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

All right. There we go. I think we're in business now. Thanks, everyone, for joining. My name is Adam Seiden. I lead the U.S. machinery and construction effort at Barclays, and thanks for attending our 43rd Industrial Conference here in Miami. So for this presentation and fireside chat, we have with us today the folks from Lincoln Electric. So joining us is Steve Hedlund, CEO; as well as Gabe Bruno, the CFO. And we have Amanda Butler from the IR team as well out in the audience. So the format of this session, like I was just saying, is a chat between myself and the fellows to my left. We will also be taking audience response questions through the event. You could participate in that through the little phone-looking devices on your table there, and we certainly would welcome your participation here throughout. So with that, Lincoln folks, welcome back to Miami.

Great. Thanks for having us. Glad to be here.

Well, I appreciate you being here as well. And just last week, you guys had some big news. You're talking a bit about your -- the next step in your strategy. The way I look at it is a bit more of an evolution rather than a revolution, which are a lot of consistencies with what we've seen in the past. But maybe just to pass the floor to you for a second here just to talk a little bit about RISE and what it means for Lincoln Electric and how it positions you going forward?

Okay. Great place to start. And you didn't interpret it correctly. It's more of an evolution of continuing to do the things that we did that were successful for us and the higher standard strategy, trying to take that further and accelerate the growth and performance of the business. So RISE is an acronym that stands for reimagine how the work gets done, so we can drive safety, productivity and quality in our factories. I, is for innovating to differentiate us from competition. We've got a lot of really great ideas in the early part of the funnel in R&D. We got to get them through the funnel and into the market faster. S, is about serving the customers better than we are doing today and better than our competition, as a point of differentiation to help us take share in a very competitive market. And E, is really around elevating the team members. So helping each individual person, achieve their career aspirations and getting the team to work more effectively together. So that's a fairly simple acronym. We think there's a lot of potential left in the business to go to, continue to expand margins over a cycle, higher highs in good times, higher lows in challenging times and to continue to drive organic growth and to deploy capital in pursuit of accelerating that strategy through M&A. So we're really excited about it. We're launching it to all of our global employees starting next week. The early returns and the teasers of how we're rolling this out have been extremely positive. So we're really excited.

Great. And yes, higher highs, higher lows are always...

Always a good thing.

Always a good thing. So we probably could go through each letter of the acronym, but the one that I did want to touch on and go through a bit more is on the R on the reimagine side. So you described within that -- around this as being center-led, not centralized. So how does that work in practice? And would you say the -- how are the four reimagined pillars set up? Are they equal in scale and in size and impact to the business?

Yes, great question. So it's important to understand that the history of the company is we ran very decentralized autonomous regions. So folks in Europe would have their own way of doing demand forecasting, processing orders, doing supply chain planning, and the like. And they're largely similar, but just different enough so that when you go to deploy things like shared services or AI chatbots or other things to make the business more efficient, it really -- it stumbles on the fact that the data is not entirely consistent. The processes aren't consistent. So we call it center-led in the sense that there is a centralized functional expert. I'd say, in finance, which is Gabe, but IT, HR, supply chain planning, R&D and the like. They set the processes and the policies and the tools that they want their teams around the world to follow, so we can try and capture economies of scale, but we still run the individual functions more regionally tied into the business units so they can be responsive to local market and customer needs. So it's trying to get the benefit and the best of both worlds from a centralized for scale, but decentralized for flexibility and agility. And Gabe and his team have done a really nice job on the finance function, over the last 5 years and have driven about a 50 basis point as a total percent of sales, reduction in our finance costs. There are other functions that are following-on Gabe's work, particularly in IT and HR. There are ones that are more newer. So R&D and global purchasing are fairly new initiatives for us. And basically, we expect the maturation of the benefits to happen sort of evenly over the course of the 5-year planning program. So there's not an assumption that we have to do 3 years of hard work and then a miracle happens and we get a hockey stick. You ought to see a consistent layering-in, an improvement in the profitability of the business through these enterprise initiatives steadily over the 5 years.

Great. That's helpful. And if you think about one of the other legs to RISE, you guys spoke a bit about M&A. And within that growth framework, you're leaving yourself 300, 400 basis points or so, right, of M&A growth. So how should we think about that? Over the last number of years, you guys have bought a number of assets, smaller ones that added up to equal the -- quite a bit of contribution. So is it more targeted within one spot of the portfolio more on Automation? Even within that, is it more complex systems or similar systems? Just trying to get an idea of how we could think of that 300 basis points?

