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spk10: Greetings, and welcome to the Lincoln Electric 2022 Third Quarter Financial Results Conference Call. At this time, all participants are on a listen-only mode, and this call is being recorded. It is now my pleasure to introduce your host, Amanda Butler, Vice President of Investor Relations and Communications. Thank you. You may begin.
spk02: Thank you, Tawanda, and good morning, everyone. Welcome to Lincoln Electric's Third Quarter 2022 Conference Call. We released our financial results earlier today, and you can find our release as an attachment to this call slide presentation, as well as on the Lincoln Electric website at lincolnelectric.com in the investor relations section. Joining me on the call today is Chris Mapes, Lincoln's chairman, president, and chief executive officer, as well as Gabe Bruno, our chief financial officer, and Steve Hedlund, chief operating officer. Chris and Steve will begin the discussion with an overview of our results and business trends. Gabe will cover our quarterly financial performance in more detail. And finally, Chris will conclude with a review of our full year assumptions and discuss our announced definitive agreement to acquire Foree Automation. Following our prepared remarks, we are happy to take your questions. 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. A discussion of some of the risks and uncertainties that may affect our results are provided in our press release and in our STC filings on Forms 10-K and 10-Q. In addition, we discussed financial measures that do not conform to U.S. 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 Chris Mates. Chris.
spk08: Thank you, Amanda. Good morning, everyone. Turning to slide three. I'm pleased to report another quarter of record sales, profitability, earnings and returns on great momentum in America's welding and automation on strong industrial activity as well as capital investment. The organization did an excellent job servicing customers and capturing growth in an increasingly dynamic operating environment. Our focus on putting customers first, innovating, driving operational excellence, and investing in our employees shapes our higher standard 2025 strategic initiatives and has been key to successfully navigating through the cycle and through current market conditions. We achieved record sales of $935 million, led by 21% organic growth on 13% higher price and a 9% increase in volumes. Our third quarter sales also benefited 1% from acquisitions, which partially offset an approximate 7% unfavorable impact from foreign exchange translation. Our third quarter marks our return to 2019 volume levels at the consolidated level and with an operating model that is generating considerably more value compared to three years ago. We achieved record third quarter profitability with a 16.4% adjusted operating margin with a 24% incremental margin. We are operating at our long-term higher standard 2025 strategy margin target. while managing segments that are navigating through unique end market dynamics, but year to date are also operating within their higher standard margin ranges. Supply chain conditions are improving in our consumables portfolio. However, we continue to be challenged in our equipment. While we've achieved a neutral cost price position year to date, we continue to operate in an inflationary environment and are driving productivity to mitigate the impact. However, in certain products and markets, we have implemented further pricing actions to offset inflationary pressures. Returning to our third quarter highlights, adjusted earnings per share increased 31% to $2.04, a record performance despite a $0.07 foreign currency headwind. We achieved a record 28.7% adjusted return on our invested capital and a 19% increase in cash flows from operations with a 94% cash conversion rate. We returned $59 million to shareholders in the quarter through dividends and share repurchases, bringing our year-to-date returns to $255 million, which includes $156 million of share repurchases. We also recently announced our 27th consecutive dividend increase at 14.3%, reaffirming our confidence in our business model and our progress towards achieving our higher standard 2025 strategy targets. And now I'm going to pass the call to Steve Hedlund, our Chief Operating Officer to cover organic sales trends.
spk09: Steve Hedlund Thank you, Chris. Good morning, everyone. Looking at third quarter organic sales performance on slide four, we achieved good momentum across all of our segments in every region, excluding China, and across our three main product groups. Our product demand trends reflect strong industrial production activity and platform investments, most notably driven by strengthening automation demand. Looking at our end markets, we achieved organic sales growth across all five end sectors, led by an acceleration in demand in automotive transportation. We are also benefiting from the heightened investment activity in energy in the Americas and internationally. In both end sectors, customers have maintained or accelerated production activity and capital investments to increase existing capacity or support greenfield projects. Lincoln's leadership position in automation and our proprietary solutions for wind turbine fabrication and the manufacturing of EV battery trays, as well as a host of other industry-leading solutions, has allowed us to capture this growing investment cycle in auto and energy, and we expect this trend to continue over an extended period. In addition, we are seeing heavy industries, general industries, and construction infrastructure all maintain low to mid-teens percent growth rates. Heavy industry production levels remain elevated as OEMs address high backlog levels. General industries demand reflects strengthening in Americas, partially offset by weaker international fabrication activity in Europe and China. Our third quarter performance also reflects the long-term growth catalysts that favor our business, including the acute shortage of skilled welders, reshoring and shortening of supply chains, and significant government investments in infrastructure, energy, and the electrification of the transportation sector. While we are cautious around the near-term pace of industrial activity and investments in Europe and China, due to the unique headwinds in each area, we are confident that we are well positioned to capture growth once these markets stabilize and we continue to see strength in Americas and automation. And now I'll pass the call to Gabe to cover third quarter financials in more detail.
