Lincoln Electric Holdings, Inc. (NASDAQ:LECO) Q4 2024 Earnings Call Transcript

Lincoln Electric Holdings, Inc. (NASDAQ:LECO) Q4 2024 Earnings Call Transcript February 13, 2025

Lincoln Electric Holdings, Inc. beats earnings expectations. Reported EPS is $2.57, expectations were $2.03.

Operator: Greetings, and welcome to the Lincoln Electric Holdings, Inc. 2024 Fourth Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise, and this call is being recorded. After today’s presentation, there will be an opportunity to ask questions. You may press star one again. It is my pleasure to introduce your host, Amanda Butler, Vice President of Investor Relations and Communications. Thank you. Ma’am, you may begin.

Amanda Butler: Thank you, Janine, and good morning, everyone. Welcome to Lincoln Electric Holdings, Inc.’s fourth quarter and full year 2024 conference call. We released our financial results earlier today, and you can find our release and this call’s slide presentation at lincolnelectric.com in the Investor Relations section. Joining me on the call today is Steve Hedlund, Chair and Chief Executive Officer, and Gabe Bruno, our Chief Financial Officer. Following our prepared remarks, we’re happy to take your questions. Before we start our discussion, though, 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 discuss financial measures that do not conform to US GAAP. 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 Hedlund: Thank you, Amanda. Good morning, everyone. Turning to Slide three, I am pleased to report strong full-year results across key metrics despite challenging demand trends. The team did an excellent job staying focused on serving customers and accelerating innovation with one of the largest new product introductions in recent years, along with a solid 50% vitality index of new product sales and equipment. We also successfully added three acquisitions, which expand our engineering and application expertise, further differentiate our technology platforms, and will extend our brand in underpenetrated channels in the years ahead. Operationally, we continue to drive efficiency improvements, most notably in our automation portfolio and in Harris Products Group, where margins improved over 100 basis points each despite top-line headwinds.

These achievements would not have been possible without the focus and commitment of our global Lincoln Electric team, our distribution partners, and our customers who collaborate globally to help build a better world. So thank you. Turning back to our highlights, we achieved $4 billion in net sales, reflecting manufacturing weakness and deferred capital spending across most end markets and regions. Our automation portfolio achieved $911 million in sales, and the portfolio remains on pace to hit our $1 billion 2025 sales target. Despite the 6.5% decline in organic sales, we achieved record profitability with a 17.6% adjusted operating income margin. Both Americas Welding and Harris Products Group outperformed their 2025 higher standard strategy profit margin ranges.

This reflects strong execution of our strategic initiatives coupled with diligent cost management, with approximately $21 million from our targeted saving actions, which outperformed our expectations. We achieved our second-highest adjusted earnings per share performance at $9.29 and maintained strong cash flow generation with over 90% cash conversion. These achievements contributed to strong ROIC performance and a 23% increase in returns to shareholders through a higher dividend payout rate and $264 million in share repurchases. Heading into 2025, we have a solid balance sheet and ample liquidity to fund growth investments and continue to return cash to shareholders as we navigate the cycle. Turning to slide four, looking at our interim progress to our higher standard 2025 strategy goals, I am very pleased by our performance, which positions us to achieve or even exceed most targets across our financial and sustainability metrics.

Looking at financials, our sales growth is pacing within target. Profit performance continues to improve annually, and we have averaged a 15.7% adjusted operating income margin with a 28% incremental margin from 2020 to 2024. We are on track to achieve our 2025 16% average profit margin goal. This is a 200 basis point improvement of our average operating margin from the prior cycle. This year’s record margin performance in a down cycle reinforces how strong execution of our strategic initiatives will continue to drive margin expansion in the next growth cycle. In addition, our working capital efficiency continues to improve as average operating working capital to sales performance advances closer to 15% by the end of 2025. We are also committed to a balanced capital allocation strategy.

