Lincoln Electric Holdings, Inc. (LECO) Q2 2025 Earnings Report, Transcript and Summary

Greetings, and welcome to the Lincoln Electric 2025 Second Quarter Financial Results Conference Call. [Operator Instructions] And this call is being recorded. It is my pleasure to introduce your host, Amanda Butler, Vice President of Investor Relations and Communications. Thank you. You may begin.

Thank you, Tamika, and good morning, everyone. Welcome to Lincoln Electric's Second Quarter 2025 Conference Call. We released our financial results earlier today, and you can find our release and this call slide presentation at lincolnelectric.com in the Investor Relations section. Joining me on the call today is Steve Hedlund, Chair, President and Chief Executive Officer; and Gabe Bruno, our Chief Financial Officer. Following our prepared remarks, we're happy to take your questions. But before we start our discussion, please note that certain statements made during this call may be forward-looking, and actual results may differ materially from our expectations due to a number of risk factors and uncertainties, which are provided in our press release and in our SEC filings on Forms 10-K and 10-Q. In addition, we do discuss financial measures that do not conform to U.S. GAAP, and a reconciliation of non-GAAP measures to the most comparable GAAP measure is found in the financial tables in our earnings release, which again is available in the Investor Relations section of our website at lincolnelectric.com. And with that, I'll turn the call over to Steve Hedlund. Steve?

Thank you, Amanda. Good morning, everyone. Turning to Slide 3. I am pleased to report strong second quarter results. Our 7% sales growth reflected diligent price management, benefits from our M&A strategy and improved volume performance from the Americas Welding and Harris Products Group segments. Our team has done an excellent job managing inflationary headwinds and navigating supply chain complexities while maintaining our neutral price/cost position. These efforts, combined with $11 million from savings actions and stronger operating leverage from SG&A has delivered strong profit performance. These results demonstrate the long-term value creation we are generating from our higher standard strategy initiatives and how we are shaping the business to outperform in the next growth cycle. I would like to recognize and thank the global Lincoln Electric team for their ongoing hard work and commitment to serving our customers and advancing the business towards our targets. Our earnings expanded in the quarter with adjusted earnings per share up 11% to $2.60. Year-to-date cash flow generation has been strong with 100-plus percent cash conversion of free cash flow. We have maintained top quartile ROIC performance, which reinforces our disciplined and balanced capital allocation strategy of investing in growth through the cycle and returning excess cash to shareholders. And as we highlighted in our earnings release, we are pleased to announce that tomorrow, we expect to close our acquisition of the remaining 65% interest in Alloy Steel. We are excited to bring the Alloy Steel team aboard and work together to scale their proprietary wear plate solutions into new geographies and end markets. We've had a chance to work with them for a few months, and they are a great addition with a strong business that will be accretive to margins and earnings on day 1. Turning to Slide 4 to discuss organic sales performance. We achieved an approximate 3% increase in organic sales in the quarter, led by pricing actions taken to mitigate higher input costs. Volume declines narrowed to 2.3% as North American manufacturing activity and the industrial gas distribution channel in Americas Welding remained more resilient than expected. In addition, the Harris Products Group generated 11% higher volumes, primarily from the rollout of product to support a new national U.S. retail partner as well as ongoing strength in HVAC due in part to data center build-outs. We continue to see customers defer capital spending and maintain a wait-and-see approach due to policy uncertainty, which continues to impact our equipment and automation portfolios. Our automation sales have stabilized around $215 million per quarter, which we expect to continue in the third quarter and possibly through year-end. We are encouraged by automation steady order rates and backlog quarter-over-quarter and quoting activity remains elevated across their end markets. Year-to-date, automotive and energy sector projects are growing, and we saw general industries pivot to growth in the second quarter. Looking at end market organic sales trends, 3 of 5 end markets grew in the quarter. This was largely price driven, but we achieved volume growth across general industries, which incorporates HVAC and in consumables supporting domestic manufacturing activity. Energy also grew, led by domestic and international power generation projects and strong pipe activity in Americas Welding. Heavy industries remains challenged, but it is incrementally improving on easier prior year comparisons. And as agricultural machinery OEMs continue to destock, it sets up for a recovery in production in 2026. Construction infrastructure is generally choppy given the timing of project activity. But looking at the first half of the year, which smooths out project timing, organic sales were relatively steady. And finally, automotive transportation volumes were compressed due to slower production levels, while equipment investments did expand. I am pleased by the progression of the business year-to-date and would like to underscore our team's continued focus on serving customers, investing in growth and driving productivity and operational efficiency throughout the organization. We also remain disciplined on price/cost management and are continuing to shape the operating model to position the business for more profitable growth as end markets recover. And I will now pass the call to Gabe Bruno to cover second quarter financials and our raised outlook in more detail.

