... Good morning. My name is Saree Boroditsky. I cover multi-industrials here at Jefferies. We're really excited to have Lincoln Electric CFO, Gabriel Bruno, with us today. Lincoln is a global leader in welding that's coming off a strong margin performance quarter, despite operating in a very dynamic environment. Over the long term, we expect the company to compound earnings through its strong position in automation and capital deployment strategies. So thank you for joining us today.
Thank you for having us, Saree. Great to have Jefferies host us and talk about our business.
So this is a fireside chat format, so if you do have any questions, please feel free to raise your hands, and otherwise, we'll just jump into it. So maybe we'll just start with the current environment. You know, on the last earnings call, you continued to see customers defer capital spending and maintain this kind of wait-and-see approach. Has this changed at all as customers digest the one big, beautiful bill, maybe Section 232 tariffs now? So what are customers waiting for to execute on some of these projects?
Well, just to give you a broad perspective on the environment, I can kind of paint a picture of the active current production cycle versus the capital investment cycle. And we went into the second quarter knowing that there was just a lot of uncertainty. Our posture is to protect our business model with a pricing strategy to be price-cost neutral, and so we entered the second quarter considering a volume potential compression that would offset pricing. We didn't see that. We saw resilience, particularly in our North American markets, as well as in our consumable part of our business, which is a key indicator of what you see in a production cycle, so we're pretty positive with that.
There is a bit of a wait-and-see sentiment when you're thinking about capital investment that has impacted both our automation offering as well as standard equipment, and that hasn't changed, so we saw resilience in our overall business, but deferral, kind of a flattening level of business within our automation business, so it's very active in terms of quoting, but not so much in terms of pulling that to orders. In terms of the big, beautiful bill, we do see potentially some acceleration of investment, particularly with small and mid-sized fabricators, that may take advantage of accelerated depreciation. It's too soon to tell. Typically, that would come into play around the fourth quarter, but we haven't considered that within our overall operating assumption.
So the tone in the current environment is stability, and some resilience, particularly in consumables as well as North America.
And then I had to add in this question after yesterday. I think the big topic on people's minds was Section 232 tariffs. So obviously, that's kind of broadened the coverage. Can you just quantify, like, how you're thinking about it from a pricing or supply chain perspective?
Yeah. So I think that what's important to know is what our posture is, and our posture is we'll navigate the uncertainty, we'll quantify the impacts to our business, and then we're gonna take action on pricing to maintain a price-cost neutral posture. We have been very active in looking at alternative suppliers in the U.S. for where we've seen the specific optionality in sourcing, but that will continue to be pretty key for us. Our team, in this latest round of actions and administration, there's a little bit more of a challenge in getting through the bill of materials and understanding the component impacts to that. But once we quantify, we'll respond as we always have, with a price-cost neutral posture.
Keeping the supply chain, the guys and girls busy. Heavy industries is one area that you've stressed is operating in a weaker environment this year. I think you've expected it to improve into next year, so just maybe kind of frame expectations and how far below mid-cycle are you in that?
Yeah, so when we think about heavy industries, you know, we've been navigating a compressed environment, particularly with the destocking dynamics going on within ag and heavy industries. So our best view, when you go back to peak, is 2019-ish timeframe, and with the compression we've seen, we're probably down mid teens in terms of volumes. We do, as you would expect, have easier comps progressively in the second half of the year, but we don't point to any expectation of growth until sometime in 2026. So that's gonna be one of those end markets, which represents about 19% of our business. They're gonna be somewhat of a challenge.
Now, within that, we do have some optimism around construction, some mining, that could offset that, but in general, we don't look to growth until 2026 .
Maybe one more specific end market. You've talked about energy being strong domestically and internationally. Maybe just the key drivers there and then visibility to growth over the next few years.
