening up of order activity and investment tied to 2027 launches. So still pretty contracted in 2025 and 2026, but that's current year launches, and then we should start seeing that. That's newer to our business since we acquired Fori. We acquired Fori at the end of 2022. So that gives us a new perspective of our positioning within the automotive industry. So that's a positive for us.

Yes. So people are going to have to think of said Lincoln being so short cycle, a little bit short cycle going out.

And let's keep our automation strategy.

Strategy, right. You guys touch a bit about what automation is by mix by end market. Clearly, automotive is a big spot. Maybe if you could talk a little bit about what you're seeing across in the other areas. And then you brought up Fori as well. So I'm curious what -- how much of the business has been acquired essentially? Or how that revenue pie has been acquired versus you've seen organic growth to get to that mix?

I think it's a great question. So beginning of the strategy cycle 2020, our automation business was about $400 million in sales. In 2024, were $911 million in sales. About half of that, a little more driven by acquisitions and organic growth, the difference. So this is why we believe that not only the M&A component of growth is pretty key for us and automation, but also the organic growth. We believe that automation from an organic standpoint is going to grow 2x that as core welding. This is why we're such invested into that. When you think about end markets, prior to the acquisition of Fori mean we continue to drive balanced engagement across automotive, heavy industry and general industry. And so as we're introducing more applications, more capabilities and industrial automation. We want to see that broaden out. The Fori Acquisition tilted us back into being heavier on the automotive side. So our mix in 2024 was 45% automotive. Still growth strong as you're starting to see the mix of lead times and larger scale, longer-term type projects versus some of the Tier 1 or 2, maybe shorter cycle but that anchors a broader perspective on automotive. Meanwhile, we're introducing technologies like coal bats, continue to develop our robotic cell capabilities that tie to a broader [Audio Gap] in adopting small and midsized fabricators. So you've seen us talk a lot about our Cooper software, Cobot. Those are key to furthering and adoption into general industry. So our strategic focus is to be more balanced in how we're serving end markets across general industry, have the industry in automotive.

And I guess maybe you can broaden this question now to both the conversation we're having on automation, but then across broader welding as well. And that's around your share position. So whether it's been building the automation business and touching some of that organic growth you're talking about, do you get the sense that Lincoln is displacing others that would have other potential suppliers in the industry? And then more so from the welding side, how fluid is share across whether it's the consumables or the equipment side of the business?

So for sure, we believe we're capturing market position in automation. You can just see the numbers and growth, right? So then when you look at core welding, the businesses are a little different between how ITW's position in North America versus us. This is like we like to reinforce how we've done on industrial and distribution. We kind of pointed to, we believe we're capturing pockets of market share within our relationships on distribution. Then on the ESOP side, they're heavy into gas equipment into some of the emerging markets, and we're not as penetrated in certain of those markets. But very hard to shift and talk about movement within the core 3 competitors in Welding. But we're holding our line. We see opportunities in different parts of the market. This is why it's so important for us to continue to drive innovation, technology introductions. We've had a big year in 2024 in new product introductions. In the long term, we'd like to think about 100, 200 basis points of CAGR, driven by innovation and technology. We just updated our vitality index in our deck and 50% of equipment sales in 2024 were from new product introductions over the last 5 years. So we're well positioned. We're pretty aggressive in technologies we're acquiring and building into our portfolio.

Yes. And that's a pretty good context about how Lincoln is growing in the market. One thing that I did in preparation for this, I was pulling up slides from fields like from 10 years ago to where we are today in the broader market. And a lot of the slices of the pie amongst Lincoln and your peers are very similar. Now what I don't know is that maybe there's just not enough industry data there to really get a better idea of what the picture is. But just general, if you look out there, are you seeing share changes amongst the broader competitive set? And then also just within the -- on the regional side, like who are these regional competitor serving as opposed to the ITW's and the ESOP, et cetera?

Yes. So you go back 10 years, that's an interesting time because 2015, '16, you'll see it in our investor communications that we were pruning different parts of the markets where we didn't see our value proposition being appropriately served. So we've contracted in whether some of the emerging markets, we had acquired Air Liquide Welding, if you remember, we pruned some of that part of the business, where we're just the margin profile was not in line to where our long-term strategic objectives are. So we went through those dynamics. That's behind us now. And we're looking to continuing to deploy application technologies that are going to drive growth, and that's continuing to drive innovation that's going to differentiate our offering quality or productivity for the welding type of user. So but it's very much focused on key end markets that we're serving to drive productivity into welding experience. And to simplify, like in the automation discussion we just had, simplify the adoption on technologies that could be meaningful to deal with the labor constraints that are in the market. So those are dynamics that all of our competitors are facing. Regional players are more product specific so while we're talking about a broad welding application timing in a consumable and power source and automation together into an offering, the regional players may be just speaking to equipment or consumable or an automation, maybe as an integrator on the automation side. So you're talking more holistic presence in how we approach the markets.

Got it. So we talked a bit about some of the margin improvement that you've seen across the broader business. And from your higher standard, your 2025 strategy, certainly, you've made a lot of progress in reaching those targets. So just when you think about -- when you think about sales versus the profits on the sales side, I think Lincoln does something that you don't see on a lot of companies is they don't give themselves full credit for price. And I think that's admirable. So just given that there's been some inflationary price that's benefited folks some not necessarily structural. So that's the sales side. You guys are showing up already for us. Maybe if we think a little bit more about from the margin side, how much of that margin improvement would you say has been driven by various different buckets, price volume, M&A, whatever it may be?

Yes. So you're right, Adam. So I would take pricing out of the discussion because we just want to make sure that the margin trajectory of our business isn't impacted by the cost pricing dynamics we have there. So the big drivers when you think about the 200 basis point improvement that we've made, think about business process capabilities that we've introduced. So I mentioned automation, for example. That's all about how all these acquisitions we've done, how they integrate into a single platform or leveraging the people, the facilities, the capabilities to be able to improve margin performance. That's doubling. When I talk about mid- to high single digits in 2020 to mid-teens, that's a doubling of the margin. Think about Harris. Harris, we've significantly expanded the margin profit. they're exceeding the targets that we have set for the 2025 strategy of 13% to 15% and 17% kind of trajectory is what they're on, and we continue to see areas for improvement there. International, those are all business model cost plays that we've done in shaping the business model. So the biggest outside of just traditional management of volumes and costs are the shaping of our business models across all of our segments. And then you have the dynamics of volumes. So volumes are always going to give us leverage and so we expect incrementals into that low to mid-20s as we execute on volumes. But the shaping of our business is so important for us and also identifying opportunities progressively to continue to expand our margins.

That's fair. And so opportunities to continue to expand margins. We're in 2025. I think even on this most recent call, there was mentions of 2030. So I'm sure there will come a time in a place to talk more about that, but general thoughts are the Lincoln team is happy with the strategy that they have today.

Absolutely. And we'll continue to drive similar strategies and expanding the business. The value proposition that we introduced first from a customer standpoint. With the welding technologies and the investment innovation, we have in acquisitions, M&A, inorganic types of activities to continue to grow our model. So we continue to think about how can we grow into that high single-digit, low double-digit framework, and we'll continue to think about what are the opportunities to expand the margin profile. And you've seen through each of the cycles, you go back 20 years, we've been very consistent in expanding the margins by 200 basis points plus. So that's kind of what we're anchored on. How do we continue to expand the margins. Where are the opportunities? I just shared a couple of them that we continue to see to expand and improve on the business model performance pretty well positioned for the long term.

So maybe we'll switch over here to the audience response questions for a sec? [Operator Instructions] So for the first question, it's -- do you currently own the stock? Yes, overweight, market weight, underweight or no. All right. Don't own most of the room. Next question, please. What is your general bias towards right now? Positive, negative or neutral. Start the clock. All right. A little over half is neutral almost 2/3. Next, please. In your opinion, through cycle EPS growth for Lincoln will be above peers, in line with peers or below? Start the clock. In line with peers. Next one up. In your opinion, what should Lincoln do with excess cash, bolt-on M&A, larger M&A repos, divvies, debt paydown or internal investment? Start the clock. All right. About half of them is bolt-on M&A and a little repo and internal investment. So Gabe, what do you think about that? How does that drive with some of the ambitions that Lincoln had?

Well, we have a very balanced capital allocation strategy, but we will always prioritize growth, which is one, bolt-on M&A and 6 internal investment. High-return investments always start off on the internal model we have. So we're going to be really focused on maximizing that. You've seen that we've moved that level of internal investment CapEx, $117 million this past year. We're in that $100 million, $120 million range. So we know that. And M&A, look, we have our strategies to be CAGR at 300 to 400 basis points. Our last 10 years tracking is a 3.6% CAGR through a bolt-on type acquisitions. So that's where we're focused. And then any excess strategic cash we define it, that's where share repurchases go. Our dividend rate has increased 29 years in a row, and we look at any excess strategic cash to look at share repurchases.

Excellent. All right. We'll move on to the next question, please. In your opinion, on what multiple of '25 earnings should Lincoln trade on less than 10x up to higher than 21x? Standardized ranges for the conference here. All right. Mostly in the 16, 18 count. Moving to the next one, please. What do you see is the most significant share price headwind facing Lincoln, core growth, margins, capital deployment or execution? Start the clock. All right. Core growth. That is the most resounding answer for core growth. It's 100% for those on the line. But that is not unique to Lincoln Electric. So I guess maybe just to wrap up and pass it back to you, Gabe, is just when you -- the concern of the room is core growth, but ultimately, Lincoln is able to execute and manage on the cost side. So when you look at 2025 and beyond, as we stay out in 2030. How much do you feel like it's in your control to deliver the results as a organization?

The execution is fundamental, right? And we talk about growth particularly on the automation side, there's a bit of work in navigating through the capital investment cycle, but that's execution for us to -- how do we continue to leverage the applications that we continue to build on to drive a value proposition that's going to provide the returns that our customers desire. So that's in our control. A little bit of market dynamics for sure. When you look at other aspects of end markets, and there's a bit of short cycle discussion around. We just talked about whether it was general industry or what's going on with the destocking on heavy industry. So for us, what can we control? We can control how well we introduce new technologies, how we drive applications, how we continue to drive a value proposition that's differentiated in the marketplace.

Yes. We'll certainly, you see 0 people replied on margin expansion. You've done a great job of improving our profitability. So well, if you could join me in thanking Gabe and the Lincoln team for being here. I appreciate that. Thanks so much.

Great. Thank you.