Yes, great question. So if you look back at the last 10 deals we've announced, I think it's pretty evenly balanced between the legacy Welding business and the Automation business. So we're looking across the breadth of the portfolio in terms of business units, the breadth of the portfolio geographically and really just looking for assets that either come in with an accretive margin structure that helps the business or a business that has a clear pathway to get to be at least margin neutral, ideally margin accretive for the business. So if we look at 2 of the last deals we did, Alloy Steel, which has a proprietary process for doing wear plate, using Lincoln electric equipment and consumables, by the way, trade secrets, very high margins in that business. So glad to have that as part of the portfolio and tremendous growth opportunities to take that technology around the world. Look at Vanair, that was a business that was a little bit margin dilutive to the company, but a really clear growth strategy and cost synergies that we could deploy to get that to be at the corporate average margins in a very quick period of time. So those are the type of things we look for, and we're looking across the breadth of the business to do that.

Great. So I guess just maybe to put a finer point on that, looking across the breadth of the business, the larger scale M&A, is that something...

Well, as the business gets bigger, right, to get 300 to 400 basis points of growth, you need to either do a lot more deals or bigger deals. And so we'll try and do both. I think it would be unlikely that you would see us do something that's truly transformative, bet the balance sheet all in one go or anything like that. But I think we are looking to do things that are slightly larger in terms of their impact to the business.

Great. So in the strategy, I think you guys referenced channel access as well. So how does that play out in the M&A strategy?

Yes. Vanair is a great example of that. So they do solutions for mobile work trucks. So all those utility vehicles you see going down the road, that repairing transmission lines or substations, almost all of them have an engine-driven welder on the back of the truck. We had a very, very small part of that business because we didn't have access to those customers. That was the primary reason for acquiring Vanair was to be able to sell Lincoln products through their channels to the customers we couldn't get to. In other places, you might see that as trying to build a position within a distribution channel. We're very fortunate we have a great position in North America. You look at other places like India or parts of South America, we're not as strong in the channel as we'd like to be. So we look for opportunities to acquire businesses that can improve our position and help pull through the full range of products that we already make.

Great. So maybe flipping a little bit from the long-term strategy to thinking about a bit today. So on this past call, my interpretation was that there was a little more enthusiasm around the volume outlook as you proceed through the year. So what are some of those key data points that Lincoln is watching to determine whether a second half inflection is durable?

Yes. So there's two elements to that. One is in the long-cycle Automation business that we have. We have the backlog that will mature in the second half of the year. So it's a lot of long-cycle projects. They're on percent-completion accounting. So as we do the work, we recognize the revenue, but the work tends to be back-end loaded in those projects. So we're fairly confident that we'll see a pickup in the Automation business from the business they've already got in hand. And then in the rest of the business, we look at PMI as a pretty good proxy for the confidence of customers to make capital investment decisions. Typically, our consumable volume grows maybe a month after you see a continued step-up in PMI. So hopefully, we've had a few head fakes in the past. Hopefully, January was not a head fake. But if we see a couple of consistent months of PMI strengthening, you should see consumables a month after that, and then you should see capital investment in standard equipment and standard automation maybe a quarter or 2 after that. So we're looking for continued improvement in PMI. We're looking for some improvement in our consumable volume, and then that will really give us the confidence that the second half growth will be there.

And just to add, so when you think about mid-single-digit sales growth, 70 basis points, we know, right? That's the acquisition. We know of pricing we put in place through the end of 2025. That's in the assumption. And then we point to, as Steve mentioned, the volume assumptions that are from real activity that we've seen in orders and backlog for Automation and are staged more in the back half of the year. So that's what gives us confidence in that overall assumption for this year. And we're cautiously optimistic. You see more continued trends on PMI and the like that points to more broader growth in short-cycle activity. But our posture initially is to provide visibility on what we do know and what we see in our business.

Okay. And of course, the portfolio is wide and best and there's a lot of different areas you participate in. So I'm just curious, if we were to exclude Automation, would the core Welding business still be expected to grow volumes in the second half?

I would assume a modest level of growth.

Got it. And then when you think about the different end markets that Lincoln is participating in, which of the five major end markets offer the most visibility today? And then one step broader maybe for Steve is, like where are you guys best positioned within those major end markets?