Under our higher standard strategy, we have invested over $1.3 billion in growth and have returned approximately $1.6 billion to shareholders, reinforcing our confidence in cash generation and the sustainability of the business’s improved margin profile. Moving to slide five for year-end demand trends. Fourth quarter organic sales performance continued to reflect softer manufacturing activity across most end markets, predominantly driven by large OEMs who continue to curtail production levels to right-size inventories in their dealer channels. In addition, we saw ongoing deferred capital spending across large industrial customers, which impacted equipment and automation demand. These declines were further impacted by challenging prior-year comparisons in automation sales and energy project activity across Asia Pacific and the Middle East in 2023.

Consumables demand remained more resilient, aided by strength in HVAC. From a channel perspective, retail continued to grow, and our industrial distribution channel in the Americas was more resilient as compared to a low double-digit percent decline in direct OEM sales in the region. We are encouraged to see the beginning of a pickup in the longest cycle automation projects serving the automotive industry, which should result in continued momentum and capital investments starting midyear for mid and short cycle projects needed to support upcoming model launches. So as we look ahead to 2025, we are ready to capitalize on growth opportunities and drive margin expansion. And now I’ll pass the call to Gabe Bruno to cover fourth quarter financial results and our 2025 assumptions in more detail.

Gabe Bruno: Thank you, Steve. Moving to slide six, our fourth quarter sales declined 3% to $1.022 billion, primarily from 8.5% lower volumes. Pricing was 1% higher, and acquisitions contributed over 5% to sales. Foreign exchange translation had a 1% unfavorable impact. Gross profit dollars held relatively steady at $369 million, which included a $6 million benefit from our savings actions and a $5 million LIFO benefit in the quarter. Our gross profit margin increased 100 basis points to 36.1% as effective cost management, savings actions, and operational efficiencies offset lower volumes. Our SG&A expense held relatively steady at $187 million as higher SG&A from acquisitions was offset by $13 million in benefits from our savings actions and $7 million in lower incentive costs.

SG&A as a percent of sales increased 50 basis points versus the prior year to 18.3% on lower sales. Reported operating income declined 13% to $177 million, primarily from lower sales as well as a $5 million rationalization charge and $4 million in acquisition-related items. Excluding special items, adjusted operating income increased 2% to $186 million as our adjusted operating income margin increased 100 basis points to a fourth-quarter record of 18.2%. Disciplined cost management, savings actions, lower employee costs, and strong operational execution in our automation portfolio all contributed to record performance. The strong execution in our automation portfolio resulted in a 17% EBIT margin, a 200 basis point improvement from the prior year.

Interest expense net in the quarter increased 31% to $11 million, reflecting our refinancing completed in 2024. Our fourth-quarter effective tax rate was 16.1% due to the mix of earnings and timing of discrete items, which compares to 20.5% in the prior year. Excluding special items, our adjusted effective tax rate was 16.8% as compared with 19.3% in the prior year. Our full-year 2024 adjusted effective tax rate was 20.8%, in line with our full-year assumption range. Fourth-quarter diluted earnings per share was $2.47. Excluding special items, we achieved a record $2.57 adjusted diluted earnings per share in the quarter, which includes a favorable $0.10 benefit from the lower tax rate partially offset by a $0.02 unfavorable impact from foreign exchange translation.

Moving to slide seven, our cost savings actions launched in the third quarter have yielded better results than initially expected. As these savings will be largely maintained until demand improves, we are now increasing our annual life savings rate to $60 to $50 million. This increases our quarterly savings run rate to $15 to $20 million from the initial estimate of $10 to $14 million. We expect to recognize $40 to $55 million of incremental cost savings in 2025 before fully anniversaried in the fourth quarter. Moving to our reportable segments on slide eight. America’s welding sales held steady versus the prior year. As an 8% benefit from our Red Viking and Van Aire acquisitions and steady price offset 7% lower volumes and a 1% headwind from foreign exchange translation.

