Lincoln Electric Holdings Inc (LECO) September 24, 2026 Conference Transcript

All right. Well, thanks everyone for joining us. It's great to be here. We got Gabe Bruno with Link 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'd kind of like to start there and just get your thoughts. Hey, is it more a matter of the rate of demand has improved? Are we actually seeing the drivers broaden out at this point and really kind of 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 with the business and backlog out of automation so we had confidence in that and we also saw consistency and 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 welder. 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, 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'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 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 America segment and that's what I mean by consumable standard equipment and automation we've seen strength in Asia so 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 MIA 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 in volume now in 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 20 30 targets and we expect the kind of organic growth that would be 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 two false start years in terms of automation or automotive, I should say, in particular, where I mean, it was, first it was elections, and that kind of caused everyone to go, hey, we're 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. I guess from a conversational perspective, some of these things just have to move forward if you're going to produce new platforms in 28 and beyond. But 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?

So 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, heavy industries, structural fabrication. We haven't seen it yet in automotive. And you're 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 and 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 a pretty important telling tale on that because there are the market indicators, standard importers 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.

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 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 with that mid-single-digit decline, but you're seeing the strength of general industries, heavy industries, a kind of broader level of automation investment. And that excites us. Pulled back a few years ago before we acquired this business called 4A 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 and but it leaned into our mix of automotive to be almost half the business so now we're tracking about 40 percent of our automation business tied into automotive we like to see that more balanced and it was prior to our acquisitions like a third general industry third heavy industry structural fabrication and a third automotive so that's the kind of mix that will then foster adoption because we've introduced products and capabilities that would allow small mid-sized fabricators to really embrace automation. And 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. I mean, when you think about automation, you can look at it sort of one of two ways as an investor. 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 driver 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 and automation in the high single digits. So as I walk through organic growth drivers, whether the Asia dynamics long-term being strong or America's, 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 six, nine 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 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 it's a bit of a shock no matter what time you're talking about but what can we do internally to kind of offset some of these things well just to to emphasize our strategy we've been managing inflationary conditions for 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 a long-standing operating level of execution strategically in our business so what we saw is a continuation we call it persistent inflation we had we had talked about it i talked about it during our second quarter earnings call we had already put taking price in actions during the second quarter but as we see continued inflationary pressures and we take pricing actions now what 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 america's welding segment as well as international they will take hold in September America's beginning of September international 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 could then respond in their own pricing requirements but very disciplined market and managing the price cost dynamics.

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 six-month period, is it just, again, a matter of how volatile that move is and how fast you can recapture it?

Well, we expect price cost neutral in the fourth quarter. So we expect this is a third quarter dynamic, and then fourth quarter, we're back to price cost neutral. And then, obviously, we're managing our business, and if we see more inflationary pressures, then we'll continue to manage that price-cost posture we have.

That's 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's some structural reasons there, but there's 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's a challenge 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 we were targeting for international so on the international side you know this the short term we're hovering between 10 11 percent EBIT margins our target is to be 12 to 15 percent 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 gonna be pretty healthy so that's how we look at the international market so Middle East strongly positioned there we've got pressure short term but we're excited about the energy capabilities and our level 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 you know but I guess it's 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 destruction at this point from from fuel costs we haven't seen any 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 so asia is postured

for organic growth and we'll monitor conditions and obviously be responsive to that uh and the middle east dynamic is is a headwind for us you know as we're navigating the progression of the conflict we've we've talked about six to seven million dollars a quarter of headwind coming from both international and the americas is 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 that makes sense and 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 on metals but maybe he's remind us what the mechanisms look like for passing through that that metal inflation and how quickly that happens on a typical basis yeah so i would i would uh 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 you know a large part of the tariff issues we've had in the last couple years are driven by section 232 tariffs of which a lot of sourced welding rod comes from the north and so we've already dealt with that we are looking to domestic suppliers to be able to to shore up the supply chain there but in the meanwhile we're just managing through pricing dynamics and and that's largely behind us on the hair side of the brazing The largest two 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. 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. So expect on the hair side pricing adjustments on a monthly basis depending upon where silver and copper costs progress. And so right now it's been relatively stable, but certainly it was escalated in 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 and that side of things, right? Because green wire rod, I think it pretty much is non-existent in the United States, correct?

Yeah, you know, we're looking for rods. I'm referring to rods, steel rods. And what it is, is the welding grade rod is specialized, right? And so 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's a very new development then.

We've been working on it now for the last 12, 18 months. 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. And I guess to shift gears a little bit, obviously, automation is exciting. I'm going to keep pressing you on it. But when I think about your strategy of moving more and more into material handling, you know, 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'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 engage with. It's broader base, it's capabilities that 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?

Yeah, so our objectives for growth in M&A work is 300 to 400 basis points of CAGR for the 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 five years, we'd like to point to we've done 10 transactions into the bolt-on type of transactions, half automation, half welding, half core welding. In core welding, meaning in the Americas, in international markets, but where we see opportunities to drive an alignment of adjacencies to our core capability. So 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 Van Air, 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 RealTech, 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. And we're planning on taking over, so we're just introducing some AI capabilities. So the way we look at acquisitions is there may be technology-focused type opportunities, and we'll execute on that to build out capabilities. It 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. I was at IMTS the other week, and again, and 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?

So 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. So you tie that with our first intro is into a cobot. Think of a cobot that 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, the robot 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've got a robot laying down 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, a master welder to make those adjustments to be able to do the weld. introducing AI, introducing vision capabilities under a co-biostructure, then that allows us to have physical AI 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 launch it that VapTAC and then start to take orders in the months to come.

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? I mean, 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 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 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 the general industry, small, midsize fabricating that make it easier to weld.

Got it. Got it. And 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 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 yeah so so the price actions we take are to protect the business model the margin profile of our business what what so we have that as kind of the baseline in navigating so we've talked about getting back to mid 20s increments 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 to 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 percent OP to 14 to 16 which was the last cycle we exited 2025 at mid-17s and 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 to achieve high 20s and 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 try 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 it's the volume driven and so typically we would say pricing in a normalized basis would be somewhere between a hundred to hundred basis points so when we talk about organic growth objectives in the mid to high single digit it's a hundred twenty basic points price the The rest is truly volume in how we are then positioned within the end markets and are 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 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 in our business.

Well, and 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 the program and you kind of hey 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 yeah so this this 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, yeah we're going through some consumer pressures on the retail side. Some are 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. 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 America's 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 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 growth, and then the automation solution set driving incremental growth. 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 air of defense we're thinking f-35 large platforms but like munitions have become a major focus and 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 in the navy our additive uh solutions that we've 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. Been a lot of announcements on partnerships we've had with the military. Just haven't seen it play out into actual incremental volume. It's starting to take hold, and so we're optimistic that the additive business will start 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, and we looked at the additive component to be incremental to that it's an opportunistic upside no that's extremely helpful thank you 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 three four years might hold yeah because 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 one of the key drivers to accelerate the margin expansion of our business and then how we operate so as 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 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. You know, we're a 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 and M&A work. So that 300 to 400 basis points of growth and how we allocate capital is our first agenda item in terms of capital allocation. And then returning cash to shareholders. We've been very consistent in the dividend rate increases since being on 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.

That's 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. Alright, thank you.