Thank you, Steve. Moving to Slide 5. Our second quarter sales increased 6.6% to $1.089 billion from 5.2% higher price, a 3% benefit from acquisitions and 70 basis points from favorable foreign exchange translation. These increases were partially offset by 2.3% lower volumes. Gross profit dollars increased approximately 6% to $406 million and gross profit margin held relatively steady at 37.3%, down 30 basis points versus prior year. A $3 million benefit from our savings actions as well as diligent cost management and operational initiatives substantially offset the impact of lower volumes and $8.5 million LIFO charge in the quarter and acquisitions. Year-to-date, we have incurred approximately $10 million in LIFO charges, which is expected to repeat in the second half of the year. Our SG&A expense increased approximately 1% or $2 million, primarily from acquisitions. $8 million from our savings actions offset an incremental $4 million of employee costs, reflecting our decision to reinstate the annual compensation merit increase in the quarter, which adds approximately $5 million per quarter. SG&A as a percent of sales improved 100 basis points to 19.4% of sales. Reported operating income increased 29%. The year-over-year increase reflects special item charges in the prior year period. Excluding special items, adjusted operating income increased approximately 10% to $195 million. Our adjusted operating income margin increased 50 basis points to 17.9%, reflecting a 26% incremental margin. Acquisitions had a 30 basis point unfavorable impact to our margin. Other income, excluding special items, was 19% higher from our initial Alloy Steel investment. We reported second quarter diluted earnings per share of $2.56. On an adjusted basis, EPS increased 11% to $2.60. Our EPS results include $0.03 from favorable foreign exchange translation and $0.06 from the impact of share repurchases. Moving to our reportable segments on Slide 6. Americas Welding sales increased approximately 7%, driven by 6.5% higher price and an approximate 5% contribution from our Vanair acquisition, which anniversaries August 1. Volumes were lower by approximately 3%. Higher price reflects actions taken through the first half of the year to address rising input costs. We anticipate higher price in the third quarter due to the timing of our actions throughout the second quarter, and we will continue to monitor trade policy and decisions and take appropriate actions as needed. Americas Welding segment second quarter adjusted EBIT increased 1% to $138 million. The adjusted EBIT margin declined 130 basis points to 18.6%, primarily due to higher incentive compensation and the impact from the acquisition and higher allocation of corporate expenses, which anniversaries in the third quarter. These factors offset the benefits of cost management and our savings actions. We expect Americas Welding to continue to operate in the 18% to 19% EBIT margin range for the remainder of the year. Moving to Slide 7. The International Welding segment sales declined 2.5% as approximately 4% favorable foreign exchange translation was partially offset by 7% lower volumes. Demand trends further weakened in the EMEA region, largely outside of core Europe and Asia Pacific was challenged with stronger prior year project activity. Adjusted EBIT increased approximately 19% to $31 million. Margin increased 230 basis points to a more normalized rate of 12.7%, which reflects seasonality, benefits from savings actions and equity earnings from our Alloy Steel investment. We expect International Welding margin performance to operate on the higher end of their 11% to 12% margin range for the balance of the year, reflecting the inclusion of Alloy Steel. Moving to the Harris Products Group on Slide 8. Second quarter sales increased 19% with 11% higher volumes and 7% higher price. Volumes reflected strength from the HVAC sector and expansion of our brand in the retail channel requiring initial inventory stocking. Underlying retail trends remained challenged in the quarter. Price increased on metal costs and price actions taken to mitigate rising input costs. Adjusted EBIT increased approximately 28% to $32 million and margin improved 100 basis points to a record 19.4% on volume growth, effective cost management and strategic initiatives. We expect the Harris segment to operate in the 17% to 18% margin range for the balance of the year due to seasonality and normalized volume trends. Moving to Slide 9. We continue to generate strong cash flows from operations in the quarter. For the first half, cash flows have increased approximately 9% with 104% conversion ratio. Average operating working capital rose 40 basis points to 18.4% versus the comparable prior year period. Moving to Slide 10. We are executing well to our capital allocation plan. We invested $57 million in growth, reflecting CapEx investments and our initial investment in Alloy Steel. We also returned $169 million to shareholders through our higher dividend payout rate and the $127 million of share repurchases. We maintained a solid adjusted return on invested capital of 21.7%. Moving to Slide 11 to discuss our operating assumptions for 2025. We are raising our operating framework assumptions given first half actuals and the inclusion of Alloy Steel. Year-to-date, we have seen volumes only partially offset price increases, and our updated operating assumptions assume this dynamic will continue through the balance of the year given the relative resilience in North America. We expect this will result in a low single-digit percent organic sales growth for the full year. With the announced agreement to acquire the remaining interest in Alloy Steel on August 1, we now expect acquisitions to generate approximately 270 basis points in sales growth this year with Alloy Steel contributing $20 million to $25 million in sales for the balance of the year. We are continuing to target a neutral price cost position. Our supply chain initiatives are focused on maximizing domestic supply, and we are pursuing benefits from operational initiatives and savings actions to help offset inflation in addition to price actions. Our savings program anniversaried in July and in the first 4 quarters of the program, we generated $47 million in incremental savings with approximately 65% from temporary cost savings actions. As we look ahead to the balance of the year, we estimate an additional $10 million to $15 million will be realized largely from permanent structural savings now that we have anniversaried our temporary cost savings actions. These permanent savings will be split evenly between our 2 welding segments. This savings mix shift reflects the reintroduction of some discretionary spending into the business to support our commercial teams and strategic initiatives, which have been margin neutral as demonstrated in the second quarter. By year-end, we expect to achieve approximately $60 million in savings from the 6-quarter program at a 50-50 temporary and permanent split, and we continue to assess where we can further shape the operating model. With more favorable volume performance in the first half of the year and the inclusion of Alloy Steel, we now expect our full year adjusted operating income margin to be steady to slightly up versus the prior year period with a high teens percent incremental margin. This builds on our first half incremental margin rate of 17%. Our interest expense, tax and CapEx assumptions are being maintained, but we are now including $0.07 of EPS contribution from the Alloy Steel acquisition for the balance of the year. We believe these updated operating assumptions reflect the progression of the business while remaining cautious on demand trends in the near term. And now I would like to turn the call over for questions.