Yeah, so we're bullish on energy, and that's not short term, but long term as well on both the U.S. as well as the international markets. When we think about projects and energy driven by oil and gas, about two-thirds of our energy we estimate position is in oil and gas, and we've seen some really good activity in pipe mill and pipeline activity, which would be in the midstream components of oil and gas, which is more than half of oil and gas for us. We also are pretty active in power gen, and you have different projects to really drive it in Southeast Asia and Middle East, and so we're pretty, pretty excited about what energy plays out for, for the foreseeable future. So good momentum.
We were growing in the second quarter, and we'll continue to expect that for the balance of the year.
You mentioned a little bit earlier about the consumables, kind of reflecting factory activity. You know, what does this tell you about underlying demand versus the willingness to invest in equipment right now?
... Yeah, so what it's telling you is that customers are buying what they need for production, because consumables is a function of production. When we think about some of the key underlying macros that we track, they're aligned to production, or PMI. That's a measure of sentiment, and you saw that the PMI just released saw a little bit of strength in new orders. So while still contracting, particularly in the U.S., you're seeing some components that could be more optimistic. But the other measure that's important, which is reflective in our business, is actual industrial production. You know, it's been kind of flattish. It was up maybe just over a hundred basis points from the July period, but that's kind of what we've seen in our business.
So when you see in a consumables activity, essentially flattish on volumes, it's an indication of what our production levels across the various markets. It's pretty important indicator for us. It does provide a framework on what our customers' needs are currently. When you point to growth, which we haven't seen, generally it's been flattish, and you see consistent growth, that would also lead into further capital investment, and that would yield into growth, into standard equipment, into even automation and other drivers for ... So consumables is a pretty important product reference, which is more than half of our business. 52% of our business is consumables.
You know, one of the things I often hear is kind of consumables is kind of more generic. Could you just kind of talk about the, what differentiates your consumables business?
High quality, consistency. When you're dealing with an automation offering, you wanna have the kind of bulk packaging that doesn't tangle, so you wanna drive productivity, efficiency, and so our products are differentiated for its quality. On the automation side, if you're investing millions in an automation line that's anchored on welding capabilities, you know, you don't want tangling, you don't want to invest in or procure consumable products that are gonna cause some productivity issues on the line. So that's what differentiates us.
You brought up the automation angle, so, you know, I believe one of the benefits of automation was that it increases customer loyalty and, like, the stickiness of consumables. So just have you seen that play out, and what percentage of automation customers use Lincoln consumables?
So we shared some figures recently. So what's not captured in how we communicate automation sales are the consumables sales that we sell into robotic applications, and we estimate that to be about $300 million last year. So I think about 15% of our consumables are anchored around supplying robotic applications, and we have substantially all of the business there. 'Cause then you have customers that are making large-scale investments, and they need to be able to have consistency in the quality of the products being in use from a consumable standpoint. So our team would tell you substantially all of the business is our business. So very sticky, very much aligned to the value proposition of the automation within the welding fabrication part of our business.
55% of our automation offering is tied to welding fabrication, so it's a very sticky part of our business.
You know, the original guidance called for lower volumes, basically to completely offset the higher prices, but obviously, volumes were not as impacted as feared. You know, was the original guidance just overly conservative, or have you seen customers in certain segments respond differently than you would have thought?
Well, for sure there is some conservatism there because, you know, as we think about our operating assumptions and how we communicate them, they're really a posture of how we're looking at our business. And our posture was to protect our model with pricing actions, knowing there's a lot of uncertainty on what a response would look like in volumes or what the markets in general would respond to the tariffs, and the dynamics there. But as we talked, Victoria already just talked about it, it was pretty resilient from a volume activity. So, when you look at some of the key markets, automotive has held up better, so you've seen the latest on SAAR. We track production, SAAR on the sales side, but also production levels on the automotive side, as well as inventory levels.
So that's pretty key for us, and so production seems to have held up a little better than we would've anticipated. Distribution, industrial distribution in general, has been holding its own, too. So we look at that channel as about 60% of our business, the strength there, so it was very good as well.