Yes. I would say from a visibility standpoint, you look at the places where we tend to have a greater proportion of direct sales to large end users. So that would be things like automotive. It would be things like the heavy fab, construction, ag equipment, where we just are in much deeper discussions with the decision-makers around their forward production planning than we would, say, Joe's fabrication shop, right, that we service through distribution. So a little more visibility in those segments. I think we're very confident, particularly in the Americas region and our position across all the segments. We have really great solutions, really great people delivering and supporting those solutions. That's probably one of the things that people don't fully appreciate about the Welding business is there is a lot of on-site pre- and post-sale technical support of customers. And we've got a significant advantage in the capability of our sales force to do that in the Americas region. We look internationally, it tends to be more either large end users, so the automotive, heavy fab or it tends to be project work in the industry, energy industry. That's where we see our strength outside the Americas region.

Great. And Gabe, you mentioned a second ago on pricing. So when we think about the mix of volumes and price through the year, does price go down to 0 in the second half? Or does it get back to more of that long-term average that you have over the 2030 strategy here? And how should we -- so essentially, how should we think about pricing on the other side of the volume?

So our assumptions are that the pricing reflects only actions in 2025 as we exited 2025. So if you took fourth quarter pricing, compare to that first quarter, you can start to see the anniversarying effect first quarter, second quarter, third quarter. And yes, we'll have -- on that basis, a flat-type of assumption for pricing in the back half of the year. there's no incremental pricing built into that.

Now having said that, if we see continued cost inflation in the business, we'll take pricing accordingly. We just -- as we sit today, felt like we had taken enough pricing through the end of Q5 (sic) [ Q4 ] to cover the current cost structure through 2026.

Got it. So maybe on cost, a different type of cost, but there's some pass-through in the business. So when you think about the mid-20s incremental margin framework for '26, does that include the commodity pass-through as well? Or should we be excluding that throughout just to calculate that?

So when you're referring to commodity pass-through you refer to silver and copper-type within the Harris business?

Correct, yes.

So we haven't assumed a significant level of pricing within the Harris business because it's just difficult to predict -- for anyone to predict what silver or copper will move like. But we assume that irrespective of the move there, we should be able to hold to that mid-20s type of incremental.

Great. So maybe shifting a little bit on share. I think share was brought up a bit earlier, too. So one of the things I love to do is I like looking at your investor deck and seeing the global market share pie and seeing if there's been even a small change there. It seems fairly stable. So I'm curious, when you look at it on a regional level, is that a similar event where it's stable? Or just how does market share, I guess, vary based on North America versus EMEA and APAC and so forth?

Yes. Great question, Adam. Share moves very, very slowly in our industry, right. People are generally risk averse. If it isn't broken, don't fix it. There are a lot of codes and standards that people have to comply with, so they qualify products from a particular factory, for a particular application. And what really moves share over time is, product innovation where you've got a better mousetrap that you can't get from somebody else or just out-servicing the competition, being much more reliable and predictable on supply chain performance, technical support and the like. So you don't see wide share shifts at the broad global macro level. At a regional level, you can see it with a little bit more granularity. In North America, for example, we have really, I think, adjusted or fine-tuned our go-to-market strategy. We had emphasized in a prior period a little bit more direct selling that alienated some of the distributors. They weren't too excited about that. We have really reembraced a more balanced route-to-market these days. And we're seeing the distribution channel reward us with share gains. So we get very good share data from some of the large gas distributors. We have rebate programs that are structured around the distributors have to tell us their market share data. So we feel very confident in the visibility of that data there, and we're confident that we're winning share in the North American channel. So we're very excited about that. Some other parts of the world, a little more challenging. Europe is a fairly tough market because of the industrial malaise there, the high fixed cost nature of labor in the European markets. There's a lot of competitors that are a little more willing to play the price game to try and keep their factories running. So that becomes a little bit tougher market for us. And then our visibility and share in some of the rest of the world is a little more limited, right? But overall, we feel like we're doing a great job executing the strategy and driving share gains, particularly in the most important market for us, which is North America.

Great. So maybe shifting to Automation a little bit. In those same slides, right, you give pretty good color as far as the end market mix and so forth. And what it also seems like is parts of the Automation business is becoming a bit more short-cycle. So how do those businesses compare an outlook and margin profile versus more of like the engineered and custom solutions?