[Operator Instructions] Your first question is from the line of Angel Castillo with Morgan Stanley.

I was hoping you could help unpack a little bit more what you're seeing in terms of orders and just kind of customer demand. In particular, if you could talk about maybe what you're seeing in terms of trends in July and how that kind of progressed from 2Q into July and how that's kind of informing your second half outlook?

Yes. So thanks for that question, Angel. We are seeing July order trends hold. So this is what gives us confidence as we provided an update to the assumptions. We're seeing more strength in general industries as we wound up the second quarter. As Steve commented, volume trends were improving in general industries. More cautious, as you can expect in heavy industries being down low teens, seeing that progression still into the third quarter. And then on the automotive side, I'd comment that while the overall trends were up low single digits, a little bit more pressure on volumes as we saw progressively in the second quarter and as we enter the third quarter.

That's helpful. And then I was hoping you could help me understand, I guess, a little bit more of the kind of the Harris segment volume dynamic. It sounds like some of the volume uplift there was kind of driven by some inventory stocking ahead of -- I think you said product rollout. But just curious, can you help us understand, I guess, maybe the underlying -- what the underlying kind of organic demand trends are like when you back that out? And as we think about that stocking, I guess, how does that ultimately impact your second half or potentially first half of next year?

Yes, Angel, great question. So in general, I just think if we remove the initial stocking for a new retail customer in the channel, we're probably more flattish type of volumes progressively as we go into the third quarter.

Your next question is from the line of Saree Boroditsky with Jefferies.

Kind of building on the end market commentary, but you talked about customers deferring decisions. I was just curious if we get more tariff certainty, we now have The Big Beautiful bill, if you've seen any changes in behavior? And if not, what are customers waiting to see to execute on some of those elevated quoting levels that you talked about?