Persistent weakness in North American manufacturing activity and capital spending, as well as a challenging prior-year comparison from Forre and the pull-forward of automation projects, contributed to results. Americas Welding segment’s fourth-quarter adjusted EBIT increased 2% to $132 million. The adjusted EBIT margin increased 30 basis points to 19.1% execution in our automation portfolio and higher than expected temporary cost savings fully offset lower volumes. Moving to slide nine, International Welding sales declined approximately 17% and 16% lower volumes. Industrial weakness in portions of Europe, Turkey, and Asia Pacific were amplified by challenging prior comparisons from strong project activity and automation demand in 2023. Price held steady.

Adjusted EBIT compressed 24% on lower sales. Adjusted EBIT margin of 12.8% repositioned the segment back within their higher standard strategy target margin range. Effective cost management, savings actions, and operational initiatives contributed to improved margin performance. Moving to the Harris Products Group on slide ten, Fourth-quarter sales increased 11%, benefiting from higher price and volume growth. Continued growth in HVAC and an increase in the retail channel offset continued compression from industrial sector applications. Adjusted EBIT increased 42% to $22 million and achieved a 370 basis point improvement to margin at 17%. This strong performance is a culmination of effective cost management and the ongoing operational improvements which have been advancing the business.

Moving to slide eleven. Cash flows from operations were $96 million and $599 million for the full year with a 91% cash conversion ratio of free cash flow to adjusted net income. Cash conversion is seasonally lower in the fourth quarter due to higher uses of cash for incentive compensation payments as we invested in higher levels of capital spending in the quarter. We improved our operating working capital to sales ratio to 16.9%.

Amanda Butler: Moving to slide twelve.

Gabe Bruno: We invested $31 million in CapEx in the quarter, bringing full-year CapEx to $117 million. We returned $93 million to shareholders in the quarter with $53 million of share repurchases and our higher dividend payout. We continue to generate a solid return on invested capital of 21.8%. Turning to slide thirteen, in our full-year 2025 assumptions. The advancements we have made in the channel.

Steve Hedlund: Our expanded innovative portfolio and improved cost profile positions us well as we head into 2025. Our initiatives have demonstrated that we can continue to optimize the business, invest in long-term growth, and compound earnings through a down cycle. Given how early it is in the year, and pending clarity on the impact of federal policies, including recent tariff actions we are assessing, we are conservatively posturing for low single-digit sales growth in 2025. This contemplates 50 to 100 basis points of positive price starting in the first quarter as we issued price actions in our Americas and International Welding segments earlier this year ahead of any tariffs. We also expect approximately 200 basis points of sales growth from our 2024 acquisitions.

At current foreign exchange rates, we anticipate an unfavorable foreign exchange impact on full-year net sales. This cautious outlook does not contemplate volume growth. We expect first-half volume performance to be more challenged versus the back half given lower production levels among heavy industry and automotive OEMs, soft manufacturing activity across key regions, and expectations for slower automation sales through the second quarter as previously discussed. This is likely to equate to a low single-digit percent decline in volumes for the full year, with America’s welding and Harris being the most resilient. Despite challenging end-market conditions, we expect a low 20% incremental margin rate with modest earnings growth. We will continue to benefit from diligent cost management, an incremental $40 million to $55 million from our savings actions, and our business units are continuing to pursue operational improvements through local and enterprise-level initiatives.

We estimate interest expense net at $45 million to $50 million and an effective tax rate in the low to mid-20% range. We are budgeting $100 to $120 million of CapEx investments to fund growth and operational efficiencies. We are anticipating full-year cash conversion at 90+% of adjusted net income. Again, our full-year assumptions do not include the impact of pending tariffs. Our team is currently assessing the potential impact from trade and tariff headlines, and we will leverage our agile supply chain and issue new pricing actions to offset any margin impact. As we have done successfully in prior inflationary periods. Overall, we are very confident in our ability to successfully navigate the year ahead. Our customer-first approach, innovation pipeline, and focus on staying agile to capitalize on growth opportunities and optimize operations will continue to drive superior value as we complete the final year of our higher standard 2025 strategy.

