Lincoln Electric Holdings, Inc. (LECO) Earnings Call Transcript
September 24, 2026
Earnings Call Speaker Segments
All right. Well, thanks, everyone, for joining us. It's great to be here. We got Gabe Bruno with Lincoln Electric. Thanks so much for making the time and coming down. Look, I mean, it's Kind of just to jump in here. Obviously, we had some comments last week, you were talking about just how strong demand has been. I guess I kind of let me start there and just get your thoughts, hey, is it more a matter of the rate of demand has improved? Or are we actually seeing the drivers broaden out at this point and really kind of move in a much more concerted way?
Yes. So Chris, that's a great place to start short-term thinking about what are the demand drivers and how we look at the industrial cycle. So we came into 2026 pointing to the strength of order activity, quoting activity. within the automation business and the backlogs that gave us visibility to a level of real volume growth in the back half of the year, pointing to potentially at the end of the second quarter. Now we've seen that. We typically have line of sight for 6 to 9 months or so with the business and backlog out of automation. So we had confidence in that. And we also saw consistency in the level of consumable volume. So a little bit more than half of our business is consumables. And what that represents is what's actually being well what's the fabrication, the level of production going on in the market. So when we point to stability, in consumable volumes. What we're telling you is that production activity, whether it's in general industries or heavy industries or automotive and that's what tracks to production is the level of consumable volume activity. So we saw consistency, some stability in volumes, which is a good sign. And then we saw an inflection in the Americas Welding segment. Our consumable volumes in the second quarter were up mid-single digits. So what it's telling you is that you're seeing a level of industrial activity that's holding and growing. And typically, after you've seen some consistent production activity, then you see conviction of capital investment so we had already seen automation investment, which is driven by production, capacity needs, quality need safety, all that what the automation solution offers to our customers. And then we saw a significant inflection in standard welding equipment. And that's what we saw entering into Q2 and now we've consistently now in the third quarter. So that would progress to what we typically would expect in the strength of an industrial cycle consistency in production, that consistently translates into conviction of capital investment. And so that's the tone. And so it's been strong across the Americas segment, and that's what I mean by consumables, standard equipment and automation. We've seen strength in Asia. So when we think about the international markets, about 70% of our business is within EMEA. And then the 30% is Asia. We see good growth out of Asia. EMEA continues to be challenged, not only in core Europe, but also as the conflict in the Middle East. And then we've seen Harris starting to inflect some positive and volume down this third quarter. So those are the drivers of demand that point to the kind of strength that we expect. Now that's all pretty much how we look to short cycle activity. Long-term expectations, organic growth, we're talking about mid- to high single-digit CAGR on the long-term strategy. We just launched this year our rise strategy and set forth 2030 targets. And we expect the kind of organic growth that would be in the mid- to high single digit leaning with more significant growth, high single digits in the automation side of our business. So that's kind of a lay of the land there, Chris.
No, that's extremely helpful. And I guess nice dovetail in terms of you talking about conviction of capital spending. I mean we've had kind of 2 fall start years in terms of automation or automotive, I should say, in particular, I mean it was First was elections and that kind of caused everyone to go, hey, are we going to ICE EV, let's kind of just sit on our hands for about a year. Tariffs blew the world up last year. Now you're starting to see some of these projects move forward in the back half of '26.Iguess, -- from a conversational perspective, some of these things just have to move forward if you're going to produce new platforms in 2018 and beyond. But I guess, does it shorten the selling cycle? Does it kind of give a bigger opportunity long term? Like how do you think about just the impact on automotive being so stretched out here?
So that's -- the automotive end market is the only end market that we haven't seen growth yet. So we were down mid-single digit in the second quarter. And as I mentioned, think about our consumable activity in automotive time to production. So when the markets are telling you that production is down low to mid-single digits, you can see that's our consumable volumes are tracking that. . And that's what our comments infer. We have seen, as you point to, high level of quoting activity, but we haven't seen that turn into orders. So we've seen broad growth in automation in general industries, have industry structural fabrication. We haven't seen it yet in automotive. And you're right. The last 2 years have been challenged. You had the whole decision-making around EV and ICE. And then you had all the dynamics, elections and otherwise and pause in investment, extending the life of existing platforms. And so we're optimistic that the 2028, 2029, program launches would mean demand for us and some of our longer lead time items within our offering. And the next few months are going to be pretty important telling tail on that because there are the market indicators, standards updates that come over April and October. We want to see that align to what our commercial team is advising us on what's happening on quoting activity. We want to see that line up with real orders and real conviction across the industry that, that 2028, 2029 program launch is going to mean meaningful investments.
