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

Usually they're complete investments.

All right. Interesting. Anything happening with share in that end market?

I would say, in general, it's held. I think about the question, Steve, I think about the whole EV-ICE change-out that happened in 2024. We're agnostic as to whether you have EV or ICE or hybrid. You see more accelerated demand on the hybrid side. But we're very much agnostic in how our welding applications and the content within vehicles play out between each of those drivers. So I would look at more steadiness in the market.

Okay. And you mentioned the difference between production and capital investment. How does that breakdown for you guys?

So think about the consumable side of our business serving production, and then you've got the standard equipment and the automation serving the equipment. It's a longer cycle portion serving the automotive side versus consumables tied to production. So think about consumables overall -- it's probably a good bellwether, half -- a little over half the business is tied to consumables.

Got it. Okay. Good. Automation has been I think a bright spot for you guys. I think the backlogs are at record levels and you're starting to see the volumes turn. Just talk about what you're seeing in automation.

We've seen, after a challenging 2024, 2025, as we exited 2025, significant level of orders, increased -- record levels of backlog, and broad-based. Except for the comments we just went through on the automotive side, whether it's general industry, whether it's energy, whether it's heavy industry, structural type work, broad-based activity on the automation side. So that's what points us to growth. If you think about it from a long-term perspective, we expect kind of high single digits organic type of growth on the automation side. So we're seeing that play out. And while we're doing that, also continue to drive improvements in our EBIT margins within our automation business. So broad-based level of activity, with the exception of automotive. We expect automotive to start seeing some real growth opportunities here short term, and then continuing to shape our business model in automation.

So you mentioned margins. Remind us kind of your midterm targets there and kind of how you get there.

So we exited second quarter high single-digit type of an EBIT profile. Our targets are to be mid-teens type of an EBIT, and driven by how do we continue to drive leverage off our platform. So that's more volume growth at a high single-digit organic growth. We continue to shape our business processes. Think of a lot of project execution and management. We call it our Lincoln Business Systems. How do we continue to drive the kind of disciplines for incremental margins? We also look at the mix of our business. So there are components that we've talked a little bit about, some of our pre-engineered type businesses, that drive a higher margin relatively speaking. So we're going to continue to look to richening the mix of our business within automation, and then just continuously focus on the broad execution. That's just how we do it. We feel we have a clear line of sight. It's still dilutive to our overall objectives from an operating margin perspective, but going from a low double-digit to mid-teens, 50% improvement is kind of where we're at. It's what we're targeting.

All right. Good. So another topic that's pretty broad here is just kind of AI and how you're starting to integrate that. I think you had the Inrotech acquisition to help along that process. Just talk about how that's going to play out.

Look, we're really excited. We've been developing technology, which is our first entry into what we call physical AI. And so that's tying to vision, that's tying machine learning, all of the welding analogy that we introduced into a solution that's -- we're going to anchor on [ Cool Box ] initially. We have an industry trade show, FABTECH, coming up in October. We'll be continuing to showcase our product. We expect to take orders on new technology platform yet this year. So we're pretty excited about driving what we've acquired through vision capabilities, through machine learning, through AI into a new introduction. So we're pretty excited about what this could look like for us.

So what does that AI-enabled system do that you can't do today?

Yes. Think about -- I like how we've talked about think about a master human welder being able to make adjustments to a welding process without a CAD file, without having structural computer-aided designs leading the path for welding. So think about a human able to make those kinds of adjustments to a weld process. So our team is actively working on this, and I would look for technology introduction in the coming months.

Okay. All right. Good. Maybe I'll stop just for a second. Does anybody want to chime in on end markets or technology? No? Okay. Maybe let's talk a little bit about sort of pricing and margins and tariffs. We touched on that, I think, in your opening commentary. But give us a sense of how that's evolved through 2026.

