Greetings, and welcome to the Lincoln Electric 2024 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, Greg, and good morning, everyone. Welcome to Legal Electric's second quarter 2024 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, 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 discussed financial measures that do not conform to US GAAP. A reconciliation of non-GAAP measures to the most comparable GAAP measures 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 solid second quarter results, demonstrating the team's strong execution of our higher standard strategy initiatives, structural improvements in the business and diligent management of costs, which has enabled us to successfully navigate through a more challenging portion of the cycle.

Despite an organic sales decline of 4% in the quarter, we held our operating income margin steady at last year's record 17.4% rate. I would like to thank the global team for staying focused on our customers and executing our commercial and operational initiatives in a dynamic environment.

We also reported solid earnings performance, cash flow generation and cash conversion at 110%. We continue to invest not only in growth via internal CapEx and two acquisitions, but also returned $91 million in cash to shareholders in the quarter through our dividend and share repurchases.

We did this while maintaining top quartile ROIC performance, highlighting strong capital stewardship in the business. Turning to slide 4 to discuss organic sales trends in the quarter.

We experienced lower demand in our two welding segments due to lower production levels among heavy industry OEM customers, moderating automotive production and weak macroeconomic conditions impacting our customers in the general industry sector.

We also saw a pause in capital spending for automation projects as the automotive OEMs rebalance future product plans between EVs, hybrids and internal combustion powertrain platforms and as small and medium-sized fabricators moderate their capital investment in the face of increasing economic uncertainty.

These factors, along with challenging prior year comparisons in equipment resulted in a 4% organic sales decline. Looking at our end markets, two of our five end markets or approximately 30% of our end sector sales mix grew in the quarter, led by strong international growth and construction infrastructure and global energy projects.

General industries declined modestly, while heavy industry and automotive sectors were more challenged. Moving to slide 5 and investments for long-term growth. I am pleased to report that we have added approximately $175 million of annualized sales from three acquisitions year-to-date.

This generates 400-plus basis points of sales growth versus prior year, which is in line with our strategy. We previously highlighted our RedViking Automation acquisition in April and I'm pleased to discuss two new acquisitions, including Vanair, which we announced earlier today.

First, Inrotech is a small but impressive automation integrator in Denmark that has developed a proprietary AI-based solution that automatically programs a welding robot with minimal human intervention. This technology enables customers to reduce the time it takes to program a robot to make complex repetitive welds from days to minutes.

Initially designed for shipbuilding applications, we believe this technology is a game changer that can be deployed across a broad range of solutions. Earlier today, we announced the acquisition of Vanair, which is a leading player in mobile power solutions for the service truck industry.

This acquisition extends our channel reach to sell our existing welding products to this customer segment while expanding portfolio of mobile and battery-powered solutions. We have been working with Vanair on several co-development projects and have seen very strong customer response to the products we have launched to date.

We estimate that our three acquisitions will generate an initial full year earnings run rate of $0.14 to $0.16 per share pre synergies as we work to integrate their operations. Moving to Slide 6 and an update on our EV fast charger initiative.

I am proud to report that we successfully launched our initial 150-kilowatt Velion fast charger that was designed specifically to meet the US NEVI requirements.

We have achieved several key milestones and have received very encouraging feedback from prospective customers and continue to pursue a number of sales opportunities tied to NEVI program and private fleets. However, the EV charger market has evolved significantly in the last six months. The deployment of NEVI funds has been very slow.

And with new vehicles able to accept much higher charging levels, the market has begun to question how to future-proof investments in charging hardware. As a result, several leading EV charging hardware manufacturers have become insolvent, exited the industry or announced significant layoffs.

While response to our technology manufacturing capabilities and value proposition has been overwhelmingly positive, many customers now want products that differ materially from NEVI's specifications.

In response, we are leveraging the modular nature of our product architecture to accelerate the introduction of new products to enable us to better serve evolving customer needs. We expect this will extend the start of any meaningful revenue ramp to late 2025.

We remain confident that the long-term market potential is attractive and that we will continue to pursue this opportunity without the need for significant further investments.

