Look, 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'd like to start there and just get your thoughts. 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 move it in a much more concerted way?
Yeah. 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 the end of the second quarter. Now, we've seen that. We typically have line of sight for six to nine months or so worth of business and backlog out of automation, so we had confidence in that. And then we also saw consistency in the level of consumable volumes. So a little bit more than half of our business is consumables, and what that represents is what's actually being welded, what's the fabrication, the level of production going on in the market.
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, 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 needs, safety, all that with the automation solution offers to our customers. And then we saw a significant inflection in standard welding equipment.
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 would typically would expect in the strength of an industrial cycle. Consistency in production, that consistency translates into conviction of capital investment, and so that's the tone. 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 you 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 with the conflict in the Middle East. And then we've seen Harris starting to inflect some positive volume now in this third quarter.
Those are the drivers of demand that point to the kind of strength that we expect. That is all pretty much how we look to short-cycle activity. Long-term expectations, organic growth, we are talking about mid to high single-digit CAGR on the long-term strategy. We just launched this year our RISE strategy and set forward 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 on the automation side of our business. That is kind of the lay of the land there, Chris.
No, that is extremely helpful, and I guess nice dovetail in terms of you talking about conviction of capital spending. We have had kind of two false start years in terms of automation or automotive.
I should say, in particular, where first it was elections, and that kind of caused everyone to go, "Hey, are we going to ICE, EV? Let us kind of just sit on our hands for about a year." Tariffs blew the world up last year. Now you are starting to see some of these projects move forward in the back half of 2026. I guess from a conversational perspective, some of these things just have to move forward if you are going to produce new platforms in 2028 and beyond. I guess, does it shorten the selling cycle? Does it kind of give a bigger opportunity long term? How do you think about just the impact on automotive being so stretched out here?
The automotive end market is the only end market that we have not seen growth yet. We were down mid-single digit in the second quarter. As I mentioned, think about our consumable activity in automotive time to production. When the markets are telling you that production is down low to mid-single digits, you can see our consumable volumes are tracking that, and that is what our comments infer. We have seen, as you point to, high level of quoting activity, but we have not seen that turn into orders. We have seen broad growth in automation, in general industries, heavy industries, structural fabrication. We have not seen it yet in automotive. You are right, the last two 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.
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 tale on that. Because there are the market indicators, Standard & Poor's updates that come every 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 investment.
Well, to that point, my understanding was a lot of the back half 2026 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?
We're seeing 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. That excites us. Pull back a few years ago, before we acquired this business called Fori Automation, 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 positioning type equipment, which is very good capabilities in an automation offering. But it leaned into our mix of automotive to be almost half 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, a third heavy industry, structural fabrication, and a third automotive.
So that's the kind of mix that would then foster adoption because we've introduced products and capabilities that would allow small mid-size fabricators to really embrace automation. So when you see us talk about cobots and other means of automation that makes it easier to weld, it's because we want to broaden out the adoption within our automation footprint.
Well, that's again, a nice segue. When you think about automation, you can look at it sort of one of two ways as an investor. It's 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?
Yeah, now 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 digits. As I walk through organic growth drivers, whether the 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 base, and we just see that continuing to drive. So it does give us, because some of these projects are longer cycle type projects, it gives us some visibility in what's progressing six, nine months, in terms of an investment cycle.
But we really believe its high single digit type organic growth gives us opportunities to continue to look at acquisitions that complement the core business or add capabilities like we've done in vision capabilities, that introduce AI capabilities that we think about. So that's how we see automation.
No, that's extremely helpful. Thank you. 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 re-emphasize our strategy. We have been managing inflationary conditions for years and years and years, and our strategy is to be price cost neutral. As we are navigating inflationary pressures, we take action on price, and that has been a long-standing operating level of execution strategically in our business. What we saw is a continuation, we call it persistent inflation. We had talked about it, I talked about it during our second quarter earnings call. We had already taken pricing actions during the second quarter. As we see continued inflationary pressures, then we take pricing actions. 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.
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 Welding. They will take hold in September. Americas Welding, beginning of September. International Welding, the end of September. We will not see that mature into the fourth quarter. Our strategy is always, no matter what environment we are operating, if we have inflationary pressures, we are going to take pricing actions. The channel is pretty disciplined. We give notice so the channel can then respond in their own pricing requirements. Very disciplined market in managing the price cost dynamics.
I guess maybe just a level of confidence in terms of your ability to offset this. I think over a 12-month period, you would be very confident in terms of being able to claw this back. Over a six-month period, is it just, again, a matter of how volatile that move is and how fast you can recapture it?
We expect price cost neutral in the fourth quarter.
Okay.
We expect this as a third quarter dynamic, and then fourth quarter, we are back to price cost neutral. Then we are, obviously, managing our business, and if we see more inflationary pressures, then we will continue to manage that price cost posture we have.