Well, and to that point, my understanding was a lot of the back half '26 automation projects that are starting to move forward and getting back into some nice growth was that it was associated with automotive? Is that correct number one? And number two, if it's not, where are we seeing? Is it the material handling? Is it heavy equipment? What's the driver there?
I see broadly outside of automotive, right? Automotive continuing to manage, but that's mid-single-digit decline, but you're seeing the strength of general industries, heavy industries, the kind of broader level of automation investment. So -- and that excites us. pull back a few years ago before we acquired this business called FlurAutomation, which was 100% automotive. Now that introduced capabilities, and we then introduced as a solution within our automation offering. -- with AGVs, material handling equipment, testing and position type equipment, which is very good capabilities in an automation offering. But it leaned into our mix of automotive to be almost half of the business. So now we're tracking about 40% of our automation business tied into automotive. We'd like to see that more balanced and it was prior to our acquisitions, like a third general industry third heavy industry, structural fabrication in a third automotive. So that's the kind of mix that will then foster adoption because we have introduced products and capabilities that would allow small midsized fabricators to really embrace automation -- so when you see us talk about coats and other means of of automation that makes it easier to well, it's because we want to broaden out the adoption within our automation footprint.
Well, that's, again, a nice segue. I mean when you think about automation, you can look at sort of 2 ways investors are we moving more and more into the CapEx cycle, so we're amplifying the cyclicality of the business -- or is it more a matter of, hey, look, this is broadening our growth drivers, so we're actually dampening it down? Or is it kind of a little bit of both?
Yes. No, look, I think what's important to think about is that the secular drivers for automation investment are not going away. And we still believe we're in the early part of industrial adoption and automation capabilities. So we see long-term growth in automation in the high single-digit -- so as I walk through organic growth drivers, whether it's Asia dynamics long term being strong or Americas, we believe that, that automation portfolio is going to yield high single-digit type of growth. and broad-based. And we just see that continuing to drive. So it does give us because some of these projects are longer cycle type products. It gives us some visibility in what's progressing 6, 9 months. in terms of an investment cycle. But we really believe it's high single-digit type organic growth gives us opportunities to continue to look at acquisitions that complement the core business or add capabilities that we've done and vision capabilities that introduce AI capabilities that we think about. So that's how we see automation.
No, that's extremely helpful. I guess shifting gears a little bit more towards profitability, obviously, fuel, freight, ocean containers have all gone kind of parabolic here. You touched on that a little bit ago. But maybe just -- what are the mechanisms or the levers we can pull internally to try and whether it's move more quickly on that, reprice things. Again, it's a bit of a shock no matter what time period you're talking about. But what can we do internally to kind of offset some of these things
Well, just to reemphasize our strategy, we've been managing inflationary conditions for years and years and years. And our strategy is to be price cost neutral so as we're navigating inflationary pressures, we take action on price. And that's been the long-standing operating level of execution strategically in our business. So what we saw is a continuation, we call it, persistent inflation. We had talked about it and I talked about it during our second quarter earnings call. We had already put -- take pricing actions during the second quarter -- but as we see continued inflationary pressures and we take pricing actions. Now what did it mean to us? . Short term, it meant that we were not going to be price cost neutral in Q3. We were going to look at incrementals instead of being in the mid-20s to be in the low 20s, so not a significant dollar impact on incrementals, but it was repositioning. We had just announced price increases then in August. -- in both the Americas Welding segment as well as international. They will take hold in September. Americas beginning of September, international at the end of September, and we won't see that mature into the fourth quarter. But our strategy is always just no matter what environment we're operating. If we have inflationary pressures, we're going to take pricing actions. And the channel is pretty disciplined. We give notice so the channel can then respond in their own pricing requirements. -- a very disciplined market and managing the price cost dynamics.
I guess maybe just a level of confidence in terms of your ability to offset this? I mean, I think over a 12-month period, you'd be very confident in terms of kind of being able to claw this back. But over a 6-month period, it's just, again, a matter of how volatile that move is and how fast you can recapture it. .
We expect price cost neutron the fourth quarter -- so we expect this as a third quarter dynamic and then fourth quarter, we're back to price cost neutral. And then we're obviously remaining our business. And if we see more inflationary pressures, and we'll continue to manage that price cost posture we have. .
That's very helpful. I guess to shift a little bit into some of the areas that have been a little more challenged when I think about growth. Europe is obviously the biggest one. there are some structural reasons there, but there's a lot of excitement around aerospace and defense investments, some kind of reindustrialization there. What are you seeing in terms of conversations around Europe specifically? .