And now I would like to turn the call over for questions.

Operator: Thank you. Ladies and gentlemen, at this time, we will be conducting a Q&A session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. To ensure that everyone has an opportunity to participate, we ask that you ask one question and one follow-up, and then return to the queue. Our first question comes from the line of Angel Castillo from Morgan Stanley. Please go ahead.

Q&A Session

Angel Castillo: Hello. Thank you for taking my question. This is actually Stefan Diaz. I’m sending in for Angel. Maybe to start, can you just talk about your welding business in a bit more detail as it pertains to competitive dynamics? I believe at a high level, it looks like your organic growth in welding has lagged your biggest direct competitor for the last four quarters, which seems to be a reversal trend seen in 2022 and 2023. Obviously, end-market mix and geographic mix can sort of cause divergence. But, basically, any insight into, you know, what might be causing organic growth, underperformance versus peers, and, you know, whether you’ve seen any shifts in competitive dynamics in that business would be helpful.

Steve Hedlund: So, Stefan, let me just kinda highlight some of the key differences in our business model. So first, I point to our automation business. Right? So when we talk about the mix of automation that we’re pushing billion dollars in revenues largely invested in heavy industries and automotive and that. So you’ve got to consider that dynamic separate from the other large two competitors in our industry. We’re pleased with the progression of our automation business. You know, I pointed to 200 basis points of improvement in overall EBIT margins. While we pointed to continued softness in capital investment in our automation business was down mid-teens. But we’re starting to see some strength in some of the longer-term drivers to orders.

So that’s positive. I’d also point to the mix of our business, because between our international and America’s scope. We did mention that on the distribution side in America’s, we held pretty well. We were down single digits. So the mix of business has a relevant difference in how each of the models is structured. A large part of OEMs are tied into heavy industries and automotive investment and demand, and that’s the kind of mix that you see progressively in our business.

Gabe Bruno: Hey, John. Just echo Gabe’s comments that really when we look at the business portfolio, there’s a significant difference in channel mix in the US so we have a much stronger concentration of business with OEMs than some of our competitors do. And we’ll mention earlier on the call that we see a disparate impact of OEM demand versus distribution channel. So that has an impact on the business. And then within international, the relative mix of our business in places like Europe where we have very challenging market conditions versus India, Middle East, and other places, South America that are growing more rapidly. I think that’s what presents some of the challenges for us in looking at the comps versus the other leading competitors.

I will add that we are very closely engaged with the majority of our customers both at an end-user and at a distributor level, and do not believe that we’re losing share. In fact, if we look at the distribution channel in the Americas, we believe we’re gaining share.

Angel Castillo: Great. That’s very helpful. Thanks for the color. And then maybe as a follow-on, what does your guidance assume for first-quarter organic sales by segment? I know you went a little bit into first-half versus second-half dynamics, but any additional color you could provide there would be helpful. Thanks.

Steve Hedlund: Yeah, Stefan. So we don’t provide that level of deep detail by segment in our comments, in our assumptions that we shared. But I would point to that we would expect for the first half of the year, more pressure on volumes. So I would point to low single-digit declines progressively in this first half of the year until we start to anniversary some of the dynamics that we experienced, particularly in heavy industries and automotive in the back half of the year.

Operator: Our next question comes from the line of Saree Boroditsky from Jefferies. Please go ahead.

Saree Boroditsky: Good morning. This is James from Forserry. Thanks for taking the question this morning. Hi. I wanted to kinda touch on the, like, the outlook, the flight organic sales growth. Can you kind of provide more color on your expectation by kind of end markets and how you’re thinking about the contribution from, like, consumables equipment, and automation?

Steve Hedlund: Yeah, James. So let me just kinda give really high-level comments on the trajectory of how we see our business. You saw that we ended the year with general industries down mid-single digits. You know, we do point to it was good to see PMI turned positive in January. But we need to see more trajectory there before we can anchor on a consistent trend. So as, you know, as we talk in general, you know, we do expect volumes to be more compressed in the first half of the year and then flattening out in the back half of the year. Jonas streak, you can see continue to see about that low to mid-single-digit type perspective. On the automotive side, you know, I would expect a little bit more stability on the consumable side of the business.