And I'll just pause and see if there's any questions from the audience. Okay. Thinking about conservatism, the current guidance assumes automation stays stable through the year, which I think implies a decline for the full year. That says you kind of talked about steady order rates and elevated quoting activity. So what do you need to see for those quotes to turn into orders to actually hit this year? And could we see a positive surprise?
We're running out of time this year, heading to September, to see some meaningful change in order activity have an impact on our current assumptions. Flattish implies, and we were essentially almost spot on $215 million per quarter for the first half. We see more of the same for the second half, and so while that appears to be steady, we had a pretty strong fourth quarter last year. If you remember, automation business peaked at $270 million of sales in the fourth quarter. So we don't see that for this year. That's built into the operating assumptions. We need to see real conviction on the quoting activity, which is still very strong and very broad-based.
And when we think about broad-based end markets, we're talking about automotive, heavy industry, general industry-type opportunities, but just haven't seen that translate into meaningful, incremental orders that would change our posture within our operating assumptions. We're still pretty excited about what we see... and it just, for us, it's just a matter of timing. And our win rates are improving over time, so we're pretty well-positioned to drive you know, the kind of posture we would expect out of our automation business, but we're just kind of saying we haven't seen it yet, but we do think it's a function of time.
You know, automation sales are skewed, obviously, to Americas and to auto markets. Like, how do you think about diversifying this business, either geographically or by end market, and does this require additional investment or acquisitions that you're thinking about?
For sure, we look at acquisitions as part of our growth strategy. I'll start there. When we think about what we've done within our automation model is we've increased from four hundred million in 2020 to we're right on top of the billion-dollar target. We get some mix of when capital orders are accelerating. But our growth trajectory is by organic and inorganic growth, so we continue to see opportunities on the acquisition side, both in the U.S. and outside the U.S. Outside the U.S., when we acquired Fori a couple of years ago, that allowed us to give us a nice footprint to continue to mature our positioning in India and China, South Korea, and Europe, and we'll continue to do that. Our largest component, as you mentioned, is in North America.
80% of our automation business is in the Americas, but we're continuing to look at geographically our ability to acquire or maybe specialize automation business as we've done in the past, and continue to broaden out the footprint through acquisitions in North America. Then when you think about end markets, you know, our posture has tilted a little heavier on the automotive side since our acquisition of Fori. But we were, before that acquisition, a third split between general industry, heavy industry, and automotive, and with a very much intent of presenting solutions into the markets that would accelerate adoption. While the automotive industry has been a leader in automation, heavy industry has also been pretty deep, and then looking to small, mid-size fabricators to also adopt welding technology. And so we've broadened out our product offering.
We've got, say, on the lower end in terms of value propositions, $100,000 or so on the cobots, and you got hundreds of thousands for pre-engineered robotic cells. That ties into the small, mid-size fabricators nicely, who are more recently into the adoption of automation technology. So I see that as a way to broaden our footprint and to continue to present solutions that would accelerate adoption.
I just wanted to circle back to your prior comment on the high quoting activity. Are you seeing customers quote, like, different locations, different countries, or is it, you know, just trying to, like, scenario plan, or are all of these kind of like fixed ideas?
No, they're really. When we measure our quoting activity, our team is engaging with our customers, and then they're assessing a probability of that level of order. So you get into deep design and quoting, so as we're defining that, they're not just superficial quotes. They're deep, engineered designs that are part of how we present our value proposition to our customers. So these are largely quotes that our team has assessed with a 90+% probability in this month, and so what we've seen is that level of confidence slip from one month to the next, to the next, to the next.
We have confidence in the quality of the portfolio of quoting activity, but just, it hasn't been pulled into actual orders, and we've seen that throughout the years, just pulling back the months on quote to order.
Yeah, I thought at this conference, maybe we could talk about, you know, things getting a little better with more certainty with the big, beautiful bill and maybe tariffs, but now we have this new- are you, are you- has this impacted anything? Like, people still pretty uncertain, or are people-
No, I would say it's more the same. So since we announced in July, it's more the same. We've seen resilience, seen some steadiness in actual production and order patterns, but haven't seen an acceleration.