The incremental operating expenses associated with the EV charger initiative are almost fully offset by the improved performance of our additive manufacturing business, which is reaching an inflection point in commercial adoption.

The maturation of additive manufacturing after several years of technology development and incubation is evidence of our ability to leverage our core competencies to create value outside of our legacy welding business.

I am pleased with the team's execution of our strategy in a challenging environment while we continue to invest in long-term growth and operational efficiency. These efforts position us to capitalize on the many opportunities ahead deliver superior value through the cycle.

And now I'll pass the call to Gabe Bruno to cover second quarter financials in more detail..

Thank you, Steve. Moving to Slide 7. Our second quarter sales declined 4% to $1.22 billion primarily from 5.4% lower volumes. We achieved 1% higher price and benefited 1.2% from acquisitions, which were partially offset by 40 basis points of unfavorable foreign exchange.

Gross profit dollars increased approximately 3% and to $384 million to a record 37.6% gross profit margin, which increased 240 basis points versus the prior year. Effective cost management and operational improvements generated strong profit performance. We recognized a $2.2 million LIFO benefit in the quarter.

Our SG&A expense increased 8% or approximately $16 million from a combination of acquisitions, higher employee-related costs and incremental unallocated corporate overhead costs. SG&A as a percent of sales increased 220 basis points to 20.4% versus prior year on lower sales, but was relatively steady sequentially.

We expect corporate expenses to be closer to $3 million per quarter in the back half of the year. Reported operating income declined 16% to $149 million, primarily due to $29 million in special item charges including a $23 million non-cash rationalization charge from the final liquidation of our Russian business.

We also incurred a $5 million loss from an asset disposal related to a small international divestiture, which helps shape our model and $2 million in acquisition-related transaction costs.

Excluding special items, adjusted operating income declined approximately 4% to $178 million, while our adjusted operating income margin held steady versus prior year at 17.4%. Interest expense net in the quarter declined 9% to $10.7 million. We expect our interest expense net for the full year 2024 to be relatively flat versus prior year.

This reflects our recent refinancing announced in late June, where we issued $550 million of senior unsecured notes and used the proceeds to repay our $400 million term loan and fund acquisitions.

Once these new note transactions completed in August, we will have $1.25 billion in total debt with a weighted average interest rate, including the impact of interest rate swaps of 4.08%. We also entered into a new 5-year $1 billion revolving credit facility to increase liquidity and align with our higher EBITDA performance.

At June 30, we did not have any borrowings against the revolver. Moving further down the income statement, we reported a $1.6 million other expense in the quarter. This reflects the net impact of a $2.4 million gain from the termination of interest rate swaps offset by the $5 million loss on asset disposal, which I previously discussed.

Excluding special items, other income was $3.4 million and was $6.7 million in the prior year period. Our second quarter effective tax rate effective tax rate was 25.6% on lower reported income. On an adjusted basis, our tax rate was 21.2%.

We continue to expect our full year 2024 adjusted to be in the low to mid-20% range subject to the mix of earnings and anticipated extent of discrete tax items. Second quarter diluted earnings per diluted earnings per share was $1.77. Excluding special items, adjusted share was $2.34. Moving to our reportable segments on slide 8.

Americas Welding sales decreased 4% in the quarter, primarily due to 6.7% lower volumes with compression across all three product areas, reflecting factors Steve previously discussed, and a challenging prior year comparison in automation and equipment systems.

Price and the benefits of our RedViking and Power MIG acquisitions contributed approximately 3% sales growth. We expect price benefits of 50 to 100 basis points in the third quarter. Americas Welding Segment second quarter adjusted EBIT declined approximately 2% to $137 million.

The adjusted EBIT margin increased 10 basis points versus prior year to 19.9% on effective cost management. We expect Americas Welding to operate in the 19% to 20% EBIT margin range for the remainder of year. Moving to Slide 9. The International Welding Segment sales declined approximately 6% on 4% lower volumes.