And then continued pressure on the capital investment side of automotive. So I would point to so while broadly we were down mid-teens percent in the fourth quarter. I would look to that to moderate somewhat as we progress throughout the year. Heavy industries, you know, we were down low double-digit for the fourth quarter that’s driven by what we all read about in terms of what’s going on in ag and construction. We expect that to continue in the same levels that we saw. Fourth quarter lined up pretty closely to the third quarter. So I would continue to expect pressure in the first half of the year and then flattish type of outlook in heavy industries. Energy was down low 20% in Q4. We’re bullish on energy. Prospectively. But I would expect them for the full year to be into positive range for the full year.

And then lastly, construction infrastructure, you know, that was down mid-teens. That’s a choppy part of our business. So again, I would expect to see some pressure in that part of the markets as we progress the year. I would look to low, maybe mid-single-digit down. In that part of the market.

Saree Boroditsky: Great. That’s a great color. It’s very helpful. And I guess kind of just wanted to touch on kind of the what is it? Industrial OEM the cautiousness here. I think we’re kind of seeing, like, cautious optimism, like, with the new administrations. Oh, like, still but there are still many answers to this. So can you provide, like, more insight on what you’re hearing from, like, industrial OEM customers, like, after the new admin took office? And when do you expect kind of OEM business to trend with the kind of distribution channel?

Steve Hedlund: James, it’s very early for us to have a definitive position on it. I would point to the fact that the PMI recently turned positive in the US market is an encouraging sign. But you have really the wildcard of trade policy and the potential impact as highly integrated as supply chains are in North America, If we do move forward with significant tariffs and we get into retaliatory tariffs, between the US, Canada, Mexico, you know, that really presents a wild card that’s difficult to plan around at this point in time. So as we mentioned during our prepared remarks, our watchword for the organization is agility and to respond quickly to those challenges, but it’s very hard to have a crystal ball as to how this is all gonna play out.

Saree Boroditsky: Great. Thanks for taking questions.

Operator: Our next question comes from the line of Mig Dobre from Baird. Please go ahead.

Mig Dobre: Hey. Good morning, guys. It’s Joe Grabowsky on for Mig this morning.

Joe Grabowsky: Hey, Joe. Good morning.

Mig Dobre: Good morning. I just wanted to get a little bit more color on the green shoots you’re seeing in the automation order trends. And then it seems like if automation’s gonna get to a billion dollars, year, that would imply at least modest organic growth for the year. I just wanted to net is true. So just kinda a little more color on what you’re seeing in automation.

Steve Hedlund: Yeah. Particularly the long cycle part of our business, which we think of is primarily Forre, but some of the organic business that we had historically is focused on very long projects, cycles that are tied to model changeovers, and refreshes in the automotive industry. And as we were talking about six months ago, we were starting to see some indecisiveness in our customers around which projects they wanted to move forward with and in what sequence, responding really to the changing market demand for electric vehicles and the balance of EV versus hybrid versus size prod projects. We’re now starting to see customers make those decisions and release projects to us, which is encouraging for us in terms of the long cycle nature of the business, and we expect the mid and short cycle portions to improve somewhat, you know, through the course of the year.

Joe Grabowsky: Got it. Okay. Great. Thanks for that color. And then my follow-up question I wondered if you could tell us a little more about the $5 million to $7 million of quarterly permanent cost savings considering you’ve got flat organic sales guidance for the year. Kind of maybe, you know, give us a little color there and how it positions the company for the next demand upturn.