That is very helpful. Thank you. 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 is some structural reasons there, but there is a lot of excitement around aerospace and defense investments, some kind of re-industrialization there. What are you seeing in terms of conversations around Europe specifically?
Well, Europe is a challenge market for us, right? Our posture strategically is a stable operating environment in terms of demand, but continue to challenge the operating model. We are hopeful that aerospace defense, the industrial base in Europe, that there does progress into incremental investment. We have not seen that yet, but we are hopeful. Until we see that, our posture strategically is to not expect growth out of core Europe, but to continue to challenge ourselves in the operating model to improve the margin profile that we are targeting for International Welding. On the International Welding side, the short-term, we are hovering between 10% and 11% EBIT margins. Our target is to be 12%- 15%. We want to continue to drive more improvement in the margin execution out of Europe, but drive growth out of Asia with incremental margins that are going to be pretty healthy.
That is how we look at the International Welding market. Middle East, strongly positioned there. We have got pressure short-term, but we are excited about the energy capabilities and our level of positioning in the Middle Eastern market, which should be accelerating growth as well.
That's really helpful. I guess maybe just to pull that thread a little bit in terms of Middle East and Asia, obviously, we feel the fuel prices 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? Is there demand destruction at this point from fuel costs?
We haven't seen any pressure on demand as a result of fuel short-term. When you look at the Asia markets, we continue to see strength in India, see strength in China, see strength in Southeast Asia. Asia is postured for organic growth. We'll monitor conditions and obviously be responsive to that. The Middle East dynamic is a headwind for us, as we're navigating the progression of the conflict. We've talked about $67 million a quarter of headwind coming from both International Welding and the Americas Welding. There's an export component of business that comes out of the Americas and serving 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.
Yeah. No, that makes sense. 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?
Yeah. So I would differentiate the question between metals associated with core welding and metals that are associated with our brazing business. 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 rod comes from the North. So we've already dealt with that. We are looking to domestic suppliers to 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 Harris side, with the brazing, the largest two commodities that drive some volatility in pricing is silver and copper. Silver had peaked at over $110 a troy ounce beginning part of this year. Now it's hovering between the 60s.
Haven't 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. Expect on the Harris side, pricing adjustments on a monthly basis, dependent upon where silver and copper costs progress. Right now it's been relatively stable, but certainly it was escalated beginning part of the year.
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 and that side of the things, right? Because green wire rod, I think it pretty much is nonexistent in the United States, correct?
Yeah. No, we're looking for rod. I'm referring to rods.
Okay.
Steel rod. What it is the welding grade rod is specialized, right? It's really working with potential domestic suppliers that can provide some optionality for domestically sourced welding rod. That's really what I'm referring to.
Interesting. So that is a very new development then.
We have been working on it now for the last 12, 18 months. It is a key part of how we look at supply chain sourcing. But largely, up north, that is 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, so I am going to keep pressing you on it, 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 is now probably 40%, 50% of the automation business. So it is how do we continue to develop the footprint within our customer base to provide more and more automation capabilities? So when I mention material handling or testing or other capabilities, it is 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. That is what the automation solutions really engage with. It is broader base, it is capabilities, and we continue to broaden out.
That's really helpful. I guess from a strategic perspective, as you think about additional acquisitions, 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?
Yeah. So our objectives for growth and M&A work is 300- 400 basis points of CAGR for its annual growth rate. In the last 10 years, our CAGR has been 480 basis points. So very broad-based. 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. Over the last five years, we like to point to, we've done 10 transactions into the bolt-on type of transactions. Half automation. Half welding. Half core welding. Core welding meaning in the Americas, in international markets, but where we see opportunities to drive an alignment of adjacencies to our core capabilities. We saw it last year with the alloy steel transaction out of Australia with wear applications.
We saw it in the Americas a couple of years ago with Vanair Manufacturing, 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, Inrotech, which is about technology. That technology provides us vision systems that have been key to our development of Physical AI capabilities and automation, which by the way, we're going to launch our first Physical AI offering in our trade show in October, called FABTECH. We're planning on taking orders, so we're just introducing some AI capabilities. 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 what 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. I guess maybe not to preview too much what's happening at FABTECH, but just what is the thought process there? Is it a matter of partnerships? Is it a lot of internal R&D? How do you think about the opportunity?
Yeah. I mentioned the acquisition. The acquisition introduced vision capabilities. You think about intelligence, think about our own welding intelligence, the expertise we have and the power sources, the parameters, the welding process. We tie that with our first intros into a cobot. Think of a cobot that has the intelligence to be able to make unstructured decisions surrounding a welding joint. That's what it does. The vision allows the cobot, the robot to see, and then the welding parameters intelligence allows the cobot to make adjustments to the welding process. I use this example to make it really simple. Traditionally, if you have a straight welding path and you've got a CAD design, pretty straightforward, you've got a robot laying down a welding bead in a straight path.