Strong automation sales and project activity in portions of the Middle East and Asia Pacific regions continued to be offset by weak European macros. Price declined 1.2%, but did not impact underlying margin performance as lower price was offset by disciplined cost management, which helped mitigate lower volumes.

A 10.4% adjusted EBIT margin performance, reflects quarter-specific operating inefficiencies, which we do not expect to repeat. We continue to expect the segment to perform in the 11% to 12% EBIT margin range, for the full year 2024. Moving to, The Harris Products Group, on Slide 10.

Second quarter sales increased approximately 3%, led by 5% higher price on rising metal costs, which was partially offset by 2% lower volumes. Volume declines continued to narrow in Harris, as retail and specialty gas grew, but were offset by the challenged HVAC market. Adjusted EBIT increased approximately 28% to $25 million.

The adjusted EBIT margin increased 350 basis points to a record 18.2%, reflecting a seasonally high quarter, structural improvements in their operations and effective cost management. We expect the team to generate EBIT margins in the 16% to 17% range for the balance of the year. Moving to Slide 11.

We generated $171 million in cash flows from operations in the quarter, resulting in 110% cash conversion. Our average operating working capital decreased 90 basis points to 18%, versus the comparable year period on improved inventory levels. Moving to Slide 12.

We invested $176 million in growth in the quarter from $23 million in CapEx and $153 million in acquisitions. We returned $91 million to shareholders through our higher dividend payout and approximately $50 million of share repurchases. We maintained a solid adjusted return on invested capital of 23.7%.

For the balance of the year, we will continue to focus on growth and opportunistic share repurchases. Turning to Slide 13 and our Full Year 2024 Operating Assumptions, we are maintaining the assumptions we provided in late-May that reflect slowing end market trends in a more challenged portion of the industrial cycle.

Our sales in June and July have tracked to these lower assumptions. As we progress through the second half of the year, we are focused on heavy industries demand trends and the timing of automotive OEMs capital expenditure plans, as these two factors present added risk to our operating assumptions.

As stated in May, we expect a mid-single digit percent decline in organic sales in 2024, likely at the higher end of the range with typical seasonality. We expect price to contribute 50 to 100 basis points of growth with volume headwinds from weak industrial activity and slower capital spending, which will be most notable in our welding segments.

Acquisitions are expected to contribute $75 million to $85 million of sales in the second half of the year, primarily in Americas welding. We anticipate acquisition sales will be weighted to the fourth quarter based on the timing of revenue recognition.

In the third quarter, we expect an approximate 300 basis point contribution to consolidated sales growth with the addition of Vanair. We expect acquisitions to contribute between $0.05 to $0.07 of adjusted EPS in the second half of the year with high integration activity.

Excluding acquisitions, we continue to anticipate solid operating income margin performance at approximately 17.5% on a full year basis. This reflects the benefits of diligent cost management structural improvements in both Harris and Automation's operating model as well as the early benefits from cost-saving initiatives.

We estimate that the acquisitions may unfavorably impact our estimated full year average operating income margin by up to 30 basis points, but we are working to minimize impact. Before I pass the call for questions, would like to summarize that while we are managing through a challenging portion of the cycle, we remain focused on growth.

whether through innovation by driving new solutions into the market from our core businesses as well as through our adjacent new technology initiatives and by accelerating the top line with acquisitions.

We're also operating a more efficient business as demonstrated by our ability to mitigate weakness in demand with stable margins, strong cash flows and 100-plus percent cash conversion. And now I would like to turn the call over for questions..

Thanks, Gabe. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] And it looks like our first question today comes from the line of Angel Castillo from Morgan Stanley. Angel, please go ahead..

Hi. Good morning. Thanks for taking my question. I was hoping we could unpack a little bit more just what you're seeing at the kind of from an end market demand perspective.

It looked like there were some buckets where maybe we saw a little bit of kind of sequential improvement but others where we're hearing under production or just continued deterioration into the second half.

So just based on kind of your order books that you see today, just where kind of conditions to date and kind of evolving?.