Steve Hedlund: Yeah. So, Joe, I would just emphasize that you know, the permanent cost actions that we take, they’re actions that structurally shape our business, and these are ongoing opportunities for us to continue to develop our business model. And so those are examples that we’ve done all over the years that have yielded an improvement in our operating margin profile. So Steve’s comment on is during the current strategy cycle, we’ve increased our operating margins on average 200 basis points. So those are permanent changes in our model that give us confidence that we’ll continue to build out the operational model to value proposition that we’ve consistently expanded on throughout cycles.

Gabe Bruno: Yeah. I would think about some of the permanent savings as being things like manufacturing footprint optimization as we look to better utilize the footprint that we have and continue some of the evolution of our European business from Western Europe to Eastern Europe manufacturing. And as we look at the automation business, being able to more effectively share work across sites, we can improve our utilization of those facilities. Those combined with looking at some of the spans and layers and trying to get leaner and more efficient. Those are the things that yield the permanent cost savings that should not impact our ability to respond to a market rebound in demand. And then on the temporary side, you have things like projects and travel and discretionary spending where we just decide we’re gonna take a pause.

We know that some of those costs will come back into the business. When demand improves, but during a down cycle, we go through a belt-tightening process. Around the things that we can control.

Operator: Our next question comes from the line of Nathan Jones from Stifel. Please go ahead.

Nathan Jones: Good morning, everyone.

Steve Hedlund: Morning.

Gabe Bruno: I’m gonna start on the tariff question and obviously, nobody knows what’s gonna happen from here, but Lincoln and the industry have been through many inflationary periods before and the industry in Lincoln have a very good track record of passing increased costs through discuss. During COVID, Lincoln not only passed the cost increases, but also did it with a gross margin on top of it. And talked about being gross margin neutral. During that inflationary period. So I guess my question is if we do see inflation, caused by tariffs, would be your perspective that you’ll pass that through on a dollar-to-dollar basis, you’ll be able to pass it through with a margin on it. The markets are in a little bit different position than they were during COVID, obviously. So just any color you can give us on how you think the business will be able to react in terms of mutual at margins, mutual at EPS.

Steve Hedlund: Yeah. Nate, I’m disappointed you weren’t gonna give us some clarity on the tariff. I thought given your opening preamble, I thought you were gonna instruct us. But I would say, look, Nate, our job as management is to grow the business and expand margins over the cycle. We’ve got many different levers for doing that. When we think about margin, there’s productivity initiatives, that we’re driving through the business. There’s innovation. And there’s managing price cost, and we’ve got a very good track record of being diligent in managing price cost so that we protect the profitability of the business. We don’t like to rely on price. It’s very disruptive to our customers and to the market. One of the concerns that we have as we look forward is to the degree that tariffs get piled on tariffs and we get into a tit-for-tat situation.

As widgets get more expensive, people tend to buy fewer widgets, so there’s a volume impact to it. So we’re not eager to jump on the price lever, but it’s a lever we’ll pull when we have to.

Nathan Jones: Fair enough. I have no insight into what’s gonna happen. I’m not that smart. I guess a question on M&A. Balance sheet is obviously in pretty good shape. And you talked about new acquisitions as a potential for upside. The business over the last few years has concentrated on acquisitions in automation. You’ve maybe potentially built that business out to where you want it to be. So I guess the question is is automation still a big focus? For acquisitions, or have you moved strategically to some kind of other of the business.

Steve Hedlund: Yeah. And then I would just clarify that the entire business portfolio has always been the focus for us for acquisitions. And you saw last year, we acquired the Van Aire business to improve our position in the work truck channel, which we saw as a critical route to market where we were not as strong as we would like to be. From a core business standpoint. We’ve done acquisitions in the past to support the expansion of the Harris Products Group business and HVAC. So it’s not that we’ve been solely focused on automation. It’s been a more productive hunting ground for us in the last couple of years just due to the fragmented nature of that industry. And we continue to look for investment opportunities on automation so we can continue to the types of solutions that we provide to our customers and grow the addressable market for us. So I think you’ll continue to see more of the same from us.