You know, well, I think one of the positive surprises has been margin performance, maybe as always, but automation is inherently more fixed costs, but the margins have held up there, I think, maybe better than expected. How have you managed to protect the margins this year, despite the weaker top line? Has there been any cost adjustments, and what does this imply for incremental margins as we see a pickup?
Well, specific to automation, you know, when we talk about our playbook, which is our cost management approach to manage throughout the softer cycles, you know, we announced that last fourth quarter, it impacted all parts of our business. And the way we think about it is we differentiate between temporary actions that are truly driven by the volume dynamics versus permanent actions, which are the long-term structural changes that we introduce in our business, which is what gives us confidence in our continued expansion in our operating model, those permanent structural changes that... So our automation team has done a nice job in dealing with both temporary and structural changes. What does that look like?
When you think about and how we communicate our Lincoln business systems, it's how our team is positioning capacity across its operating plants, and that just gives us leverage, ability to manage more effectively the cost structure within our business. We're seeing opportunities within our corporate, center-led strategies, and for example, procurement, you've heard us talk about this over the last year. What are the disciplines that we could introduce leverage to our broader global spend? Automation's part of that. Our team has done a nice job while challenging this environment to maintain and grow overall the margin base we had in automation. Automation's footprint when we were in 2020, we were talking about mid to high single digit type EBIT. We've doubled that.
We've more than doubled the ability to drive the margin profile that we would expect within our business. They still have, on a normalized basis, a couple hundred to 2-300 basis points of improvement that we need to go after, but we're confident that we'll continue to drive that from both organic and inorganic opportunities.
You know, what's the typical return on investment that an industrial customer might see from implementing a Lincoln automation solution? And is there opportunity to capture more value there and more margin? 'Cause I know, you know, the target was the average Lincoln-
The average.
But why wouldn't it be higher, given the value that you're providing?
I think it's an excellent question, something that we always challenge our teams on with so much value that we're introducing into the market. So for cobots, pre-engineered robotic cells, you're looking at a shorter payback cycle, six to 12 months. When you're looking at more of the larger multi-million, tens of million types of systems, it's a longer term, so you think about two to three years kind of ROI or payback that we would look to. But the value is driven on the solution, the needs on both labor, efficiency, productivity, quality, and consistency that we offer up.
So our team is very much focused on how do we drive business disciplines to more effectively manage our operating effectiveness and cost structure, and continuing to challenge ourselves from a value proposition to our customers. But we think we have a very, very great offering to present in the markets.
You mentioned procurement savings, so I, I'm mostly just curious, have you looked at, like, AI to help improve operational efficiency, maybe expand capabilities? And how do you see that impacting growth or margins?
Yeah, look, it's still early. I mean, our teams, our IT and our business teams are working to different technologies and, and generative AI, and that is more back office types of capabilities we'll continue to engage in. It's kind of hard to say that we're gonna have this kind of impact in this time frame. But certainly an area that we're looking for areas of productivity within our operations. On the commercial side, a little different. We talk about the data management capabilities of our products, as well as, looking at automation capabilities and welding. We acquired a business last year that ties into vision and AI capabilities to drive more efficiency in developing a weld path. So we're gonna look at it both commercially and operationally.
But I think it's early, too early to tell what kind of impact and what time frame it means to us.
You know, your sales framework assumes, like, a hundred, two hundred basis points above industrial production from new initiatives, innovations, an additional two hundred to three hundred for automation and additive. Can you just talk about how that's trended over the last few years, and how do you expect this framework to hold into this year, into 2026?
Yeah, so I'll start at the latter end. We haven't announced 2026 strategies yet. We'll do that beginning part of next year.
We'll do that today.
Yeah, beginning of next year. But the drivers are still there, right? We're right on top of our sales growth objectives, and if you remember, they were high single digit, low double digit. The mix has changed a little bit between the volume and price on the core. We've seen nice acceleration within the automation business, and on the acquisition side, through 2024, we're at four hundred and forty basis points of growth. So we're right on top of those objectives. You can expect the same kind of themes, meaning we're gonna have a very disciplined acquisition agenda. That three to four hundred basis points, where we're in the high end and over that for the current period, it's pretty key for our growth strategy. When you think about innovation, it's gonna be pretty important for us.