Yeah. So Angel, thanks for that question. Just to emphasize, as we adjusted our assumptions at the end of May, we saw the progression of those same demand patterns in June and July. And as we noted, we saw an acceleration of softness in certain areas within heavy industry, particularly in the ag side of our business.

And so we see more of that progressively into the second half. When we think about demand within our automation business, we've talked about some pause between how the market is considering its next steps between EV investment, ICE and even hybrid. And so we see that air pocket or pause continuing.

And so as we look at end market progression, we see more of the same in what we have seen in our business to date. And that's why we maintained the assumptions as we have..

And could you maybe help us quantify just degree of coverage you now have within automation. I think historically, you've had kind of six month visibility within that.

Is that still kind of the case? Or just given some of the pause that we've seen in orders, how is that kind of coverage level evolving?.

Yes. And I think that's a fair assumption still on average in that six-month type of outlook. But we did point to in the short cycle sign, which is about 15% of our automation business we saw some pullback, particularly in the small to midsized fabricators. So that continues to be a challenge for us.

But in general, I mean we look at projects, I mean they do extend between three, six months on the shorter end and some of the longer projects for, for example, or beyond that. But six months is a fair representation of our mix..

Very helpful. Thank you..

Thanks, Angel.

And question comes from the line of Bryan Blair with Oppenheimer. Bryan, please go ahead..

Thank you. Good morning, everyone..

Hi, Bryan..

Hi. In terms of bailing commercialization, I'm not surprising that, that time line has been pushed back a bit.

Has your team's view on the medium-term revenue potential shifted given all the moving parts of the competitive landscape? And similarly, it's still the expectation that DC Fast Charger revenue fully mix accretive as it ramps up?.

Yes. Bryan, take that in reverse order. Yes, we still expect EV revenue to be accretive to the business. We still believe the market is there. The US needs more robust DC fast charging infrastructure in order to drive the adoption of electric vehicles. The real question is on the timing of how the money is going to be invested to do that.

And as I mentioned in the prepared remarks, the NEVI program rollout of the funds has been much slower than anyone anticipated, which has had two effects. One, people aren't buying the hardware at the rate that we and everyone else in the market thought they were going to be buying at.

And second is, I think the US has missed the opportunity to drive standardization around a common platform of 150-kilowatt charger, which spending the $7 billion or $8 billion relatively quickly would have driven everybody to adopt that as the main standard in the industry.

Now what you're seeing is a lot of people looking at the vehicles that can take higher charging levels, looking at the finite capacity they have in terms of electrical service to a site and trying to figure out how to best optimize that. And so you've got a lot of different customers with a lot of different ideas about how to do that.

They typically involve the idea of power sharing, dynamic power sharing between two different charge dispensers, which was something we had on our road map anyway. And so we're accelerating the work on that so that we'd be in a position to be able to offer that capability to customers.

But it's still anyone's guess as to when and how quickly this is going to mature but we believe in the long-term potential, and I think the team has been doing a great job of getting us to where we are now in a very short period of time..

Understood. Very helpful color. Your comments on additives were quite encouraging, at least directionally. So we've always found that to be a very intriguing technology and initiative for your team.

I guess just to level set, what's the run rate revenue now of additive, what's current profitability? And how does your team think about the medium-term potential of platform or initiative scale?.

Yes.

So Bryan, the run rate of the business now on a revenue basis is on the order of $10 million, which I can appreciate doesn't necessarily sound all that exciting to outside observers, but we've progressed from the position of printing blocks and test coupons and things of that nature to be able to validate that the technology works to prospective customers to we're now actually printing parts that would go into production, doing destructive testing on those, passing all those tests with flying colors.

And so we're seeing a real groundswell of enthusiasm among the targeted customer base to use additive manufacturing to replace large castings for which there's a very long supply chain and for which the quality of those parts is not particularly good.

The customer typically has to do a lot of weld repairs on them before they can put them into service. So our technology gives them a higher quality product and a much shorter lead time.

So we're seeing just a tremendous uptick in the activity level from our customers around trying to move this from a validation stage into actually using additive parts and production. The more exciting part about this, at least from a financial standpoint is while the revenues are not that large at this point, we're getting the brackets off business.