spk03: Thank you, Steve. Moving to slide five, our consolidated third quarter sales increased 16% to $935 million. The increase reflected a 12.5% increase in price, approximately 9% higher volumes, and a 1.3% benefit from acquisitions. These increases were partially offset by a 6.6% unfavorable foreign exchange translation, primarily from the Euro and Turkish Lira. Gross profit increased 15%, or $41 million, versus the prior year on higher volumes mix and cost management. In the quarter, we recorded a LIFO charge of $3 million and currently expect a $7 million charge in the fourth quarter. Our profit improvement was partially offset by lower operating leverage and approximately $15 million unfavorable impact from foreign currency translation. Our third quarter gross profit margin was relatively steady versus the prior year at 33.1%. Our SG&A expense increased approximately 7%, or $10 million, primarily due to $6 million of higher incentive compensation and employee costs, as well as $3 million of higher discretionary spending. SG&A as a percent of sales decreased 150 basis points to 17% on higher sales. Reported operating income increased 23% to $142 million. Excluding $11 million of special items, primarily from an asset impairment charge and acquisition transaction costs related to our recent foreign automation announcement, our adjusted operating income increased 25% to $153 million on higher volumes, operational improvements in automation, and favorable segment mix, which was partially offset by $8 million in unfavorable foreign exchange translation. Our adjusted operating income margin increased 120 basis points to 16.4%, generating a 23.6% incremental margin. Interest expense in the quarter increased approximately $2.5 million to $8 million on higher borrowings. We expect interest expense in the fourth quarter to be impacted by borrowings from the FORE acquisition. Our third quarter effective tax rate as reported and adjusted was approximately 20% due to our mix of earnings and discrete items. We expect our full year 2022 effective tax rate to be approximately 20% subject to the mix of earnings and anticipated extent of discrete tax items. Third quarter diluted earnings per share increased 253% to $1.87, excluding special items adjusted diluted earnings per share increased 31% to a record $2.04. We incurred a $0.07 unfavorable impact to EPS from foreign currency translation. Moving to our reportable segments on slide six. America's welding segment's third quarter adjusted EBIT increased approximately 41% to $119 million. The adjusted EBIT margin increased 220 basis points to 19.1% from solid volume growth, operational improvements in automation, and effective cost management versus the prior year. America's welding organic sales increased approximately 27% as key end markets such as automotive, general industries, and energy accelerated in the quarter reflecting strong customer production activity and capital investment. Organic sales growth was led by an approximate 15% benefit from pricing implemented to mitigate inflation and approximately 11% volume growth led by automation and consumables. The Kester acquisition contributed approximately 100 basis points to sales growth. Moving to slide seven. The international welding segments adjusted EBIT decreased approximately 13% or $4 million to $25 million, which was impacted by $6 million of unfavorable foreign exchange translation. The adjusted EBIT margin declined 130 basis points to 11.1% due to unfavorable mix and the timing of pricing actions to mitigate broadening inflation in Europe. Organic sales increased approximately 16% led by 14% higher price primarily from prior pricing actions and price adjustments made to mitigate unfavorable foreign exchange translation. Volumes increased 2% with strongest demand in Turkey, the Middle East, and India. Moving to the Harris Products Group on slide eight. Third quarter adjusted EBIT decreased approximately 10% to $14 million. The adjusted EBIT margin decreased 270 basis points to 10.6%, reflecting lower operating leverage and declining commodity pricing in certain metals offerings. Harris's organic sales increased approximately 11% on higher volumes and a 50 basis point decline in price due to decreases in commodity metal prices. Volume was stronger than expected on continued high demand for specialty gas solutions and the fulfillment of back orders serving HVAC customers. These increases offset continued softness in the retail channel, which is expected to persist through year end on weakening consumer trends. The segment also benefited from a 5% increase in sales from the FTP acquisition serving the HVAC market, which anniversary in August. Moving to slide nine, we generated seasonally high levels of cash flows from operations in the quarter. Cash flows increased 