Yes, Sure, I think what you're seeing is as the Trump administration starts to provide some clarity around the tariff rates for individual countries, the rules of the road are starting to get more firmly set up, which has, I think, been the key hang up for a lot of our customers who look at investments in CapEx, particularly around equipment and automation, not wanting to put capacity or investments in the wrong place as the trade policy wins were shifting constantly. So I think as we start to get a little bit more clarity on what the rules are going to be going forward and hopefully, those stabilize, I think that will really go a long way towards addressing the wait-and-see attitude that a lot of our customers have taken. The One Big Beautiful bill will obviously try to create incentives and pressures for reshoring in America. And I think that will primarily benefit the general industry segment where we have a lot of the more smaller fabricators that are going to see an uptick in demand and need to invest, particularly in automation to handle the additional volume despite the labor shortages.

Appreciate the color. And then you cited the $10 million to $15 million of savings in the second half from permanent cost action. Could you just expand on some of those actions that you're taking?

Yes. Saree, just think about the actions as a continued focus on evolving the operating model. So whether it's an organization or looking at facilities and shaping efficiencies for the long term, we just continue to look for opportunities to shape the model.

Your next question is from the line of Bryan Blair with Oppenheimer.

You noted that automation quoting activity has been strong. That's encouraging. I'm wondering if you could offer any finer points on that front. You just mentioned The One Big Beautiful bill. I suspect that's going to be a good guy in terms of automation demand near to medium term. Just curious what color you can offer. And in the end, I'm mostly curious how your team is feeling about potential inflection in demand and sales rate into 2026.

Yes, Bryan, thanks for the question. A lot of what's happening is our customers are trying to figure out how they're going to respond to the changes in trade policy in terms of what they make where. And a lot of the quoting activity is driven by their contingency planning and their desire to respond to whatever the ultimate rules of the road become. The wait-and-see approach is while the rules aren't finalized, so I don't really know whether to pull the trigger on the investment you quoted for me in the U.S. versus Canada versus Mexico, what capacity should I be assuming and the like. So our team is very encouraged that as the trade policy starts to get more firmly established that, that will encourage customers to then pull the trigger on projects that we've quoted for them already. Now we've been in this wait-and-see approach for a while now. So I think we're a little bit conservative in trying to prognosticate when the spigot is going to get turned on. And there are portions of our business that are fairly long cycle. So we need to get the orders in hand before we can be confident about forecasting the future revenue of those. But in general, the market situation is very encouraging, and we're optimistic about the future with a conservative assumption that the business is -- the automation business will basically stay steady through the second half.

Okay. Understood. I appreciate the color. And you mentioned that International Welding demand incrementally weakened during the quarter with that weakness more so outside core Europe. Can you offer a little more detail on that dynamic? It would be helpful to know how International Welding orders trended through the quarter and into July. Gabe, you had mentioned that July trends have held overall. Does that include International Welding? Just any color or nuance would be helpful.

Yes, Bryan, when I talk about July, I'm talking overall. So that is a good observation you made, Bryan. But when you think about International, there are a couple of dynamics that we kind of pointed to. One is the timing of projects, particularly comparing on the Asia side of the prior year. And then on the EMEA side, Turkey continues to operate in a challenged economic environment as well as some project timing in Middle East and some areas of Europe. So if you back those out, core Europe is probably tracking more in the low single-digit type progression of -- on real organic trends. And the timing of projects have a meaningful impact on the overall trend. So that's built into the overall outlook that we built into the assumptions.

Your next question is from the line of Mig Dobre with Baird.

So 2 things that sort of stood out to me in your end market commentary was automation. You talked about this business stabilizing, I think that's interesting. And I'd like to hear more of what you're seeing in the auto component of that business, which as we know is quite large versus maybe some of the other industries that you're exposed to in automation. And then the second thing is general industries being up high single-digit percent. I'm just kind of wondering what's all in there. I know smaller fabricators, as you mentioned, but I would imagine maybe some of your distributors are in this category as well. Do you have the sense that there's been any demand pull forward or anything unusual happening in the channel as a result of these tariffs and your own price increases?