Gabe Bruno: Just to add, Nate, and then you know what our long-term objectives are, and then we send very much aligned to that is to drive long-term sales CAGR at three to four hundred basis points. So we have a very disciplined acquisition strategy, and we’ll continue to maintain that posture.

Operator: Our next question comes from the line of Walt Liptak from Seaport Research Partners. Please go ahead.

Walt Liptak: Hi. Thanks. Good morning, guys. You’re welcome. Let me try let me try one on the tariffs too. I think everyone’s, you know, trying to figure out how these tariffs could impact the business in 2025. But what are your customers saying? Are have they do you think they’ve slowed demand? Know, are they does it look like the funnel’s, you know, building? You’re gonna move some of these projects forward? You know, I guess, what are the customers saying? And, you know, maybe around the channel inventory too. You usually think, see some seasonal channel inventory build. Going into the know, the construction season.

Steve Hedlund: Yeah. Well, what I would say is the customer leadership that I talked to is doing the same thing I’m doing, which is we’re glued to Twitter waiting for the next announcement of a tariff policy. The challenge for us is that it’s incredibly dynamic. As you know, we or Trump announced 25% tariffs on Canada and Mexico a week or ten days ago, we were gearing up to have a response to that. And then immediately they were paused for 30 days. So it’s I think everyone is really bemoaning the lack of clarity around what the trade policy is gonna be. I understand it’s a dynamic environment and this administration is trying to flex its muscle from a negotiating standpoint. So the watchword of the day again is agility. When we look at pre-buys, we didn’t see a lot of pre-buys from our customer.

First, obviously, we’re trying to take advantage where we can on things like steel aluminum and other things that we know are in the president’s crosshairs. It’s trying to manage through the business as best we can. I would note that when you look at the automotive industry, the amount of inventory that’s on dealers’ lots right now is actually fairly light. So absent, you know, a catastrophic trade policy, we expect that there should be some nice demand ahead of us in 2025 from an automotive production standpoint.

Walt Liptak: Okay. Great. And just switching over to the savings actions. What changed? Where did you find more annual savings? And then in, you know, I guess, that range that we’ve got now, you know, what do you think impacts you for meeting the high end or the low end of that range.

Gabe Bruno: Well, Walt, I mean, entering into the fourth quarter, I mean, we were pulling the levers. Across discretionary spending and looking at our model in areas that we can hold as examples and projects and things that we don’t have to move immediately on. So we just had a much better impact than we anticipated, and it was really across our business but largely in the Americas. So increasing those estimates in almost twofold and then increasing the going forward estimates are just strong execution across our team. So whether it’s in the lower end or higher end of the range, it’s gonna be dependent upon what happens in the level of travel or customer engagement and other activities that we wanna make sure that we’re focused on. But that’s a fair range in how we look at the temporary cost actions that we see, which are significantly higher than what we thought going into the fourth quarter.

Steve Hedlund: Okay. Well, Walt, I would just add that there tends to be a little bit more discretionary spending in the fourth quarter, particularly around things like travel as we’re getting ready for planning for the following year, the budgeting season and the like. And part of our original projections assumed that there would be some ramp-up. And the cost savings as we went through the quarter. And I just said the team did a remarkable job for in the direction we set and doing their best to avoid unnecessary expenditures and rely on other technologies and other vehicles to be able to communicate with each other and the team just did an incredible job and we thank them for all the hard work. We’re gonna continue to keep the focus on cost given the uncertain market environment we’re participating in. We just think a little bit of the cost is gonna start to come back up from a sequential basis as we do need to do some travel to get out and visit customers.

Operator: Again, should you have a question, please press star followed by the number one. Our next question comes from the line of Steve Barger from KeyBanc Capital Markets.

Steve Barger: Thanks. First one for Gabe. Going back to the conversation on margin improvement, the high end of operating margin for the 2025 target range is 17.5%, and you just beat that on an almost 7% organic revenue decline. So is it reasonable to just run the math forward a couple of years on what an upcycle could look like at your normal incremental it seems like the conclusion should be that there’s another couple of hundred basis points of expansion from here similar to what you’ve done over the last four or five years.