Well, Europe is a challenged market for us. right? And our posture strategically is a stable operating environment in terms of demand but continue to challenge the operating model. So we're hopeful that aerospace, defense, the industrial base in Europe that there does progress into incremental investment. We haven't seen that yet, but we're hopeful. Until we see that, our posture strategically is to don't expect growth out of core Europe but to continue to challenge ourselves in the operating model to improve the margin profile that we're targeting for international. . So on the international side, this -- the short term, we're hovering between 10% to 11% EBIT margins. Our target is to be 12% to 15%. We want to continue to drive more improvement in the margin execution out of Europe. -- but drive growth out of Asia with the incremental margins are going to be pretty healthy. So that's how we look at the international markets. So Middle East, strongly positioned there. We've got pressure short term, but we're excited about the energy capabilities and our level of positioning in the Middle East market, which should be accelerating growth as well.
That's really helpful. And I guess maybe just to pull that thread a little bit in terms of Middle East and Asia Obviously, we feel the fuel price is here, but I guess it's much more impactful in places like India and Australia where it's gone parabolic, I guess, what have you seen from an on-the-ground activity perspective? Like is there demand disruption at this point from fuel costs? .
We haven't seen any pressure on demand as a result of fuel consortium. When you look at the Asia markets, we continue to see strength in India, see strength in China, see strength in Southeast Asia. So Asia is postured for organic growth. And we'll monitor conditions and obviously be responsive to that. And the Middle East dynamic is a headwind for us as we're navigating the progression of the conflict we've talked about $6 million to $7 million a quarter of headwind coming from both international and the Americas is an export component of business that comes out of the Americas and serve in the Middle East. But we have put price increases in place to deal with the inflationary pressures in the international welding markets and we just continue to manage that. .
Yes. That makes sense. And then speaking to inflation as well. Obviously, when we're looking at North America, in particular, there's limits to what we can do from a sourcing perspective on metals. But maybe can you remind us what the mechanisms look like for passing through that metal inflation and how quickly that happens on a typical basis.
Yes. So I would differentiate the question between metals associated with core welding and metals that are associated with our brazing business right? So on the core welding side, a large part of the tariff issues we've had in the last couple of years are driven by Section 232 tariffs, of which a lot of sourced welding broad comes from the north. And so we've already dealt with that. We are looking to domestic suppliers be able to shore up the supply chain there. But in the meanwhile, we're just managing through pricing dynamics, and that's largely behind us. On the hair side the brazing, the largest 2 commodities that drive some volatility in pricing is silver and copper. And silver had peaked at over $110 a troy ounce beginning part of this year, now it's hovering between the 60s. Having seen demand destruction in that area. But it's a very disciplined mechanism for adjusting pricing depending on how we see the metals markets progress. So expect on the Hair side, pricing adjustments on a monthly basis depending upon where silver and copper cost progress. And so right now, it's been relatively stable, but certainly, it was escalated the beginning part of the year.
And just a point of clarification. When you were saying you're exploring options for sourcing domestically, I assume that that's more on the copper in that side of the things, right? Because green wire rod, I think it pretty much is nonexistent in the United States, correct?
Yes. We're looking for Ron. I'm referring to Rod. And what it is, is the welding grade route is specialized right? And so it's really working with potential domestic suppliers that couldn't provide some optionality for domestically sourced welding rod. That's really what I'm referring to. .
Interesting. So that's a very new development then.
We've been working on now for the last -- it's a key part of how we look at supply chain sourcing. But largely up north, that's kind of where we get a large part of our sourcing.
Makes sense. I guess to shift gears a little bit, obviously, automation is exciting. It's going to keep pressing you on. But when I think about your strategy of moving more and more into material handling kind of becoming this giant integrator, why is that the strategy rather than focusing more on the component sales?
Well, we just look to automation to be an accelerator for growth. when you think about how we are serving our customers and the solutions that surround automation, the welding fabrication component, it's now probably 40%, 50% of the automation business. So it's how do we continue to develop the footprint within our customer base to provide more and more automation capabilities. So when I mentioned material handling or testing or other capabilities, it's broadening out a footprint of automation needs from a customer perspective. So as our customer needs are developing, refining and driving more capabilities on our end, we continue to develop our offering. And that's what the automation solutions really engaged with its broader base, its capabilities, and we continue to broaden out. .
That's really helpful. I guess -- from a strategic perspective, as you think about additional acquisitions, I mean what's the relative favorability of additional scale in automation versus gas control versus test and inspection, how do you think about that balance today? .