We've been investing about $5 million to $6 million of operating expense for several years to develop this technology and to be able to get that to flip from the red to the black is a great -- very significant milestone for us and very encouraging..

Got it. Appreciate all the detail. Thanks again..

Thanks, Bryan..

And our next question comes from the line of Nathan Jones with Stifel. Nathan, please go ahead..

Good morning, everyone..

Hey, Nathan..

Hi, Nathan..

I guess, I'll start off following up to Bryan's question on additive there. Run rate revenue, $10 million today, what do you think the, I don't know, growth rate for that potential addressable market size for that would be? Is it still very early in the commercialization of that as well.

And it would seem like a relatively small addressable market, but with extremely high value to the customer..

Yes. So Nate, let me piggyback on your comments that we're very early in the commercialization of this. And we have customers that are talking really big numbers and are very excited about it, but yet we don't have all the POs justify those really big numbers we're talking about.

So we view this as a long-term play for the business with great upside and optionality, but we're not yet at a point where we're ready to give you projections or guidance around revenue and the like..

And Nate, the dynamics that Steve shared in terms of investment, both capital and operating, just gives us the patience to navigate how we create value in both these areas, DC fast chargers additive, and that just gives us a very promising outlook long-term, while we're navigating the development of these commercial strategies..

Okay. I'm going to -- my second question, I'm going to ask on the Vanair acquisition. It took a little bit of a departure from your recent acquisitions that are focused in automation.

Can you talk about the strategic value you think that brings to LECO? How you can leverage the your own portfolio to grow that business faster or leverage than to grow your own portfolio? What kind of cost synergies and if you're willing to purchase multiple?.

Sure. Nate, I'll talk about the strategy, and then I'll let Gabe handle the purchase multiple. So we're really excited about this acquisition. We have been selling products into the work truck industry for several years.

One of our leading competitors is actually much stronger in this market than we are, and we've found that our ability to reach the customers and penetrate the market through our traditional channels of distribution has been fairly limited.

We think this acquisition will significantly accelerate ability to sell existing welding-based products to the work truck industry.

And then both we and Vanair have been working on Battery-Powered Solutions that provide customers with a lot of environmental and operating benefits to be able to use, a battery instead of a diesel or gasoline powered engine. So we see that as the future of this part of the industry. And we bring some strength to that. They bring some strength to that.

And we think, together, we're going to be able to, to really expand and accelerate the product portfolio. So I see that there's, a lot of reasons for us to be excited about this transaction..

Nate, just to, add a couple of comments on the financials. So you saw that we pointed to a low-double digit type EBIT profile. Our objectives, as you know, are to drive to that corporate average on these acquisitions, and we think about it like in a three-year type of cycle.

So we're excited about what we can do in shaping the operating model of this business. This business has been in the double-digit growth trajectory. So we see maintaining that kind of growth as the potential here. So that's very exciting for us.

And then when you think about the multiple, if you exclude some of the real estate components that we're talking about a high-single digit type of purchase price multiples. So we're pretty excited about how this fits within our business.

And I'll just reinforce one of the comments you made we have had a larger percentage of automation type of transactions, acquisitions. But you have seen us in a very steady way emphasize growth through acquisitions also within our core Welding business.

So we look at all parts of our business in driving growth and using acquisitions as a way to accelerate growth..

Awesome. Thanks very much for taking my questions..

Thanks, Nathan..

And our next question comes from the line of Mig Dobre with Baird. Mig, please go ahead..

Hey. Good morning guys. It's Joe Grabowski on for Mig this morning..

Hi Joe. A - Steve Hedlund Hi Joe..

Hey. Good morning. I guess I wanted to drill in a little further on the trends you saw in June and July.

Were they steady? Were they choppy? Does it seem like we've kind of settled out at this new level and your -- I guess, your confidence on the visibility of the final five months of the year based on what you saw in June and July?.

Joe, just in general, the environment has been relatively choppy. I just -- for example, I'd point to first General Industry. So you saw that we were down low single digits in general fab. But on balance, I mean, what we've seen in June and July are in line to what that mid-single-digit profile looks like we're largely a short cycle business still.