Yes. So I'd say about 20% of our Automation business is short cycle. The rest has projects in duration from 6 months to 24 months at the extreme. I think the margin structure is less reflective of the short versus long cycle and more reflective of where do we have proprietary content or technology that we're integrating. So when we're integrating a welding solution with Lincoln technology, that tends to be a more attractive business for us. When we have solutions that are driven by software where we're taking a CAD file and interpreting the CAD file to automatically plan the robot, that tends to be better business for us. The pure integration where I'm buying a bunch of third-party content and I'm programming it and setting it up and installing it, that there tends to be lower barriers to entry there. The pricing tends to be a little thinner. The margins are thinner. And so as we look forward in the M&A strategy for that business, it's really trying to expand the proprietary content portion of the business. That's why we talk about [ techquisitions ], for example, like we did recently with a business in Denmark that had a Vision System for being able to look at a joint and then decide how to weld and path plan the joint, right. So we're looking for things like that where we have differentiated technology that we're deploying as part of the solution.

Yes. I had to add [ techquisition ] into my dictionary on my computer this past quarter. So if you think about automation, right, you guys have margin ambitions in that business as well. You just talked a little bit about the differences between the product level. So what are those key levers to reaching the mid-teens margin? It seems like M&A and acquiring in those areas...

Yes. I'd say the first lever has got to be volume growth, right. The business has faced a fair amount of headwinds in the last 2 years, driven in large part by the uncertainty in the economy, particularly around the ICE to EV, the hybrid transition. So we saw some pause in the capital planning cycle for automotive around that. We saw the challenge for heavy fab, having built out too much channel inventory, so they were de-stocking their distribution channel. So I think if we see a return to the previous volume levels that we had in the business, that will go a long way towards getting us towards that mid-teens target. And then secondly is by driving more proprietary content, being able to charge for that. We've got some pretty exciting solutions we're bringing to market this year using AI to help a welding robot figure out how to weld a particular joint and deal with the inherent variability that exists in a factory. I think one of the things that really goes unappreciated is how much complexity there is in a factory and how much random variation there is. And so you can get a solution that works beautifully in a lab, but you put it in a factory and it starts dealing with all the variability and it crashes, right? So it's using software to be able to handle that variability like a human would, but with a robot instead of a human. So I think it's those kind of things, the driving of technology solutions at higher margins, continuing to get some volume leverage and then being thoughtful about the M&A.

So, just to add, just to remind us that our peak sales was at $940 million back in 2023. Our EBIT profile then was in the low teens. So we have line of sight to recover and then expand the margin of the business.

Okay. So maybe we'll shift over to the audience response questions right now. So a reminder for the folks in the audience, you could contribute or participate with the gadgets on your table. One day, they'll tell me what those gadgets are called, so I could refer to them officially. All right. So question one is, do you currently own this stock? One, yes, overweight, market weight, underweight or no? It's a good year-on-year reminder that my eyes are getting worse. All right. About 2/3 of the room, no. Next question, please. What is your general bias towards the stock right now, positive, negative or neutral? Just as a reminder, the vote counts once the clock is up. All right, about 2/3 positive. Moving to the next question, please. In your opinion, through cycle EPS growth for Lincoln Electric Holdings will be, above peers, in line or below peers? Half the room, above and call it half, in line. Next question, please. In your opinion, what should Lincoln do with excess cash? Bolt-on M&A, larger M&A, repos, divvies, debt paydown, internal investment? Split about 40% on bolt-on M&A, about 1/4 of the room on larger -- no share repos and internal investment. And is there one more this year or there you go. In your opinion on what multiple of '26 earnings should Lincoln trade, various ranges from less than 10x to higher than 21x? So what's amazing about this slide is we made this, I think, back in 2016. Those ranges may need to change, guys. All right. So we're up to 6 higher than 21x, about 1/3 of the room. All right. So valuation, I think, is going to be an interesting conversation around the entire conference here. But one of the things I wanted to talk about a little bit here is on the margin range. So when you talk -- when you guys gave your view out to 2030, I guess just what drives the high and low ends of what you're thinking through? I think there was a plus or minus 150 bps view there. So what gets you to top and low end?

Well, think of the cycle, right? So starting off 2030 and 2026. So if 19% is an average, if you back off the cycle low end, 1.5 basis points, 150 basis points is, 17.5% right? So we're starting off at 17.6%, right. On the higher end, right, you have the 19% plus, 150 basis points, so that's the 20% plus. With an average of 300 basis points improvement in this cycle versus the 200 basis points in the past cycle. So it points to accelerated margin expansion with being sensitive that we manage through cycles. And while we were just exiting, kind of a down cycle and still expanding margins, we'll continue to manage our business to drive improvements in the operating model. But that just recognizes that there's a dynamic of the cycle that we have to tend to, throughout the next 5 years, but we don't know what it plays out to look like.