Yes. So we are -- so our objectives for growth and M&A work is 300 to 400 basis points of CAGR annual growth rate. In the last 10 years, our CAGR has been 480 basis points. So very broad-based. So we've got a center-led team strategically at a corporate level. that works with our business units to work through a pipeline of opportunities of bolt-on type of acquisitions, and they're broad-based. So over the last 5 years, I'd like to point to, we've done 10 transactions into the bolt-on type of transactions. . Half automation, half welding, have core welding and cord-welding, meaning in the Americas, in international markets, but where we see opportunities to drive an alignment of adjacencies to our core -- so we saw it last year with the alloy steel transaction out of Australia with were applications. You saw it in Americas, a couple of years ago at Vanar, which is a mobile power type capability. automation, you have seen transactions over the last 10 years that continue to build out our footprint. We did a recent acquisition in Rotec, which is about technology. That technology provides vision systems that have been key to our development of physical AI capabilities in automation, which, by the way, we're going to launch first physical AI offering in our trade show in October, caught attach. And we're planning on taking orders. So we're just introducing some capabilities. So the way we look at acquisitions is there may be technology focus type opportunities, and we'll execute on that to build out capabilities. There could be some regional presence. There could be some adjacencies that tie in, but each of our business unit leaders corporate-led center-led function knows that's a key part of our growth strategy strategically, and that's where we'll continue to drive hard.
Well, definitely staying tuned for that because I was at IMTS the other week. And again, physical AI was splattered across absolutely everything. So I guess maybe not to preview too much what's happening at FabTech, but just what is the thought process there? I mean is it a matter of partnerships? Is it a lot of internal R&D? Like how do you think about the opportunity?
Yes. So I mentioned the acquisition, the acquisition introduced vision capabilities you think about intelligence, I think about our own wealth and intelligence, the expertise we have and the power sources, the parameters, the welding process. So you tie that with the first intros into a call back. I think of a cobot has the intelligence to be able to make unstructured decisions surrounding a welding joint. So that's what it does. The vision allows the cobot we're about to see and then the welding parameters intelligence allows the cobot to make adjustments to the welding process. And I use this example to make it really simple. So traditionally, if you have a straight welding path and you've got a CAD design pretty straightforward, you got a robot make it a laying down welding bead to a straight path. The moment you introduce variables in an unstructured way, it takes a human tell it master welder, our teams call it, right? I master well to make those adjustments to be able to do the well introducing AI, introducing vision capabilities under a cobot structure, then that allows us to have physical I come to life. So that's what we're looking at. So it's new for us. It's been a journey in acquiring the capabilities and then developing internally our own capabilities and the software engineering behind that. And we're planning on taking orders this fourth quarter. And we've been prototyping this with some customers, and our team is ready to to launch it at FabTech and then start to take orders in the months to come.
That's very exciting. So I think we've been hearing about this for the past 10, 20 years, like how the skills gap is just growing as that workforce is aging kind of up and out out of the pool. How do you guys think about like the customer demand for something like this? I mean is it -- is that really still a major driver that's kind of skills gap. Does this really fit that niche? Again, what's the thought process there? .
Hard to say specifically what kind of incremental growth that we have just from those capabilities, but it does affirm what automation means in the industrial market -- this is what -- this is why we anchor on a high single-digit organic growth in automation. So we've built the platform a lot of different capabilities trying different parts of the end markets, and we just continue to add capabilities that give us confidence that this is an attractive offering with the value proposition that our customers are going to continue to desire. And then we grow the adoption, not just into automotive, heavy industry structural fabrication but also general industry small, midsize fabricating that make it easier to well. .
Got it. Got it. And maybe just kind of just circle back a little bit on the cost front of things. You talked about aiming for price/cost neutrality. I think you've said in the past that's on a dollar basis, right? So does all the inflation we've run into, does that give us pause in terms of some of the long-term rise targets for margins? Or just maybe kind of put that in context for us? .
Yes. So the price actions we take are to protect the business model and the margin profile of our business. What -- so we have that as kind of the baseline in navigating. So we've talked about getting back to mid-20s incrementals in the fourth quarter. our objectives, though it rises to be at the high 20s incremental. So let me step back from when you look at how we've progressed the business over the last 25 years. Each cycle, whether it was a contraction or expansion we have expanded the operating margins of our business by 200 basis points on average. So we're tracking average operating margin per cycle, and you can see an improvement going from 12% to 14% to 14% to 16%, which was the last cycle we exited 2025 at mid-17s. So -- and that was in a pretty challenged environment. So our objective is to drive a 300 basis point improvement in the average operating margin have incrementals start to achieve high 20s, and that's the trajectory of margins. So the price cost dynamic, those are short-term pricing actions that are necessary to protect the model while we continue to develop the model and drive volume leverage and more presence into the market. On a long-term basis, we don't see pricing as the driver to our organic growth assumptions. -- right? It's the volume driven. And so typically, we would say pricing on a normalized basis would be somewhere between 100 to 200 basis points. So when we talk about organic growth objectives, in the mid- to high single digit. It's 120 basis points price. The rest is truly a volume and how we are then positioned within the end markets and our offering. And that's why I point to automation being high single digit -- those are the kind of growth drivers that are real volume than just adjusting the price. The pricing mechanisms we have in place is to protect the model while we're navigating really the growth that we're going after that.