19% to $130 million, reflecting 94% cash conversion. Average operating working capital remained elevated at 19.5% of sales at the end of the quarter as we maintained higher inventory levels to support higher sales and mitigate challenging supply chain conditions. We continue to expect cash conversion to be at or above 90% through the balance of the year. Moving to slide 10. We invested $18 million in CapEx spending and returned $59 million to shareholders through our higher dividend payout and approximately $27 million of share repurchases. Through September year to date, we have spent $156 million on share buybacks and have repurchased 1.2 million shares or approximately 2% of our outstanding share count. We maintain a strong balance sheet profile with a net debt position at September 30 of $638 million, allowing us to maintain a balanced capital allocation strategy through the cycle. And now I'll pass the call back over to Chris to discuss our updated assumptions for the balance of the year and our recent four-way automation announcement.
spk08: Thank you, Gabe. Turning to slide 11 to discuss our 2022 four-year assumptions. The continued strength in Americas and global automation, as well as our ability to mitigate challenging conditions, reinforces my confidence in achieving the high end of our organic sales and incremental margin range this year. Heading into the fourth quarter, we expect America's welding performance to remain strong and follow a typical seasonal cadence on secular growth trends and high demand for capital equipment. As we previously mentioned, we're more cautious on international welding and in the Harris Product Group retail channel on soft consumer trends. Turning to slide 12, I'm excited to discuss our recent announcement that we've signed a definitive agreement to acquire Forey Automation, which we expect to close later this year. Forey is a privately held automation engineering firm and leader in providing OEMs with large-scale, complex automated welding systems, as well as assembly and material handling solutions to drive efficiencies across production platforms. They also provide end-of-line testing systems. These solutions are complementary to our automation portfolio, which further distinguishes Lincoln's leading automation offering in the industry. We are now strongly positioned to serve customers both up and downstream from the arc and on factory floors, which offers tremendous cross-selling opportunities across our end markets. FOREA is headquartered outside of Detroit, Michigan, with a broad international footprint that expands our current automation network of 23 facilities located across the Americas, China, and Europe to 31 sites with a new presence in India and South Korea. The proposed transaction would increase our automation portfolio annual sales run rate to over $850 million, which accelerates us towards our 2025 sales goal of $1 billion. FORE's low double-digit percent EBIT margins are comparable with our existing automation portfolio profit margins, and we expect volume growth and synergies post-integration will support automation achieving its mid-teens percent EBIT margin target in 2025. Turning to slide 13, we've agreed to a cash purchase price of $427 million, which represents approximately a 9.3 times EBITDA multiple with synergies driven by top line growth and profit improvement through integration of our Lincoln business system, including a new ERP system and discipline processes. We expect the business to be accrued to earnings by 12 to 15 cents in the first full year post-close, reflecting integration and borrowing costs. We also expect to double that accretion to 24 to 30 cents in 2025. As announced, we intend to fund the transaction with cash and an arranged term loan of approximately $400 million, which we expect to finalize later this quarter. We expect the term loan will increase our annual interest expense by $15 to $20 million and will increase our gross to debt EBITDA leverage ratio to approximately 1.63 times on a pro forma basis as of September 30th, which maintains our investment grade profile. In conclusion, I'd like to reiterate how proud I am of our global team who continues to lead the industry in servicing customers, driving innovation and executing on our higher standard strategy to drive value for all of our shareholders. And now, I'd like to turn the call over for questions.
spk10: Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. To ask the question, press star one one. That's star one one to ask the question. To ensure that everyone has the opportunity to participate, We ask that you ask one question and one follow-up question and then return to the queue. Please stand by for our first question. Our first question comes from the line of Bryant Blair with Oppenheimer. Your line is open.