Obviously, the automation components do extend in our longer cycle type of business. But that's what gives us confidence in maintaining our assumptions. So there are areas of risk that we pointed to, how heavy industry progresses, particularly in ag, you've seen some of the announcements there. It's an area we're monitoring closely.

How the market responds on the automotive side, to some of the capital decision making long-term those are pretty important for us. But in general, I mean, we saw that June, July follow the patterns that we've seen and that's what gives us confidence in maintaining the assumptions.

I will add an interesting point, Joe, on the automotive side, obviously, we're staying very close to that. We are hearing that industry, in general, has not pushed out production schedules out from 2026 and 2027. So that gives us a little bit of optimism and seeing how this pause or air pocket progresses in the coming months.

So, that's what gives us confidence inherently in maintaining our assumptions..

Joe, this is Steve. I'll just add a little bit of color to Gabe's comments.

So when we look at heavy industries, in particular, the production cuts in the ag portion of that business have really grabbed most of the headlines, but when we look at that business, so far through the second quarter, we did see a step down in the construction and mining subsectors of heavy industries, not quite as significant as the ag portion, but still down materially.

So we believe that we've already seen step down in all of heavy industries. We're assuming that we're going to remain flat at these production levels through the balance of the year. There could be some recovery from that, and there also could be potentially some downside depending on what our customers decide do with their production levels.

So we're watching that very closely. And then as Gabe mentioned, we saw a pause in the automation side of the automotive business as OEMs were rethinking their product plans. They have not pushed out the start-up production dates for a lot of the products they're going to launch in 2025, 2026 and 2027.

So we believe that we're to get answers very quickly on, okay, you didn't want me to do product A, do I have the business for product B. And there's some indication that the OEMs have made those decisions and the projects are starting to flow again.

But the next 30 to 60 days will be really critical for us to be able to assess how long that air pocket will continue and whether we've seen the backside of that..

That's very helpful color. Thank you very much. And then maybe just a quick follow-up on international.

You mentioned a challenging macro in Europe, maybe additional color on that and maybe kind of your thoughts on where pricing in the International segment will trend in the second half of the year?.

So I would just say, we should see more of the same. I mean we've seen some strength in areas of Middle East and Asia. Europe continues to be challenged. I did point to some improvement in our expectations in the EBIT profile.

But from an overall volume perspective, pricing what you saw first half of the year, we expect to see more of those types of trends in the second half, being very disciplined in managing costs in pricing with some improvement in the EBIT profile..

Got it. Okay. Thank you very much..

All right. Thanks Joe. And our next question comes from the line of Saree Boroditsky with Jefferies. Saree, please go ahead..

Hi. Thanks for taking my question..

Hey, Saree..

Good morning, Saree..

You talked about auto OEMs positive investments to reconsider EVs versus ICE.

I guess, one, when would you expect the air pocket to end? And then what would a recovery look like if they back away from EV investments? Does that mean less equipment needed for model changeovers? Or how do we think about that?.

Yes. So Saree, we're expecting to get answers on a lot of these projects in the next 30 to 60 days. So hopefully, by the time we're at the next quarterly earnings call, we'll have much better visibility to how that's played out.

We're relatively indifferent whether the automakers make an EV, a hybrid or an ICE vehicle based on the type of work that we do for them, we're relatively agnostic. We just need them to decide to make something so that they will invest in the automation to make that production more efficient.

And so we fully expect, since they haven't been canceling programs outright. They haven't been pushing back the start of production that they need release the orders here pretty quickly in order to hold those dates. So that's why we say it's a 30- to 60-day window..

Great. That's helpful. And then just going back to the risk to guidance, you talked a little bit about the auto investment and heavy industries. But could you just explain what are the assumptions built into the guide? And then what would drive weakness to that? Thank you so much..

Saree, just those risk factors are just highlighted to be watchful of and how we're progressing within our business. But the assumptions entail what we're seeing in our business to date. The activity in June, July, the mix of business, Steve highlighted some of the components of heavy industries, a construction that that we've already seen -- mining.