It's a key part of how we continue to posture our solutions and products into the market, and we believe that automation will continue to be an accelerator to growth. So those dynamics are still will continue to be there, and we'll continue to look for opportunities to drive that framework, but we'll communicate more 2026 and beyond 2030, beginning part of next year.
Maybe, we'll talk about Harris then, because they continue to outperform expectations on the margins, and you can... Might give them new targets today, I'm not sure. But, like, what can we expect? Can those margins be expanded further? Could they approach Americas' level over time?
Mm.
Just how you're thinking about that, 'cause they've, you know, really-
Harris has done a great job. Our team has done a great job. Give you a little history. I've been with the company a long time. But Harris, I think it's 2015, the data point we're looking at, we had an EBIT of 10%. We knew we had a lot of work to be done there. We entered a cycle, 2020, we had 15%. So we established a fair range of 13%-15% on EBIT, we thought. We have exceeded that very nicely, and we don't go back, and we're not gonna reduce. We'll be expecting our team to find ways to continue to expand the margin profile of our business, looking at the mix and all the work we've done structurally.
First half of the year, they actually exceeded the Americas business. The Americas business, we might talk about automation. The core welding's doing very, very nicely, but the automation is dilutive to the overall Americas. So we would expect Americas to continue to improve its margin profile with an improvement within the automation space. So there's a nice internal competitiveness there and looking at the segments there, but Harris has just done a nice job, and we'll reset objectives, but it's not going back. I mean, we had 19.4% EBIT in the second quarter. We did have a little bit of a stocking strategy on the retail side that helped a little bit there, but we're very nicely pleased with how our team has performed. But there's still opportunities.
I don't go through a business meeting without defining and understanding kind of where the opportunities are to improve our business. So we have that. So, expect continued development of our Harris model.
You know, I have to try to get information on 2026. As we think about the margins, how do we think about the benefit of operating leverage into next year, plus the potential for the 20 million expected LIFO charges to not repeat? Just think about the building blocks of-
Okay
... 2026 margins.
So first of all, I take the LIFO off the table 'cause it's built into our operating assumptions. What we think of in LIFO is what is in inventory, and how do we need to recognize that cost now versus other companies on FIFO. They have a turn to work through. So we actually have. I like to explain this as, we have more pressure to be really on top of our cost structure and to change this cost structure now because we see it now. We don't wait for a turn on inventory, but it's built into all of our margin assumptions. So we take that off the table.
Mm-hmm.
So truly, it's discussion on margins is gonna be about how do we continue to improve long-term our business model, all the structural actions that we take to shape. And we talked about opportunities, for example, in automation. So you know we've got opportunities there, quantify 200-300 basis points right there. International, we are not consistently within our targets. Now, we believe that our model is within the framework that we have established at 12%-14%, and we've more than doubled the margin profile of our international business, but there's still some work to do there. We need a little bit of volume stability, some slight increases in volumes will give us within the higher end of the range, which you've seen in the quarters where we have performed a little bit better, some strength there.
But our pattern has been consistently a couple hundred basis points of improving the operating margin of our business throughout the cycles over the last twenty years. So, we as we wind down the 2025 standard, high standard strategy, we're gonna be right on top of the 16% on average, and we're gonna be right also ahead of it on a run rate basis, being 17.6% last year, 17.1% in 2023. This year, we're talking about flattish, despite the volume headwinds. So we're gonna be ahead, and we'll continue to have a posture of driving improvement in our operating models.
So you are ahead of your expectations. You know, what has gone better than you thought when you were putting those standards together? And what will be the considerations as you think about setting those next margin targets?