Well, we are actively managing price/cost, and our strategy is to be price/cost neutral. We announced some pricing actions in the second quarter. You see that mature in the third, you see persistent inflation. We respond with additional pricing actions. I mentioned both in the Americas and International segments have an impact that will have incremental pricing maturing this fourth quarter. So that's our discipline. As we are seeing inflationary pressures, could be tariffs, could be otherwise, the actions we see coming out of Canada, whatever that means to us, we're going to quantify it, we're going to understand it, and then we're going to take action to protect our business model. So there are quarters like -- we started the year off, first quarter, we're 90 basis points behind. We narrowed that to 10 basis points behind, with a very much disciplined focus on that neutral price/cost posture.

Okay. And it sounds like you maybe take a small step back in the third quarter and then forward again in the fourth quarter?

We expect the pressure to get -- that's what's driving a lot of our slight reductions from that mid type of incrementals to low-20s type of incremental margins.

So how much total inflation have we seen in these end markets in 2026?

Well, think about the overall low double digits for the year, we're talking about 2/3 of that being driven by pricing. So add a little bit more to that.

Okay. And are you finding all your competitors, especially, I guess, in the consumables space, are they also being pretty disciplined?

That's a pretty disciplined market. I would point to longer term, Steve, because I think it's important in how we look at our strategy. So we look at high single-digit, low double-digit type of growth. If you take out the inorganic 300 to 400 basis points, we expect a normalized level pricing to be in that 100 to 200 basis points. That's how we look at our business long term. We don't want to be driving our strategy for growth through pricing. But we want to be disciplined in managing the model depending on what we see on inflationary pressures to protect the inherent part of our business objectives with operating profit.

Okay. And you mentioned incremental margins maybe at the lower end near term, but I think you still have sort of a high 20s longer-term forecast. Do you have confidence in that?

Yes, absolutely. So mid-20s is typical for our model when you think about the normalized level of volume. We come through a higher standard period with very modest increases in volumes and yet increased our operating margin by 200 basis points. We're pointing to a 300 basis point improvement in our 2030 objectives, which is a step-change from what we've done historically. And that's going to be driven by a higher level of incrementals. So I'll peel some of the key drivers. We talked about automation, improving the EBIT profile by more than 50%. Because of the fixed cost nature and our automation business with facilities and engineer, typically, that is a higher incremental, low to mid-30s type of an incremental type margin. We expect growth and improvement in the margin profile there. Each of our business segments have objectives to improve their EBIT profile in the strategy period. So it's a little different story. Like we just went through International and Europe shaping, strength on the growth side for Asia. On the Americas side, where you have the component of automation tied to Americas, and then you also have growth. And then we have, on top of that, enterprise initiatives. Think about 2/3 of the overall improvement in margins and incrementals driven by what I just went through. And then think about enterprise initiatives then driving another 1/3. So we expect another 100 to 125 basis points of margin improvement driven by either center-led activities across our business, our continued investment and rationalization of our facilities and operations to drive productivity, how we engage with our customers. All those are contributors to how we shape the operating model. That's what gives us confidence in a step-change with improvements in the volume trajectory of our business and how we look to innovation to drive the kind of incrementals that are going to be a step-change in our business. Now we had a question at the last earnings call of, how do you expect this trajectory over the next 5 years? And our comment is think about it on a ratable basis. We're continuously looking at process capability, best practice to contribute to a level of growth there.

Okay. So enterprise initiatives, I think, include sort of centralizing some functions, modernizing factories, improving customer service. Which of these are sort of furthest along and which has the most upside?

I would say they all have equally upside. However, I'd like to point to the center-led activities. So we've been talking about, for example, procurement as a function where, historically, more regionally driven, the buying, whether direct or indirect type of resources, are tied into that. How do we look to leverage capabilities across all of our regions? And we pointed to the historical examples of functional areas like in finance or in IT and HR where, historically, you would have had more regional concentration of resources, to more how do we leverage strategies across all of our regions. That's what's more progressive. So think about procurement, supply chain, engineering, product development being more center-led and moving away from a regional type of focus to more of a corporate center-led focus. We still have resources in region, of course. And those in-region resources, for example, if they're customer focused, they're there to drive the intimacy with our local presence, and customers that have best practices and capabilities, they're leveraged across the enterprise. That's really the focus.