The moment you introduce variables in an unstructured way, it takes a human, call it master welder our teams call it, right, a master welder to make those adjustments to be able to do the weld. Introducing AI, introducing vision capabilities under a cobot structure, that allows us to have Physical AI come to life. That's what we're looking at. It's new for us. It's been a journey in acquiring the capabilities and in developing internally our own capabilities and the software engineering behind that, and we're planning on taking orders this fourth quarter. We've been prototyping this with some customers, and our team is ready to launch it at FABTECH and then start to take orders in the months to come.
No, that's very exciting because 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 of the pool. How do you guys think about the customer demand for something like this? Is that really still a major driver, that kind of skills gap? Does this really fit that niche? Again, what's the thought process there?
Yeah. Hard to say specifically what kind of incremental growth that we'll have just from those capabilities. But it does affirm what automation means in the industrial markets. 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 tying different parts of the end markets, and we just continue to add capabilities that give us confidence that this is an attractive offering with a value proposition that our customers are going to continue to desire. Then we grow the adoption, not just into automotive, heavy industry, structural fabrication, but also to general industry, small, mid-size fabricating that make it easier to weld.
Got it. Got it. Maybe just to 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? 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.
Yeah, so the price actions we take are to protect the business model and the margin profile of our business. So we have that as kind of the baseline in navigating. We've talked about getting back to mid-20s incrementals in the fourth quarter. Our objectives, though, at RISE is to be at the high 20s incremental. Let me step back for a moment. 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% OP to 14% to 16%, which was the last cycle. We exited 2025 at mid-17s, and that was in a pretty challenged environment.
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 margin. 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. It's volume-driven. Typically, we would say pricing on a normalized basis would be somewhere between 100, 200 basis points. So when we talk about organic growth objectives in the mid to high single digit, it's 100- 120 basis points price, the rest is truly volume, and in how we are then positioned within the end markets, and our offering.
This is why I point to automation being high single digits. Those are the kind of growth drivers that are real volume than just adjusting a price. The pricing mechanisms we have in place is to protect the model while we are navigating, really, the growth that we are going after in our business.
Well, 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, and you kind of, "Hey, we have 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.
Yeah, just peel the onion a little bit on organic growth drivers. We see Asia broadly being an accelerator for growth. That's the International Welding 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. We see the HVAC. Yeah, we are going through some consumer pressures on the retail side. Some are tough comps you saw in the second quarter, some into this third. 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. Then you think about Americas. 80% of our automation business is within the Americas Welding segment.
If you have a high-single digit type of growth trajectory in automation, of which 80% is at Americas Welding, we expect Americas Welding volume to be in that mid to high-single digit type growth. And we see innovation typically to contribute about 100, 200 basis points of incremental organic growth. So take pricing as 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 growth. Then the automation solution set driving incremental growth. That's kind of how it fits together.
Not to get too specific on the drivers front, but I mean aerospace and defense, no secret, that has been a major strong point of late. I think when a lot of us think Aero Defense, we are thinking F-35 large platforms, but like munitions have become a major focus. I guess has Lincoln been approached to kind of help speed up that process at all?
Well, we certainly have seen it with some of the work in the military and the Navy. Our additive solutions that we have developed, we have not 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 has been a lot of announcements on partnerships we have had with the military. Just have not seen it play out into actual incremental volume. It is starting to take hold, so we are optimistic that the additive business will start to contribute also incrementally on sales and incremental margins as well. So that is a very nice position to have. That is opportunistic. All the core assumptions we talk about in terms of sales growth or margin expansion, we look at the additive component to be incremental to that. It is an opportunistic upside.
No, that is extremely helpful. Thank you. I guess just last final thoughts here. Anything you would really want to leave the audience with in terms of how you see your positioning in the market here and kind of what the next three, four years might hold?
It goes right back to our RISE strategy. 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. We believe that that is one of the key drivers to accelerate the margin expansion of our business and in how we operate. So that is a key part of our strategic objective. RISE and how we drive innovation, how we engage with our customers, how we provide the environment for employees to elevate, how we are engaging within our business. These 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. We are a very strong cash generation type business, very disciplined in capital allocation.
We want to emphasize growth, and that is internal investment. We have more than doubled the level of CapEx or internal investment over the last few years. We continue to look at as the highest returning opportunities for us as a business. You will continue to see a growing trajectory of internal investment and then lean in in M&A work. That 300-400 basis points of growth and how we allocate capital is our first agenda item in terms of capital allocation. Then returning cash to shareholders. We have been very consistent in the dividend rate increases since being on NASDAQ in 1995. Then we will return cash to shareholders through share repurchases to cover maintenance and then any excess strategic cash. That is how we think about it.
No, that is extremely helpful, Gabe. Again, thank you for taking the trip down to Nashville. Thanks for the insight and thanks everyone for joining us today. Really appreciate it.
All right, thank you.