Gabe Bruno: Just know, as you know, Steve, we’ve been very consistent over the last twenty years in the related cycles and expanding our margins to two hundred basis points. So, yes, we’re on the higher end of the range. With the average right on top of our average of sixteen percent which is what we plan for for this cycle. So I would expect that we would continue to develop our model and you see the opportunity shaping across all of our segments, including our targets to improve the automation profile to the corporate average. So we know there’s upside. You see that we’re performing on the high end with compression on volume. So we’re excited where the business has had it.

Steve Barger: So no reason to think that there would be any change to kind of your normal incremental as you think about an organic growth-driven upcycle and the internal initiatives that you would have, is there upside to the mid-twenty percent? Or is that where you would expect to run?

Gabe Bruno: No. We’ll talk more further as we launch our 2030 strategy, but you could expect us to continue to shape our business model with expanding margins.

Steve Barger: Great. And then one for Steve. Really good to hear you talk about the uptick in the long cycle automation projects. Is that primarily with customers you already had relationships with, or are you getting inquiries from new customers thinking about increasing their investments in automation? And maybe can you expand that to medium-sized customers as well?

Steve Hedlund: Yes, Steve. Let me sort of unpack your question a little bit. So the comments I was making about the long cycle really are around automotive projects. They’re the ones that are typically driven by a product refresh cycle and the nature of those projects tend to be eighteen months on average. If a little bit more. We were already doing business with all the customers that do those types of projects. So from that perspective on the business, it’s not us getting exposure to new customers, it’s the customer base now having more confidence in their product plans to release investment. When we look at the medium and short cycle parts of the business, there the growth strategy is around serving the customers we’ve already got and gaining new customers and particularly through technology making automation more applicable and more economically feasible for customers that have more of a high mix, low volume manufacturing model.

Because again, the fixed cost historically of setting up and program a robot were very high, and so people would only use it if they had long production runs of the same part. And through things like software and cobots and other things efficient. Applicable to medium-sized companies that are more job shop nature in their production. So think as you look forward for the automation strategy, it’s continuing to win and grow with the customers we’ve got. And continue to expand the relevant market through technology and innovation.

Operator: Our last question comes from the line of Chris Dankert from Loop Capital.

Chris Dankert: Hi. Morning. For taking the question. I guess just a point of clarification, on the cost savings. Given the step-up in actions in the fourth quarter, is the new guide here for $40 to $55 million of incremental savings in 2025 just given how that kind of rolls to the year. It seems like me to get in first half makes sense, but the back half should roll off. Almost completely by 4Q. Correct?

Gabe Bruno: Yes. That’s right, Chris. That’s incremental. And that’s all built into the incremental margins assumptions that we provided as well.

Chris Dankert: Got it. Got it. Thank you for the clarification. There. And then just on the incentive comp impact, forgive me if I missed it, but just how did that impact the 4Q here?

Gabe Bruno: Yeah. When you look at, for example, the incentive accruals, look that was pretty consistent with $7 million in the fourth quarter. That’s consistent throughout the year. So the thing to note with incentive comp and the also the changes in employee costs we’ll reset our objectives, and so you’ll have lesser of an impact on incentives, but that’s already built into the incremental. Just know how our objectives are set. They’re based on what the budgets are for the current year, and that ends up being the driver to incentive compensation. So that will be reset, and that has already been built in the incrementals that are part of the model.

Chris Dankert: Perfect. Thanks so much, guys.

Gabe Bruno: Yeah.

Operator: This concludes our Q&A session. I will now turn the call over back to Greg Buno for closing remarks.

Gabe Bruno: Thank you. I would like to thank you all for joining us on the call today and for your continued interest in Lincoln Electric Holdings, Inc. Thank you very much.

Operator: I would like to thank everyone for joining on the call today and for your continued interest in Lincoln Electric Holdings, Inc. Thank you very much.