Okay. Maybe let's switch to M&A and capital allocation. I know you've targeted, I think, 300 or 400 basis points of growth through M&A over the long term. Talk about how you build the funnel, what types of things you're looking for.

Yes. So I'd point to last 10 years, our CAGR is 480 basis points of growth. So as we drove our building blocks for the long term, we said 300 to 400 basis points kind of fits the model. But very active level of engagement. We have a corporate-led function on M&A and strategy that works alongside our business units to identify bolt-on opportunities in a very disciplined way. We're very mindful of valuation, what kind of bolt-on strategies that make sense for our long-term positioning in the markets, how do we ensure we're at that mid-teens returns by year 3. So very disciplined, active level of engagement, and it's broad-based. You see in our materials kind of what the last few years meant to us in terms of acquisitions. You've got Americas transactions, International transactions, you got Harris transactions. It's all driven by a level of engagement across our business units, with an active level of oversight and drive across the enterprise -- the executive team, and that's how we manage it. The Board is very much engaged. Very much we want to deploy capital on growth. So we're focused and doubled the level of internal investment and what we just talked about on enterprise initiatives, but also look to M&A to be an important strategy for us. So it's very key for us.

Are there any metrics around what the pipeline looks like that you might be able to share?

I would just point to very active, very broad-based. Not a day, it doesn't go by where there's some level of engagement and some level of a pipeline. But it's broad-based. So it could be an automation-type focus, it could be welding-focused in the U.S. We had a couple of really nice acquisitions over the last few years that tie into technologies, whether it's in wear or whether it's in mobile power, that are just really nice attractive ways to grow.

And remind us where you are on leverage and what your targets are?

We have a target that we set, about 1.75, but we're tracking, when you look at net leverage, close to 1.2, 1.1. So we got a lot of flexibility.

Okay. And if the great acquisition doesn't come along, can you buy back shares? Or is that not a priority?

That's what we do. Our priorities are to deploy capital for growth, so that's internal investment and acquisitions. We've had a steady, since going public in 1995 on NASDAQ, had steady increases in dividend rate for the last 30 years. And then any excess strategic cash, we're covering maintenance, which is somewhere around $75 million right now per year end, and then we'll buy back shares with excess strategic cash, and that's how we do it.

All right. Good. Another chance for questions from the field? Anybody? Pregnant pause. No. All right. So that's -- I've gone through most of what I wanted to talk about today, so maybe I'll just put it back to you. I mean we seem to be seeing kind of your first volume growth year under RISE. And what would you counsel investors to sort of focus on? What do you think the market may be sort of under-appreciating here in terms of this?

Yes, it's a few things. One, I'd point to the dynamics of the short cycle component of our business versus a longer cycle. We've been intentional in shaping our model with more long-cycle capital investment opportunities to serving our customers. So while this, historically, a view of Lincoln being short cycle, very much positioning to have longer capital, investment-driven type decisions from our customer base over the long term. So pretty important for us. The discipline of execution, despite the cycle -- and you've seen that in our business, we've got a long track record of managing an expansion and contraction with the continuous focus on shaping our business model. This is what gives us conviction that we'll continue to enhance the operating model of our business. The conviction to go from 200 basis points on average improvement to 300 basis, moving from incrementals from mid-20s to high 20s, all very important for us, and then how we shape that. We've evolved our business to have an enterprise type focus versus a regional, particularly on the operations side, the engineering side, and we'll continue to drive that. Those are real opportunities for us. When you look at a long trajectory of how we've shaped our model, it has been about gaining more leverage and the disciplines across all of our businesses. So very much focused on the areas of operational excellence, how do we drive an improving level of customer intimacy with our Elite program on the customer side. So very much focused. We've just finished another round of we call it RISE sessions across our corporation, where our CEO is out and engaging with all of our different teams around the world. And so we're pretty excited of where we're headed. It's rounding out the first year on RISE and, yes, some pretty attractive objectives and the volumes do progress positively for us, and we're excited about what the market progression looks like for us.

Great. Very clear. All right. With that, we will wrap it up. Thank you so much. We appreciate the insights. And thanks, everyone, for your attention.