I mean, firstly, Harris has been a standout. We just talked about that. Automation has had nice improvement, though our target is to be at that corporate average, but it has had nice improvement, more than double the margin profile. And then, on the international side, more than double the EBIT profile there, but still within a target framework we have there. So, Harris really stands out as better. I think just in general, our level of disciplines across the business is starting to leverage what we're calling center-led activities across all our business are gonna continue to drive expansion in our margin profile.
We talked about procurement already, but a lot of the back office ability to scale across the globe, finance, IT, HR, all the traditional functions of the business are gonna give us ability to continue to leverage that. So, we're pretty excited about where we're at and kind of where we're headed in the margin profile of our business.
So maybe turn a little bit to capital deployment. You talked about executing on more share repurchases this year, I think the largest dollar amount since 2015. However, leverage is still low. How do you think about the mix of share repurchases versus acquisitions, and can you just do more going forward of both, given where leverage is today?
With more cash generation, you can do a little bit more of both, for sure. Our strategy on capital allocation is so important. We wanna emphasize growth first. Our largest returning investments are when we invest in our own businesses, and that is through capacity expansions or operating efficiencies or new products. Those are higher-returning types of investments. You've seen, if you're tracking kind of how we've not only the results, but how we are communicating our, the framework of investment, and we've doubled that over the last few years. We'll continue to look for internal investment opportunities that are high-returning type ROIC. We're gonna continue to be pretty disciplined, aggressive in looking at acquisition opportunities, and that's in core welding as well as in automation.
We have had a larger percentage of our transactions that are anchored around automation, but nice opportunities also in core welding. We just announced our deal in Australia, acquisition of Alloy Steel in August, the Vanair acquisition in 2024, tied to welding. So we're both anchored on kind of how do we continue to broaden our footprint within the welding space, but then a lot more opportunities within the automation space, so we're gonna drive growth. Then, you know, we've had twenty-nine years in a row now of dividend rate increases. We'll go through our dividend policy in our October board meeting, but we've been pretty consistent with returning cash through dividend rate increases, and then we use opportunistically on share repurchases.
We did increase the range this year, formalize it between $300-$400 million. We're over $200 million already in for the first half of the year, so well on our way within the range, well, we're pretty opportunistic in looking at excess, but we would define excess strategic cash and the timing of that, to accelerate share repurchases, and that's why we did what we did.
But what's the right leverage for this business?
It's a good question. When we internally talk about that 1.75 times target and go up to two. We have a lot of flexibility to go much higher. We look at those. I think if we moved up into a three times range because we had the right acquisition to drive that, we would do it on a short-term basis. Our longer-term perspective to be at that 1.75 times of EBITDA.
As you look into the business in 2026 and beyond, what are the two to three key metrics you're most focused on?
I would start off with top line growth, and that's volumes, the real volumes across core welding, across automation, how we're doing across growth on acquisitions. Incrementals, pretty important for us. Broader operating margins on average, but also how we're doing on incrementals. We like to see mid-twenties type of incrementals on kind of like, call it a normalized volume level. But that's pretty important for us to continue to have the disciplines and make sure all the teams are also clear, have clear alignment of how they all the segments participate in the overall operating margins of the business. Cash, for any business, very important. So our target is to be 100% cash conversion. We're very much on top of that.
Managing working capital and cash generation, a very strong discipline of ours, so we'll continue to reinforce that. And then, you know, we're very disciplined in ROIC as an investor in thinking about the use of capital. It's pretty important for us to think through that.
Okay, one last question as we run down the clock. What do you think is the most misunderstood or underappreciated by the market right now about Lincoln? And if you were to leave investors with one thought about the business strength or strategy that's not reflected in consensus, what would it be?
Just the posture we have in one navigating through the cycles, and then leading into a growth cycle. We're very strongly positioned to see an expansion on both production, industrial production, and what does it mean for the consumables part of our business and core welding, but also positioned for the long-term trajectories in capital, while continuing to shape our model. The consistency we've had in shaping our model while posturing for driving innovation technology into the markets gives us a lot of upside on growth.
Thank you so much. Really appreciate you being here today.
Thank you, Saree.