spk04: Thank you. Good morning, everyone. Another very solid quarter.
spk08: Yeah, thanks, Bryant.
spk04: Now, automation trends remain extremely encouraging, and if my simple math proves correct here, you're pacing for at least 625 this year with the 4E automation deal getting you to the pro forma H50+. I'm curious, given the size of the transaction, if 4E was contemplated when you established the billion-dollar revenue target for 2025, and given the jumping-off point that you're likely to have going into 2023, if it's now reasonable to to think of something plus relative to that billion-dollar run rate by the 25 time period?
spk08: You know, that's a great question. I'll tell you that 4E was not in some sort of plan that we had. We recognize that it's still a very fragmented marketplace, and there are opportunities for Lincoln Electric to continue to bring in valued assets to our strategy in the automation portfolio. But I really like and think we need to focus on the second portion of your question, which is potentially could we exceed that target? And I've got a lot of confidence in the underlying growth trends that we see in automation. Our backlog in automation is at a record level and continues at that pace as we're moving into the fourth quarter. Foree brings us some new capabilities, which I believe we can leverage across the broader customer base of Lincoln Electric, especially relative to the AGB technologies that they bring, which is advanced material handling that's being utilized on the manufacturing floor. And just with the growth that we're seeing in the business and our continued desire to bolt on more strategic acquisitions into the automation space, it certainly is an opportunity for us to potentially exceed that target as we're executing on our strategy over the next 24 months.
spk04: Well, great to hear. And with regard to another catalyst, or I guess at minimum optionality for the LECO story, I was wondering if you could touch on your recent announcement of the DC Fast Charge PV initiative. We find that pretty intriguing. Maybe highlight Lincoln's competitive or technology angle in the market, the scale of the potential opportunity over the longer term, and how you're currently thinking about go-to-market strategy and the potential partnerships that may play out as you look toward commercialization.
spk08: Yeah, we're very excited about the EV technologies and potentially what it could mean for Lincoln Electric. It's really scaling our power electronics competencies that we have within the business. And Steve Hedlund, our chief operating officer, has been really driving that initiative inside the company. And I'll let Steve provide you more color on really where we're at with the initiative.
spk09: Yeah, thank you, Chris. So, Brian, we're, I guess I would say, still in early innings on this strategy. We've had initial discussions with both charge point operators as well as other people who provide chargers into the market and our value proposition and our story resonates with them. They understand our long history designing and manufacturing power electronics for high duty cycle use in very severe environments. They understand that we're very vertically integrated and can easily meet all the Buy America requirements And the feedback we've heard so far is that people believe we're very well positioned to enter this market, and we address an unmet need in the market. So now it's really the challenges for our engineering and operation teams to start to scale up to get ready for production.
spk04: Understood. Thanks again.
spk10: Thank you. Please stand by for our next question. Our next question comes from the line of Walt Liptack with Seaport. Your line is open.
spk06: Hi, thanks. Good morning, everybody. I wanted to ask about, you talked about how you're a little bit cautious internationally, but it looked a little bit more stable, and you called out Turkey and India. I wonder if you could just provide us with a little bit more detail about what you're seeing out of Europe And, you know, is the growth that you're seeing in Turkey and India, do you think that will be sustainable enough, a big enough offset, you know, in the future?
spk08: Yeah, well, look, I think the uncertainty that we're highlighting and managing is just the uncertainty with the potential energy crisis that's migrating across Europe and what that may mean to the demand models as we move into Q4 and certainly probably permeating into Q1. as they work through those challenges around energy and the colder months, especially in the international markets and specifically Europe. So we've seen some choppiness in that business. Some of that choppiness is driven by other dynamics that might be involved with pricing actions because of some of that inflation. But probably the thing that concerns me the most is actually what the demand model may or may not look like. We believe we're managing it well. We factored that into our perspectives on the company and Lincoln Electric and what we're going to be able to achieve as we're finishing up 2022. I really like the investments that we've made in areas of the international market. We've made some large investments in Turkey, we like the fact, although I didn't mention it, the FORE acquisition actually will bring us an automation facility that's active in India. We've been looking for a site in India, so we'll have a head start on that strategy, which should be able to support our consumable strategy that we also have in that market. So it certainly is more around really the uncertainty centered around those markets because of the energy inflation that they're seeing and some of the challenges that we think will occur in some of those markets.
spk06: Okay, great. And, you know, clearly, you know, the Americans region is doing great. you know, it may be, you know, can you, are you seeing any early signs you've been through a cycle or two in the past? Are you seeing any signs of slowing or is it just this acceleration that we're getting?
spk08: You know, while we've, uh, I think we were early in, in believing and in that belief, investing behind a positive industrial cycle. And we're seeing that positive industrial cycle in the markets today. And, uh, and certainly, From quarter to quarter, you might see some migration between some of those segments, but broadly, I still believe we're in a positive industrial economy. Certainly, our America's business and our automation business especially are benefiting from that. I also believe a reason why we're benefiting is because of our belief in that and then the investments in our business to be prepared to go out there and serve those customers in this portion of the cycle. I still believe that we're on that positive trend, and we'll continue to evaluate that. And I would hope that that's a very positive trend for us. When we have this many of our segments that are moving positively exiting 2022, that's a positive thematic for us as we're starting to look at 2023. Okay.
spk06: Yep, that's certainly true. Okay. Thank you.
spk10: Thank you. As a reminder, ladies and gentlemen, that's star 1-1 to ask the question. Please stand by for our next question. Our next question comes from the line of Mig Dobre with Bayer. Your line is open.
spk00: Hey, good morning, guys. It's Joe Grabowski on for Mig this morning.
spk08: Good morning.
spk00: Good morning. A really nice quarter. So you reiterated your organic growth guidance, but now the higher end more likely. which implies about low double-digit growth in the fourth quarter compared to 18% to 22% growth for the prior five quarters. Is there anything you can point to? Is this the international cautiousness that you mentioned or just tougher comps and moderating pricing?
spk03: Well, Joe, just keep in mind every anniversary, you know, the pricing actions we took last year, and you continue to see that from last year's fourth quarter. And you also see the currency impact assume that we experience in the third quarter continuing into the fourth quarter. So that provides some options to that. But in terms of organic type sales, we're seeing the higher end of that range.
spk00: Got it. Okay, thanks. And then my follow-up, the growth in automotive and transportation was really impressive in the quarter, kind of took a step function higher. Maybe expand on it a little bit. What's driving this outsized growth?
spk03: So just, you know, Joe, when you think about production levels, vehicles, you can read the reports, but, you know, like vehicle production in September was up almost 40% and our business tracked with that. So you're seeing good fulfillment on production plus capital investment. You see the capital investment coming from our automation business. So, you know, as we've talked, you know, the inventory levels have been low in the automotive sector. We're positioned to serve production, and you're seeing that within our results.
spk08: Joe, the other comment I would make is that, and I know we've mentioned it before, but I do believe that when we have historically looked at automotive, we have to look at automotive slightly differently on a forward basis. I don't think in my career we've seen the type of transition that's going in within that marketplace and within that industry as they're migrating towards EVs. And that migration towards those new technologies requires more capital investment, requires changes to facilities, requires new technologies. And yet at the same time, they're trying to continue the demand profile they see for their internal combustion engine. So that transition creates demand for Lincoln Electric. And it's probably also another underlying catalyst that we're seeing within the automotive and transportation space.
spk00: I got it. Very encouraging. Thanks for taking my questions.
spk10: Thank you. Please stand by for our next question. Our next question comes from the line of Steve Barger with Key Blank. Your line is open.
spk05: Thanks. Good morning. Chris, looks like 4E has some complementary products, but also some new things for you, like the AGVs. Do you have an estimate for how this changes your addressable market for automation and robotics?
spk08: You know, Steve, I'm not sure that I'm ready to talk about what the addressable market migration should be, but certainly as we're migrating through executing on our 2025 strategy, we need to spend some more time with that. What I do know is that when we think about automation, and we think about how our industries are utilizing automation, we know that there's a desire to migrate towards more flexible automation where possible. We're seeing it with our co-bots, where that's flexible automation. You can move it within your manufacturing facility. The AGVs are just that, flexible automation. In the past, you might have put in permanent automation because you put in other material handling systems. Really, the AGVs are really a step change in that portion of the process. That does expand that portion of the marketplace for us. The other thing is, and it's interesting, I was just at one of our own manufacturing facilities in the last two or three weeks and looked at the installation that we had of a large automation cell within that facility. And that was all around manufacturing process. It wasn't around welding or cutting application. We have those kinds of capabilities and continuing to be able to identify and participate in those opportunities I think is also a potential expansion of this addressable market within the strategy as we move forward. So you're right. I think it's great in the core. They've got some new capabilities for us. I think those capabilities we can migrate to our global customer base. and potentially opens up an even larger sandbox for us to play in longer term within automation. And we'll continue to think about that and share that with you as we're executing on the strategy.
spk09: Steve, I would add that AGVs have been in the market for a while for warehouse applications and the like. The AGVs that FORE designs and builds are different. They're really well-suited to handling large, heavy, unbalanced parts and moving those through a factory from station to station, which are ideally suited for customers in heavy fabrication and structural steel and other industries where historically they haven't had a very good way to move parts efficiently through their factories. So that gives us a lot of excitement around places we can take that product line.
spk05: Yeah, I think the AGVs are a really exciting part of this acquisition. And I guess to the point on flexibility, how interoperable are these AGVs and Forey's other products relative to your other automation products? And maybe can you talk about your vision for interoperability as you expand your product set?
spk08: Steve, I think that's driven really by two drivers within the business. Certainly, we want to make sure that we develop the operability where we can be communicating and maximizing the productivity that our customers are looking for within that process. Then, as importantly, we want to make sure that that operability aligns with what the customers are looking for within their shop floor information systems. So it's still early innings for us as it relates to what we think we can do with those products in our systems. But as you can tell from Steve's comments and my comments, we're very excited about that addition to our product portfolio.
spk05: Yeah, no, I agree. I think it's a great pickup. Thanks.
spk10: Thank you. Please stand by for our next question. Our next question comes from the line of Nathan Jones with Stifel. Your line is open.
spk01: Yeah, good morning. This is Adam Farley on from Nathan. So volume comparisons re-accelerated in the quarter, which is nice to see. How much of this volume increases from higher order rates versus improving supply chains that are potentially like backlogs that be shipped at a faster pace?
spk03: So, Adam, think through it. The consumable drivers are driven by production activity. So we've been, as we mentioned in our comments, seeing more stability in the supply chain on the consumable side. So that's driven by real activity currently. And then, again, on the automation side, tied into the America's strong growth, our backlogs are holding steady from entering the third quarter to entering the fourth quarter. So real strong demand as well as on the automation side.
spk01: Okay, maybe just another way, you know, where are your lead times today versus 2019? Are your lead times improving?
spk08: Look, I've shared with you that the lead times are improving sequentially. As I mentioned, we're starting to see more stability in the In the raw material and metals-based inputs that we'd have in some of our consumable products, we may not like some of the price points associated with them, but it's not an issue of availability. There are still challenges on the equipment side of our business with some of the chips and the electronic components, some of the control components that we might be utilizing in automation. So we're still seeing challenges in those areas of the supply chain and expect that we're going to see challenges in those areas of the supply chain at least what we see for the foreseeable future, which is probably at least the next two to three quarters. That's really the way we're thinking about the business internally. With that, as you'd expect, our on-time delivery metrics on the consumer side of our business have bounced back and quite frankly are performing very well. We believe we've made some improvements, quite frankly, even on the equipment side of our business. A lot of our products for the commercial marketplace are ready and available today for our customers. But it is still challenging from the supply chain side. And as I mentioned, just really proud of how our teams have been able to manage through the challenges we've seen in the marketplace and the fact that very early on, we decided to use the strength of our balance sheet to protect our customers in the market. And we did that by going out and procuring additional components and raw materials to try to minimize the impacts we might have in the marketplace. And I think both of those initiatives have served us well over the last, you know, three to six quarters.
spk01: All right, great. Thank you for taking my questions.
spk10: Thank you. Please stand by for our next question. Our next question comes from the line of Dylan Cummings with Morgan Stanley. Your line is open.
spk07: Hey, great. Good morning, guys. Thanks for the question. I'm sorry to ask another one on automation, but I just wanted to check in on kind of the EBIT margin targets in the business. You obviously underwrote the kind of mid-teens-ish kind of target by 2025 for broader automation. I'm just curious, um, you're going to do probably close to 17% this year, the kind of total company average level, you know, what is kind of keeping the lid structurally on margins, uh, you know, in terms of actually getting closer to that kind of corporate average level, um, over the next few years.
spk03: So Dylan, we're, we're right on track to our objective, right. Being at that corporate average OP. And, uh, we've made a step change this year, uh, tracking at that low double digit EPID profile. as we've mentioned on the four-way signs commensurate with that profile, and we're very much targeted towards achieving that mid-teens target. That's going to come from both continued growth organically, so you have some volume leverage there, but also continued development of our Lincoln business system. So our margin profile increased 50%. We were talking about mid to high single digits last year, and now we're into a little double digits, and we're on track to meet our objective.
spk07: Okay, got it. And I guess where I was going with that, too, is, you know, are there any parts of the automation supply chain that you might kind of consider insourcing over the next few years that could maybe unlock a greater kind of EBIT margin potential for that business?
spk08: You know, we're always looking at whether we would be bringing more... capabilities into the business, I think the FORE acquisition and our ability to bring the AGVs in as a capability is a great add for us as it relates to a catalyst to the margin profile. I think that, quite frankly, opening up other markets to us could be a catalyst to that, but I can't think of necessarily a capability today From a product perspective, that we're thinking about insourcing because we're challenged from a supply position. That's not something that today we believe would be an enormous value creator. Now, I can also share with you, if we did, then strategically we'd consider it. We have the balance sheet and the ability to do that if we think that's something that would be a benefit to our strategy longer term. But today, that's not something that we're contemplating.
spk07: Okay, that's clear. Thanks, Chris. And I would just sneak one last one in. Gabe, you mentioned in your prepared remarks the kind of impact of broadening inflation in Europe with regard to the international welding even margin performance in the quarter. I'm just curious if you can kind of put a finer point around that in terms of any unexpected kind of energy cost inflation that you saw vis-a-vis natural gas or electricity that maybe drove some of that margin weakness versus just kind of broader inflationary pressures around like freight labor, etc.? ?
spk03: Yeah, no, it's broader inflation, but we do anticipate continued pressures, particularly on the energy side, and we're ready to respond with pricing actions to maintain that price-cost neutral posture.
spk07: Okay, got it. Thanks for the time.
spk03: Thank you, Dylan.
spk10: Thank you. Please stand by for our next question. Our last question in the queue is a follow-up from Walt Liptick with Seaport. Your line is open.
spk06: Hi, thanks. Just maybe one last one on the 4A acquisition. What is the percentage mix of the welding automation versus material handling versus other?
spk08: You know, Walt, look, we really haven't provided that information out, and I'm probably not going to at this point in time. I think that The nice thing is when I look at the business is it does have an element of welding and larger weldments that, quite frankly, we maybe were not participating in, a slight add to our business, and then we've got the in-the-line testing and the AGV as new capabilities inside the business. For me, there's really two reasons. One is there's no question. I believe that when people think about welding and cutting automation, we come first to mind globally. I think we've built this business, we've built that reputation in the marketplace, but we also need to make sure that customers understand we have broader capabilities and we can do a lot of things that may even don't involve the arc. And so we look at that internally, but at this point in time, it's got a nice mix inside of the 4E business, and I think complements what we're trying to do with our automation strategy longer term.
spk06: Okay. Yeah, makes sense. I understand. I wonder if you could maybe then help us with the geographic mix, how much is in Americas versus international, and how much Europe exposure for 4E?
spk08: Yeah, and you know what? FORE will be folded in. Once we start the integration process, Walt, you know us well. Well, once we start the integration process, it'll be even difficult in a very short period of time for us to be able to determine what's FORE. versus what's just broad automation, because we'll have an ability to be able to migrate those technologies and capabilities across the portfolio. So, look, it is more concentrated in the U.S. market than it is globally, because it was developing those global markets, but it has a nice presence in a couple of the areas around the world, but certainly more North American-centric than global.
spk06: Okay, great. Thank you.
spk10: Thank you. Ladies and gentlemen, this concludes our question and answer session. I would now like to turn the call back to Gabe Bruno for closing remarks.
spk03: Thank you, Tawanda. 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.
spk10: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.
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