Well, and that's that kind of brings me to the question of, again, in a hypothetical, if automotive does become kind of stuck in this sort of neutral place where rates stay high, consumers stay stressed and you just don't see light vehicles move a lot. Is that baked into the program when you kind of pay like we've got growth elsewhere that's fine. Are there levers we can pull to sort of offset that kind of weaker volume growth in automotive? Just maybe high-level thoughts there.
Yes. So just peel the onion a little bit on organic growth drivers. So we see Asia broadly being an accelerator for growth. So that's the international segment, growth drivers, Asia and Middle East to some degree as well. Harris, we see HVAC, we think about Harris as a mid-single-digit type organic growth. So we see the HVAC Yes, we're going through some consumer pressures on the retail side. Some of my tough comps you saw them in the second quarter, some into this third so let's take consumer out of it. But we see HVAC long term being a growth driver for us. Some of the industrial equipment that comes out of Harris being a growth driver. And then you think about Americas. . So 80% of our automation business is within the Americas segment. So if you have a high single-digit type of growth trajectory in automation, of which 80% is at Americas, we expect Americas volume to be in that mid- to high single-digit type growth. And we see innovation typically to contribute about 100 to 200 basis points of incremental organic growth. So take price and pricing of 100, 200 basis points impact, innovation and then see the key drivers of what's happening across each of the end markets to kind of drive a posture of where do you see it grow? And then the automation solution set, driving incremental growth. And that's kind of how it fits together.
And not to get too specific on the driver's front, but I mean aerospace and defense, no secret that's been a major strong point of late. I think when a lot of us think aero defense, we're thinking F-35 large platforms. But like munitions have become a major focus. And I guess, has Lincoln been approach to kind of help speed up that process at all.
Well, we certainly have seen it with some of the work in the military in the Navy our additive solutions that we have developed. We haven't seen significant improvement in demand, but we are well positioned to where defense could be a really nice contributor for the adoption of our additive capabilities. There's been a lot of announcements on partnerships we've had with the military. Just haven't seen a actual incremental volume. It's starting to take hold. And so we're optimistic that the additive business to contribute also incrementally on sales and incremental margins as well. So that's a very nice position to have. Now that is opportunistic. So all the core assumptions we talk about in terms of sales growth or margin expansion, we looked at the additive component to be incremental to that. It's an opportunistic upsize.
That's extremely helpful. I guess just last final thoughts here. I mean anything you would really want to leave the audience with in terms of kind of how you see your positioning in the market here and kind of what the next 3, 4 years might hold?
Yes, it goes right back to our rise strategy, right? -- a lot of center-led work, enterprise work being done to continue to develop our business from a regionally driven organization segment to more of an enterprise global operation. And we believe that that's 1 of the key drivers to accelerate the margin expansion of our business and then how we operate. So that's a key part of our strategic objectives. So rise and how we drive innovation, how we engage with our customers, how we provide the environment for our employees to elevate how we are engaging within our business are all elements of how we do things that we look to high single-digit, low double-digit type of growth -- sales growth, continuing to drive organic and inorganic activity, but then shaping the operating model. very strong cash generation type business, very disciplined in capital allocation. . We want to emphasize growth and that is internal investment. We've more than doubled the level of CapEx or internal investment over the last few years. We continue to look at it as the highest returning opportunities for us as a business. So you'll continue to see a growing trajectory of internal investment and then lean in M&A work. So that 300 to 400 basis points of growth and how we allocate capital is our first agenda item capital allocation. And then returning cash to shareholders. We've been very consistent in the dividend rate increases since NASDAQ in 1995, and then we'll return cash to shareholders through share repurchases to cover maintenance and then any excess strategic cash. And that's how we think about it.
All right. That's extremely helpful, Gabe. Again, thank you for taking the trip down to Nashville. Thanks for the insight, and thanks 1 for joining us today. Really appreciate it.
All right. Thank you.
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