Yes, Mig, I'll provide some high-level commentary and then let Gabe comment on specifics. With respect to automation, I think it's important to note that our outlook for automation in the second half of the year is steady from the first half, and there is normally a fourth quarter pickup in automation. So the outlook that says steady for the second half actually does imply a decline versus prior year. But we think given where the business has settled in, that's a pretty realistic and conservative call for the second half with maybe a little bit of upside potential for that. And then with respect to your comment about general industries and the industrial distribution channel, remember that when we spoke last quarter, our concern was that we had to raise prices to offset tariffs. We were anticipating a demand elasticity response. Our call was that volume would offset price and we'd be flat. And what we've seen is that volume has been less negative than we feared, right? So that leads you to the overall organic up.

Just to add, Mig, on the automation side of things, when Steve refers to things being flat, that does imply for the full year that we're down, call it, mid-single digits. And we just haven't seen the inflection of incremental orders yet. Although as Steve mentioned, the quoting activity is very strong. The pipeline is very strong. We are very positive in terms of the framework when we do see more confidence in the commitment to capital. So we're very well postured for growth on the automation side of things. In general industries, we do have the impact on HVAC activity in general industries. But overall, volumes were positive. And so while I can't point to an inflection, I'm not aware of any buy forward of inventories that are occurring. We're not seeing that in the channels. So we are monitoring that closely, real positive within that on the consumable activity. As you know, that's a reflection of factory activity. So we're staying real close to it, trying to understand the drivers there progressively from PMI, industrial production trends. And what we saw on the industrial distribution side of things is activity holding, and I'm considering price impact and volumes and just seeing a more favorable steady trend on industrial distribution. So those are positive trends, and they are better than expected as we entered the second quarter.

Understood. I guess my follow-up then, Steve, you kind of hinted in your prepared remarks at the next cycle and mentioned margins. So I guess I want to ask you a question about that. When we're kind of looking here this year, last year, having to deal with, obviously, the volume pressure that you have to deal with, margins have been quite resilient. And I'm wondering how you think about or what the right framework to think about margins as we're starting to see, hopefully, this volume recovery extend into 2026 and beyond. How do you guys think about incremental margins? What's the right opportunity for the company, especially with the cost takeouts that you had here and with automation now being a bigger part of the mix relative to where we were in the early cycle portion of the prior cycle?

Well, Mig, the margin performance, as you point out, we're pleased with the progression, particularly with the known opportunities we see within the business. And I'll just point to a couple. You mentioned volume. And I would point to our historical incrementals when we perform in volumes in the, call it, the mid-single digits. We're talking about potentially mid-20s type of incrementals. On the automation side, which is you know, it's included in our mix of business, and we've -- despite the more flattish trending slightly down in automation, we've been able to kind of hold our overall operating margins with knowing that as we gain improvements in volume, our automation margins are going to progress at a higher incremental level. So that's how we think of our model. We continue to look for opportunities to shape our business. We expect that incrementals will progress as historically we've advanced, and we've got opportunities continuing on the automation side of our business, and I'd point to International as well. You know the targets we've established. And with some volume improvement, we should also see improvement in margins on the International side.

[Operator Instructions] Your next question is from the line of Nathan Jones with Stifel.

A bit of a follow-up question on consumables and particularly focusing on the Americas. There's obviously a lot of steel in the consumables that you sell. Interested in just hearing a little bit finer point on what volume versus price was in the consumables. Just thinking primarily about -- as you said, it's an indicator of what overall activity is. So just interested in some more color on volume versus price in the consumables business.

Yes. Nathan, in general, we don't break out the pricing between the product offerings, but you could assume that pricing is a little bit higher on the consumable side than on the equipment side. And then what that means is that volumes held on the consumables side of our business to be flattish type of a look. So we're pleased with the progression. It is -- has been more resilient than we were expecting, and we're monitoring factory activity and how that progresses on the macro level.

Okay. That's helpful. And then maybe just any color you can give us on what we should expect for pricing in 3Q, just given pricing is going to be higher in the third quarter just based on timing of what you implemented during the second quarter. And then I guess just a follow-up on that would be, do you expect to have to go back to the market for any more price just given higher steel tariffs and potential copper tariffs coming along here or anything else that's in the pipeline that might see you have to go back to the market for more price?

So maybe I'll answer that question first, the latter question, Nathan. We're going to respond with our price/cost neutral posture as we've done. And so we'll have to monitor what progresses from a trade actions standpoint as well as input costs. In terms of pricing going into the third quarter and the timing of actions taken in the second quarter, we do expect another 100 to 200 basis points of incremental pricing impact going into the third quarter from actions taken.