So it's more of the same that we've seen in our business through the current second quarter into July. But we just highlight those risks of areas that we're watchful of that could have an impact on the progression of demand patterns..

Appreciate the color. Thank you..

Our next question is from the line of Chris Dankert with Loop Capital. Chris, please go ahead..

Hi. Good morning. Thanks for taking the question..

Hi, Chris..

I guess, maybe just to round out the discussion end markets here, construction and infrastructure up low teens, that's a pretty impressive growth rate.

Maybe just can you level set us on where you're seeing the growth geographically and just kind of how that has trended kind of through July here?.

Yeah. So Chris, we have seen generally a choppy environment, as you've noted. Some areas of infrastructure construction into the international markets have been positive. But just to give you a perspective, we're up mid-teens in this quarter, we were down mid-single digits last quarter. We were up high teens, Q4. So it's been very choppy.

So we haven't seen consistency after we had a pretty strong run at throughout 2022 and just a lot of choppiness. And that's more of what we would expect to see.

So a little bit more continued choppiness we're hopeful to see a little bit more infrastructure investment in the US that could drive more demand, but it's been relatively a choppy environment..

Got it. Thanks for the color there. And then you highlighted your expectation for some improvement in the EBIT margin for the back half in international. Can you just kind of maybe give a little bit of detail there? Is it -- again, you're expecting better -- it doesn't sound like it's volume related.

So is there cost action specifically? Is it mix driven? Just any comments on what's kind of helping drive that improvement in the back half?.

Yeah. So Chris, in my comments, you may have picked up that during the second quarter, we had some isolated operational efficiencies, adjustments that were specific to the quarter. So that gives us confidence that as you pull those out, we're actually in line to our 11% to 12% type of range.

So it's just highlighting that there's some operational costs that are more onetime in nature that should reverse itself and we should see more of our expected range of performance in that 11%, 12%..

That’s helpful. Thanks so much..

Thanks, Chris. [Operator Instructions] And it looks like our next question comes from the line of Walt Liptak with Seaport Research. Walt, please go ahead..

Hey. Thanks. Good morning, guys..

Hey, Walt..

Hi. I want to ask -- wanted to ask one about the macro. It just sounds like the heavy industry, we got that slowing.

But for general industrial, we've kind of paused here, like you said, in May, what do you think is going on with your customers for this pause? Like have you gotten any feedback from them on why some of the demand has slowed?.

Well, in general, when you think Walt, the general industry, you'd like to point to the small, midsize fabricators and the uncertainties -- the broad uncertainty in the market is going to drive the level of activity. So the choppiness in PMI and the mix of new orders and production and inventories, all of that has just been inconsistent.

And so I think that just drives some uncertainty in the progression in general industry. So we're hopeful of the trend that we saw Q1 to Q2, but the choppiness in PMI indices and industrial production inherently just don't point to a consistent outlook.

So that's why we're a little bit more choppy in our perspective of how the general industry progresses..

Okay. Great. And I guess, as we think about the future and where sort of those of those -- some macro trends could go, in the past, I think, especially in North America, you guys don't -- like when things step down, you guys in just automatically, I think the program that Lincoln has just addressed automatically.

But is anything changing in the way that you think you'll deal with things either ramping down or the other way around, like you know what I mean, like do like do you have to cut costs or something that, if things start ramping down? How you look at your cost structure?.

So Walt, as you know, we're very disciplined in looking at discretionary type spending. You're referring to the profit sharing, the larger component being in the Americas. So that does move with profitability. So we're -- our posture is consistent and pulling the levers where needed.

So what you're seeing, though, is a mix of softness in demand and yet our ability to maintain margins. And a lot of what we're doing in our enterprise-wide initiatives are very much focused on cost and reduction and efficiency. And so you're seeing improvements within our business.

At the same time, we'll continue to be very disciplined in managing costs. And all the levers we have still exists and that playbook is still in play. So we're managing it two ways.