Fair enough. No, the range makes sense, just given volumes could be -- could vary. So then I guess, the plus/minus 150 basis points is on the FullCo. When you think about the segments, is there any variation on what that could be?

That would apply the same way, right? So as we give broad ranges for each of the segments, depending on the progression throughout the cycle. Americas may look a little different than International and Harris depending on what the mix of business is.

Fair enough. So when we're looking at the margin views, right, by segment. So Americas and Harris margins were guided materially higher than the prior view. International is a bit more flatter. So I guess what held margins back a bit on the International side that could look a bit more positive this time here?

Well, in general, the European markets, I mean, our view at this point is more pressure in the core European markets with more expansion in Asia, Middle East-type markets. So we just have a posture of just a more challenged outlook on the industrial base in the European side of things.

Europe is about 70% of the International business, right? So it is -- if Europe continues to have headwinds and challenges, it's going to affect the overall segment. So we are a little bit more conservative in the outlook for International than the other 2 segments.

And then keep in mind, Adam, that 80% of Automation is within the Americas segment. So the core business has been very strong. When you look at an acceleration of growth from an Automation standpoint, those are higher incrementals because of the fixed cost nature of that business. So that's what points to strength in Americas from both growth, but also the margin expansion.

Great. Now for the fun ones that I'm asking every company at the conference. So...

Buckle up.

Exactly. Buckle up is right. So AI, it's a new thing. So how would you guys say that AI directly impacts Lincoln, your business or as well as some of your customers and how you see that transpiring over the next couple of years?

Yes. So I think there's two broad areas. One is helping us be more efficient and productive in our own internal operations. And that will really benefit from the work we're doing and reimagine the standardization of the work because it's hard to deploy AI tools when everything is slightly different. I think the more interesting and exciting part is how we're going to leverage AI to improve the value proposition of products to our customers, right? And I think one of the big challenges that people face is not necessarily getting the work tool to the workpiece. So the humanoid robot thing, I think, doesn't really have a big impact for us. There's lots of different ways to get the tool to the workpiece today, a 6-axis robot, a lot of cobot, for example. It's what do you do when you get there, right? And how do I deal with the inherent variability in a factory environment to be able to get the output that the customer is looking for? So I think that's the part where we'll see a lot of exciting developments. I don't think it will ever get to be a truly lights-out factory where AI is deciding to do everything. But if you look at sort of parts of the production process, there are clearly areas where AI can help.

Great. And the other thematic is on lower rates. So...

Lower rates help, yes, that would be nice.

So what do lower rates mean to Lincoln Electric? Just to throw it out there.

Yes. Obviously, it makes capital investment easier for people to justify, particularly things that have a longer payback cycle, right, to them. I would say if we look at the capital equipment part of our business, it's probably more sensitive to confidence than it is to interest rates, right? Because generally, people are getting a very good ROI and their investment in standard equipment with higher productivity or automated solutions with higher productivity. And it's really just do I have the confidence in the business outlook to make that capital investment now or do I wait to see. And we've been in an elongated period where wait and see was the best answer. And if we can get to a point where there's more confidence in the future, I think you'll see an acceleration in that part of the business.

Excellent. You made it through the conference. So just to maybe wrap up here. So I guess, Steve, this -- in '26, I guess, this will be potentially your first true volume growth year.

That would be great. I've been CEO for 8 quarters. They've been 8 challenging quarters. I'm ready for an easy one.

There you go. So how does the messaging shift internally as you move into like resilience, through a cycle through maybe potentially catching some of those tailwinds?

Yes. I don't think the messaging changes a whole lot, right? A lot of the drumbeat of our organization is really focused on serving the customer, fixing the things that we know are problems in our everyday life. So a lot of the reimagine how the work gets done, is trying to make us more productive and more effective in serving our customers, but also make the life of the daily employee at Lincoln Electric better because there's a standardized way to do things and and they're able to focus more on value-added thought-based work than just paper shuffling, if you will. So continue to focus on the customer, continue to drive productivity and improvement in the business and continue to try to support each other and make the overall team more effective and less of me and more of the we, right? So I think that doesn't change very much. When we get into very difficult market conditions, then we start pulling the cost levers, a little harder. That becomes a nuance within the business, right. But I think the general drumbeat of the organization stays the same.

Excellent. Well, that's a great way to end it here. If you could all -- let's thank Lincoln Electric and really appreciate you guys being here.

Thanks for having us. Appreciate it.