And Nate, just to follow up on that. We have already taken pricing actions to cover the announced tariffs on steel and aluminum. So we would -- unless that policy changes, right, we would not need to take additional price on steel and aluminum. But as the country- by-country tariffs get finalized, then we'll respond accordingly, as Gabe indicated, to maintain the neutral price/cost model.

Your next question is from the line of Walt Liptak with Seaport Research Partners.

I wanted to ask about the comments around incentive comp programs and how those were brought back in. So I just wanted to understand your thinking about why you brought it back. Was it because of the second quarter and the volume and pricing discussion that we've been having? Or is it -- what is it about now that you would bring back that incentive comp?

Yes. So Walt, there's 2 elements to that. One, the incentive comp and bonus is really just formulaic based on the performance of the business. So there wasn't really a decision to make on incentive comp. On the merit increases, which are base salary increases, if you recall, we announced a temporary pause in that because we were very concerned as we saw the shockingly high tariff proposals from the Trump administration and factored in the pricing that we would have to take to try and offset that. We were very concerned that there was going to be an overwhelming demand elasticity response and that volumes could potentially fall off a cliff. So as a prudent measure, we decided we didn't want to introduce more cost into the business in that time of uncertainty. We took a 90-day pause to evaluate the demand input and the market's response to the tariffs and our pricing actions. And as we've been talking about throughout this call, right, the volume response wasn't as bad as we feared. And so we decided to reinstate or restore the merit increase per our normal program.

Okay. That's great. Yes. And I guess as a follow-up, we've talked about the volume holding up a little bit better in the second quarter. Was there anything else that stood out to you in the quarter that was better than expected? Was it the price realization that you're getting and pushback or anything else about the quarter that was on the positive side?

Again, it's important to keep in mind, Walt, in the first quarter, we had a big headwind from Turkey, right? That was a onetime related to the work stoppage and the labor negotiations there. And in the second quarter, we didn't have that headwind, and we also had a little bit of a tailwind from the load-in to a new large retail partner. So absent those 2 things, we're still encouraged by the strength of the business and the progression and the resiliency that we see, but you have to include those 2 onetimes as you're comparing the sequential move from Q1 to Q2.

Just to add, Walt, on the pricing side, based on what we saw, we're right in line to what our communications have been. If you recall, we said we expected pricing to move in the mid-single digits, and that's what we've seen now. We're probably pushing with the full -- at full maturity on the higher end of that. But really, as we've been speaking to on the call, is the resiliency in volumes where you've seen the -- which were stronger than expected.

Our final question will come from the line of Steve Barger with KeyBanc Capital Markets.

Going back to some of the third quarter commentary, I hear you on the continued uncertainty. But as you noted, pricing is strong, comps are easy. So should we expect normal 3Q revenue seasonality of down kind of low single digits sequentially? Or is there some other factor we should think about?

No, I think it's a fair observation, just progressing in our normal seasonality is a good assumption.

With the caveat, Steve, that we'll start to see now the sell-through replenishment of the new retail customer, but we won't have the onetime load-in that we had in the second quarter.

Yes. Yes. Understood. Back to the quoting activity in robotics. During the quarter, we saw an announcement between the largest Cobot OEM and one of the biggest global robotics consumers. In some industries, seeing a big player make an investment can spur activity from fast followers. Do you see dynamics like that in your business? Or is each deal more idiosyncratic?

Steve, we're really focused on trying to solve the customer's challenge of attracting and retaining labor to drive their operations. And one of the biggest barriers for somebody to adopt automation is ease of use, ease of programming, ease of setting welding parameters and the like. So we're singularly focused on trying to make automation easier for customers to deploy and adopt into their operations to the degree that there are other participants in the market that help amplify the message to the end user that they need to automate to survive. That's fine with us, but we're focused on our strategy and playing our game.

This concludes our question-and-answer session. I will now turn the call back to Gabe Bruno for closing remarks.

I'd like to thank everyone for joining us on the call today and for your continued interest in Lincoln Electric. We look forward to discussing the progression of our strategic initiatives in the future. Thank you very much.

This concludes today's call. Thank you for joining. You may now disconnect your lines.