You have all the cost dynamics short-term, but then all the enterprise-wide cost initiatives and profit improvement initiatives that are driven by our enterprise-wide initiatives..

Okay. Great. Yes..

Walt, this is Steve. I'll just add.

If we look at the gen fab portion of the business, and we focus particularly in the Americas region, what we're seeing is that weakness in the equipment and small automation portion of that segment, right, which really reflects their confidence in the future direction of the economy and their willingness to then spend capital.

And as you can, I'm sure, appreciate there's a tremendous amount of uncertainty around where interest rates are headed. There's just a tremendous amount of uncertainty around who will win the election and what policies will they put in place. And so what we're seeing is that impact on the CapEx side of the business.

The OpEx side, the consumables, not doing too bad. Just to give you that perspective on it..

Okay. Great. Great. Thanks for that Steve. And then maybe a final one for me, just around the commodities part of the business. I wonder if you could talk a little bit just about channel inventory levels and pricing. And we've seen some commodities prices come down recently.

I mean, does -- can you maintain pricing within the consumables part of your business?.

So what you see what we've done to-date, right? So we expect pricing -- you may have picked up in my comments of 50 basis points to 100 basis points of pricing progressively now into this third quarter. So our posture is to hold price.

With the exception of the Harris metals impact, they have more of an adjustment depending on how things move with silver and copper. But our posture is to manage pricing in a very disciplined way. We walked into the second quarter with some inflationary pressures, wage and otherwise.

And so we've taken those actions to protect our model and maintain that posture progressively..

Okay, great. Okay. Thanks. Good luck in the second half..

Thank you..

Thanks, Walt..

And our final question today comes from the line of Steve Barger with KeyBanc. Steve, please go ahead..

Thanks. The automation strategy has always been concentrated in the Americas. But given the breadth of the product line now, is there opportunity to increase automation exposure in international or sales focus in international even if conversion is delayed until markets firm up..

Yes, Steve. We've always had a very keen interest in expanding the automation business globally. The question really comes down to where is the industry structure and market dynamics attractive to us.

And just based on some historical evolution of where and how the robot manufacturers decided to participate or not an integration really impacts the attractiveness of some of the markets to us.

So just for example, in Europe, most of the robot manufacturers have chosen to be in the automation integration business, which means we're competing with our suppliers, and there's a lot more pressure on price and margins there.

So you've seen our strategy in Europe has been to focus on very high technology plays with Zeman and now with Inrotech, automation integrators that have a very specialized, very proprietary, high-value solution as opposed to just being a general integrator. We continue to look for opportunities around the world.

We continue to test our hypothesis around what markets we think will be attractive for us to enter and we'll continue to execute that strategy..

Yeah. To the point on Inrotech, it seems super interesting.

Is the AI programming vision-based -- and with $10 million in sales, is this technology still working out the kinks? Or is this a finished product that just needed a bigger platform to scale?.

Yeah, you're correct, Steve. It is vision-based. One of the great attributes of it is it does not require a CAD file that it's comparing what it sees to decide what to do.

It's just looking at the parts and then making decisions on its own, which don't ask me to explain how it does it because I don't really understand it myself being a little bit large major but I've seen the demonstrations of it, and it's really quite impressive. So I think the technology is fairly robust.

There'll be some work to integrate it into our platforms, but it's really a -- the investment is around giving them a bigger platform to scale the business and to access the market..

How do you think about TAM or addressable market for an application like that? And can that technology translate to Harris as well?.

When we think about the TAM for automation in general, I mean, it is much, much larger than our current business.

So we're a very a relatively small share player in a $35-plus billion market, right? When you look at the Inrotech technology, in particular, I mean, that's new to the world technology, and it really remains to be seen how many different places we can take it.

But based on what we know about it and what we know about our customers' pain points, we're really excited about it..

Great. Thanks very much..

Thanks Steve. And that does conclude our question-and-answer session. I would like to turn the call back to Gabe Bruno for closing remarks. Gabe, the floor is yours..

I would 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 and showcasing new technologies at the upcoming FABTECH trade show in October. Thank you very much..

And ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect..