Q2 2021 Lincoln Electric Holdings Inc Earnings Call
[music].
Greetings and welcome to the Lincoln Electric 2021 second quarter financial results Conference call.
At this time all participants are in a listen only mode and this call is being recorded.
It is my pleasure to introduce your host Amanda Butler Vice President.
At the Investor Relations and communications. Thank you you may begin.
Good morning, and good morning, everyone and welcome to Lincoln Electric's second quarter 2021 Conference call. We released our financial results earlier today and you can find our release as an attachment to this call's slide presentation as well as on the Lincoln Electric website at.
At Lincoln Electric Dot Com in the Investor Relations section joining me on the call today is Chris Mapes, Lincoln's Chairman, President and Chief Executive Officer, and Gabe Bruno Our Chief Financial Officer, Chris will begin the discussion with an overview of our results and business trends and Gabe will cover our second quarter financial performance in more detail.
Following our prepared remarks, we're happy to take your questions before we start our discussion now. 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 SEC filings on forms 10-K and 10-Q.
In addition, we discuss 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, and our earnings release, which again is available in the Investor Relations section of our website at Lincoln.
Lincoln Electric Dot com and with that I'll turn the call over to Chris Mapes, Chris. Thank you Amanda good morning, everyone turning to slide 3 the second quarter marks the 1 year anniversary of Covid significant impact across our business and our team has done a tremendous job persevering through this challenge.
Many of the regions. We operate in are starting to return to more normalized business activity. However, we remain vigilant on rising global Covid cases, and are continuing to operate under stringent and best practice health and wellness protocols to ensure our employee safety.
Turning to slide 4 for a second quarter highlights.
I am pleased to report that we achieved record earnings and the quarter driven by record sales and diligent price cost management increased productivity and the benefits of our prior cost reduction actions.
And I'd like to thank our employees, our customers and our partners.
Who continue to excel and such a.
The light operating environment.
Sales increased approximately 40% and the quarter or 36% on an organic basis on broad recovery momentum from the prior year trough.
Consolidated sales as well as international welding and Harris products group sales trended above 2019 levels.
<unk> and we expect Americas welding to inflect positively in the third quarter.
Our team did an outstanding job addressing supply chain constraints and inflationary headwinds and the quarter, we leveraged our elevated inventory levels and supply chain partners day maintained product availability across substantially.
All of our portfolio reaffirming Lincoln as a trusted and reliable supplier during this challenging period.
We also effectively manage raw material inflation through pricing actions and improved productivity, which resulted in neutral price cost year to date.
We will continue to monitor.
<unk> inflationary pressures and the business as we move forward.
Higher productivity and structural cost savings and disciplined management of discretionary spending offset higher employee costs, which resulted in a near doubling of our adjusted operating income to $125 million and a 440 basis.
All increase to our adjusted operating income margin to 15, 1%.
I am pleased to report that the international welding segment achieved their double digit EBIT margin goal and the quarter with and 11, 6% adjusted EBIT margin.
Adjusted earnings.
Point, there increased approximately a 109% to $1.67.
A record second quarter performance.
Return on invested capital improved 280 basis points to 21, 4% and cash flow from operations remained strong we returned approximately 55.
$1 million to shareholders with $25 million and share repurchases and paid out $30 million and dividends.
Looking at the second quarter demand in more detail on slide 5 trends remained strong through the quarter ending with backlogs above 2019.
<unk> <unk> levels.
Organic sales increased 36% and all reportable segments geographic regions and main product families achieved improved performance year over year and sequentially.
Equipment and consumable organic sales increased by approximately 40% and.
Our trending above 2019 levels.
Automation organic sales inflected the high teens percent growth as customers begin to reinvest and capital equipment.
With 80% of our revenue driven by growing end markets. We believe we are in the early stages of and industrial expansion.
<unk>.
And the second quarter, we achieved a near doubling of organic sales and automotive transportation and strong double digit percent growth and heavy industries general industries and construction infrastructure.
Energy remained challenged but declines continued to narrow and we achieved.
<unk> and modest growth and downstream applications.
Moving to slide 6.
We're entering the third quarter expecting continued year over year growth and our welding segments with high backlog levels are.
Our Harris segment faces more challenging comparisons and the second half of the year due at the spike and prior.
Your year retail channel sales and higher price levels, but we expect continued momentum and the second half based on current order levels.
Overall customer sentiment continues to be positive yet cautious on supply chain labor constraints, and COVID-19 related disruptions, which may.
<unk> from the timing of orders and deliveries.
We remain focused on safety at Lincoln electric and servicing customers with ample supply, which positions us well to capitalize on near term growth opportunities in this early stage of and industrial growth cycle, given the demand trends and the incremental pricing actions.
Actions, we've taken we are adjusting our full year top line organic sales assumption to now be and the high teens percent range as compared with the previous low to mid teens percent range.
As stated before this range does not include in the future pricing actions, which may be warranted.
The impact of all assuming standard seasonality and the business for volume performance with third quarter sales generally flat to slightly lower than second quarter results.
And we're also still expecting a full year incremental adjusted operating income margin in the high 20% range.
As we manage the business we're focused on growth.
We have innovation and acquisitions that are core tenants of our higher standard 2025 strategy. We're currently integrating our recent <unk> and automation acquisition and maintain a full M&A pipeline and are looking forward to a series of product launches and the second half of the year, including yesterday's launch of our industry.
Bidding enhanced Iot solution checkpoint.
And now I'll pass the call it the Gabe to cover second quarter financials in more detail.
Thank you Chris moving.
Moving to slide 7 our consolidated second quarter sales increased 39, 9% due.
And 226% higher volumes, a 10% benefit from price and a 3.3 favorable impact from foreign exchange and a 60 basis point benefit from the Siemens acquisition, our gross profit margin increased to 110 basis points to 33, 2%.
History has benefits from volumes and cost reduction actions were offset by higher raw material and freight costs, including a $9.5 million LIFO charge LIFO charges for the first 6 months from approximately $13 million and we expect and equivalent charge and the second half of the year.
The price cost and the quarter was slightly positive and neutral year to date, we continue to target neutral price cost and a full year basis, as we work to mitigate inflation, including LIFO charges.
Our SG&A expense increased 19, 9% or 25 million.
And there is 2.152 million and the quarter.
Higher incentive compensation and employee costs represented substantially all of the increase and we incurred $3 million and unfavorable foreign exchange. We expect 2021 SG&A expense to remain at this level through the balance of the year due.
Higher wage and incentive compensation.
SG&A as a percentage of sales decreased 310 basis points to 18, 3% due to higher sales.
Reported operating income increased 206, 4% to $121.8.
And <unk> or 14, 7% of sales.
Operating income included approximately $3.3 million of special items.
Excluding special items adjusted operating income increased 98, 6% to $125.1 million or 15.
And 1% of sales, a 440 basis point increase versus the prior year.
Adjusted operating income benefited from improved volumes and cost reduction benefits and diligent price cost management, which generated a 26, 3% incremental margin.
<unk> for the 6 months incremental margins were 28, 5%.
Our second quarter effective tax rate was 18, 3% or 17, 9% on an adjusted basis due to our mix of earnings and discrete items. This compares with a 19, 8%.
<unk> effective tax rate or 23% on an adjusted basis and the prior year period, we expect our full year 2021 effective tax rate to be and the low 20% range subject to the mix of earnings and anticipated extent of discrete tax items.
Second quarter.
Foot and earnings per share increased 255, 6% to $1.60.
Compared with 45.
And the prior year excluding.
Excluding special items adjusted diluted earnings per share increased to 108, 8% to a record $1.
And <unk> 67.
And the quarter.
Now moving to our reportable segments on slide 8.
Americas welding segment's second quarter, adjusted EBIT increased 82% to $84.1 million the adjusted EBIT margin increased 400.
The diluted points to 16, 9% from benefits of higher volumes price cost management and price costs.
And prior cost reduction actions.
And Americas welding organic sales increased 35, 3% led by 27, 1%.
<unk> higher volumes and an 8.2% benefit from pricing actions implemented to mitigate inflation.
And market recovery remains strong across the Americas led by growth in automotive transportation heavy industries and general industries.
Demand drove growth.
<unk> and all product areas, including automation and energy remain challenged but we believe is and the early stages of a recovery.
Moving to slide 9 the international welding segment's adjusted EBIT increased 209, 8% to $30 million the adjusted EBIT margin increased.
Increased 630 basis points to 11, 6% and higher volumes and the benefits of operational improvement initiatives and price cost management.
Organic sales increased 33, 8%, reflecting strong volume growth across Europe.
And the Asia Pacific region on accelerating regional demand and increase and automotive transportation and heavy industry and general industrial demand were the primary growth drivers in the segment the.
The segment also benefited 2% from the April <unk>, Zeman acquisition, which we expect will generate.
And approximately $10 million of sales per quarter.
Quarter from second quarter sales from Zimmer and were lower due to the timing of revenue recognition.
Moving to the Harris products group on Slide 10.
Second quarter adjusted EBIT increased to 55.5.
And then to $18.2 million adjusted EBIT margin increased 100 basis points to 15, 3% due to higher volumes, which were partially offset by higher employee costs.
Organic sales increased 44% with 20.
The 5%, 9% higher volumes, primarily from broad strength and Harris as end markets led by HVAC and the North American retail channel as well as the 21.
1% benefit from pricing actions taken to recover rising commodity costs, such as silver and copper.
Copper and their consumable products.
Moving to slide 11.
And we generated approximately $100 million and cash flow from operations, which was impacted by $25 million and higher tax payments cash conversion for the quarter was approximately 80.
2% and we continue to expect our full year cash conversion and excess of 90%.
Working capital remains intentionally elevated to support the recovery and mitigate supply chain constraints.
Moving to slide 12.
Given strong execution 21.
4% ROIC performance and continued strength and cash flows we continued to invest and growth in the quarter, we invested $17.8 million and internal capital expenditures and the net $83.7 million for the April 1st Zeman acquisition.
We also returned approximately.
The $2.55 million to shareholders through share repurchases and our dividend program.
Looking ahead, we continue to expect our annual Capex program to be $65 million to $75 million and we will continue to repurchase shares opportunistically.
We maintained ample liquidity with 700.
<unk> $7 million and the second quarter.
And with no near term debt maturities and expectations of cash conversion and excess of 90%. We are focused on further investing in growth and returning cash to shareholders.
With that I would like to turn the call over for questions Kara.
And <unk>.
Ladies and gentlemen at this time, we will be conducting a question and answer session to ask the question you May Press star 1 on your telephone keypad.
To ensure that everyone has an opportunity to participate the ask that you ask 1 question and 1 follow up question and then return to the queue.
Your first question comes from the line of Bryan Blair with Oppenheimer.
Alright, everyone from very solid quarter.
Thank you and good morning, Brian.
And of course you.
You seem to really emphasize that were and the early stage of and industrial expansion.
We're on the same page with that but it has been a while since we've had a healthy industrial cycle.
Hoping you could offer a little more color on what drives your team's confidence and adding some real demand runway.
Well I would say a couple of things Brian first is just the momentum we see across the breadth of the business.
And we're all as some of the things that we see within the specific segments. I think and example of that would be the mining segment. It's been a while since we've seen a really strong mining segment within the business.
You see the escalation and some of those commodity input costs that they've got from the mining side, whether that would be iron ore copper or coal and quite frankly that.
As with demand and drives activity and and replacement activity within those industries and that's just an example of 1 of them, but I do feel like we're entering and and the early stages. We can maybe look back and argue whether we're a quarter and or 2 quarters and but I believe we're at the early start of a more positive industrial cycle and.
That drive IC that is very positive for our business here at Lincoln Electric.
All makes sense and great to see automation returned to growth and the quarter is there any incremental detail you can offer on automation.
Automation and order rates expected back half growth.
And also I know it's early.
Days of owning the asset, but it would be great to hear a little more on zama and integration and how the combination of SBA and Python and <unk> impacting the growth prospects and structural steel.
I will I'll talk a little bit about zoom and then I'll, let Gabe gave you a couple of comments about automation and broadly, but I'll tell you I am happy with the with the projections that we think.
We have with the automation business it turned a little earlier than we had expected and the team is really working hard at it at the <unk> acquisition and I think it's just the right strategic fit and a growing global segment for Lincoln Electric at the right time. So many individuals are very familiar with our Python technology really a market.
And the technology out there for our robotic cutting for that structural steel industry and now we can provide another solution for that marketplace for them to be able to assemble the structural steel pieces for that industry and I will tell you I've already talked to a couple of customers out there and the marketplace and they.
They're very interested and excited about Lincoln electric being able to provide them. The complement of solutions, which really can take care of a great deal of the activity inside the structural steel manufacturing process. So we believe it's going to be a great solution for us. The teams are working hard on the integration portion.
And I know that will be.
Working with our customers and partners out there around the world. We've already developed the relationship here and the U S marketplace, where we're going to be able to expand upon that offering with them. So I would say off to a very solid start.
The very positive on the technology and the people.
People that we have there and I think it's a great strategic fit and then I'll, let Gabe give a couple of other comments about automation broadly and.
So Brian Thanks for that.
We're very excited about the.
And the growth opportunities, we see and our automation business and we had discussed about seeing an inflection point towards the middle.
And this year. So we did see an acceleration of that and the second quarter.
It was good to see where and in the high teens type of growth and we've got strong quoting activity very good backlogs going into the second half. So we will continue to see that kind of momentum into the second half of the year.
<unk> com.
The margin profile is improving we've done things within our business model to integrate the acquisitions that we've done over the years and so we're very confident that we're on the trajectory of reaching our target operating profit.
Profit profile and as we continue managing and growing and this business. So we're very excited about automation.
Comment on and we're well positioned for continued growth and as the capital markets start to expand and we see a reinvestment and and the necessary automation capabilities within factories and the world.
Okay I appreciate all the color thanks for taking my questions.
Your next question comes from the line of.
With Baird.
Good morning, this is mcdole Brian.
Good morning Mig.
Hi.
I wanted to ask a couple questions on international and.
The I guess the first 1.
Performance here, both volume and pricing quite.
Quite a bit better than that.
Yes, so 2 parts to my question first.
And then when I'm looking from a pricing standpoint, I, obviously understand the input cost commodity prices going higher but this is the strongest pricing I've seen and international for far back as my model goes so I'm wondering if you're doing something different or if theres something sort of different any environment.
Now and your international business and maybe prior inflationary period and then the second question is on volume.
It looks like and international now you're running.
Your volume is basically back to pre COVID-19 levels back in 2019 levels and.
And I'm curious as to how you were sort.
<unk> and the business progress here, because it seems like youre picking up.
Little bit quicker and international and then the Americas. So I'm wondering if there is some difference here that we need to be aware of.
Well it make the I'll start and I think the first pieces, we've been talking to you and others about our continued expecting.
Patients have improvements and the international business and part of that.
<unk> was a requirement of us to get better at managing that piece of the business part of that was the system implementation that we needed to get across the portfolio because I would tell you that 1 of the key elements of us managing some of the challenges that you have out there and an inflationary.
Scenario market like this is getting the right tools in place and then making sure that our teams are utilizing those tools and managing that process.
And we have been very good at that at Lincoln Electric in general, but maybe not as good at that and that particular market and we are we are making those improvements and I am excited about the the.
Work that the team is doing there on that so I would tell you that a portion of that is just quite frankly process driven second thing I would tell you is we've been talking about going back out and making the improvements and the broad business to regain some of the.
Of the customers and some of the relationships that may be during the integration over the last couple of.
Years that were mitigated and I think we're seeing that we're seeing strong performance from the teams, especially in the European marketplace.
For us to be able to generate the improvements we're seeing and international at this point, so really solid quarter.
We need to show consistency with that type of performance.
Vince I believe that we will obviously there is some seasonality associated with the portion of that and international market that'll be out there in Q3, but very <unk>.
Excited about making this initial target.
And evaluating exactly there and where we think we can take this area of our business as we're moving towards the end of the year and into 2022.
Okay.
That's helpful. Chris and you anticipate and we're going to go with my follow up you get the margins were quite good as you pointed out here and I'm wondering on the sustainability of this margin as I'm thinking about the back half of the year, especially within the context of the seasonality that you talked about and thank you.
Yes.
I would tell you that we expect to see seasonality and then the 1 thing which I believe is just probably a little more opaque a little bit more of a wildcard and the business and this isn't just and international com and its probably a karma and even across the Americas business, it's very difficult to get a feel for exactly what type of summer shutdowns we.
Look I and various segments across the world I hear everything from some people, saying look there could be supply chain challenges, maybe and automotive around chips and maybe they might extend some activity and then I also hear that many customers are also worried about the backlogs they have and they may actually try to actually work through portions of those windows and it's.
It's more difficult for us at this point and the cycle and maybe to get a good handle on it I would expect normal seasonality, but I will share with you. We believe that we have made structural improvements and that business and we expect to maintain those double digit margins as we're moving through the rest of the year and then identifying what should be.
The next step improvement for that international business as we're moving into 2020.2.
Great very helpful. Thank you.
Okay.
Your next question comes from the line of Steve Barger, with Keybanc capital part and capital market.
Hey, good morning. Thanks.
Steve.
It looks like 2021 revenue probably gets back nicely above 2018, and 2019 of just over $3 billion.
With price and volume as strong as they are along with the structural cost actions you talked about do you think this year's gross margin can get back to the 33 and 5% of last year or even the 34% from 2018.
Yes, Dave and thanks.
Thanks for that question 1 of the.
The dynamics, obviously as the mix of business and also price cost spread.
Confident that we'll continue to manage the price cost.
And whether or not we exceed.
The gross profit profile and going back 2018, that's yet to be seen with the growth up in the financials and.
And to manage price cost and a neutral level.
And this is Chris and look I know your comment was centered on gross margins, which I can assure you. We're very focused on them, but I will tell you what what excites me about the business as we see the momentum and the business yet I still believe strongly we've got 2 areas of the business that will continue to improve as we drive.
But we will can strategic initiatives and that's getting the automation business up to the average target margins that we have for the company and the higher standard strategy that should be able to provide us with some margin lift and as I mentioned and the earlier question. Although we've achieved the first level than our international business. We certainly expect over the next several quarters.
Orders to identify how we make further improvement so I see those 2 areas. The business still is the catalyst for continued margin improvement for the business as we work through the next several quarters.
It's a good comment on the automation business and I know the team is working hard to keep up right now across all product lines, but as you look.
The bigger secular trends.
The growth in the automation business are there opportunities to expand the materials handling aspects further from the welding cell itself or just how do you see that playing out.
Yes, and that's a great question, Steve and I would tell you I believe we've already made that step that at the end of the day.
Many of.
The processes and solutions or content within the sales that we're providing are already outside just the core welding expertise that we can provide so that is 1 element of it but I will tell you and I think about those broad secular trends I don't think that the pandemic and the challenges associated with the pandemic have done anything.
Anything except accelerate that that trend and when we think about challenges associated with labor challenges associated with supply chain and many people, especially in this market with the low cost of capital. That's out there are going to quickly think about automation and I believe theyre going to do that because I know that's what we're doing within.
And our own business.
So I believe that what we've had to manage through over the last 18 months or so only reiterate the confidence that we have and the automation business and I believe it will just continue to be a larger and larger portion of our portfolio as we look at driving it to the higher standard strategy that we're trying.
And to execute in 2025 of that being nearly $1 billion business for us with inside the portfolio.
And just 1 quick 1 on that is are you back to mid teen ish percent of automation and relative to the total top line.
Or is it still a little light.
And that's about right.
Steve That's a run rate currently yeah, yeah. Thanks.
Yeah.
Your next question comes from the line of Dillon Cumming with Morgan Stanley.
Great. Good morning, guys. Thanks for the question.
On the dead horse on.
Automation here, but christiane and sounded a lot more confident in the.
M&A pipeline and I think he changed the language and the slide deck from acquisition to Pluralize that word.
Curious you know in terms of your confidence and the pipeline now and do you feel like something more eminent and that's.
So I guess is up and we're focused on the automation side of the portfolio versus the legacy welding business.
Well, we certainly are focused in both areas Bill and we've said obviously.
To get the <unk>.
The execute on the higher standard strategy, we need to have and acquisition execution component of that I certainly like the automation business executing on the <unk> acquisition shows you our interest and continuing to deploy capital in that area, but there are also areas and core welding I think that 1 of the reasons.
And we're amplifying that is.
It is a requirement and it's something we know we need to execute on our long term strategy and and quite frankly, our M&A pipeline is very active.
So we're confident that with that and our ability to utilize our balance sheet I love our investment profile.
Why and be able to identify and execute on those opportunities.
For our long term strategy.
Okay got it thanks for the color, Chris and then maybe just 1 question on the end market kind of outlook, obviously infrastructure, the already kind of drilling and the double digit rates. So it seems like the the businesses is improving nicely, but just curious like and your conversations with customers and.
And we should have.
Backlog and quoting activity.
Staying on that side of the business.
Do you get the sense that your customers are actually positioning for a bill by year end or do you feel like there just kind of willing to invest kind of kind of ahead of any infrastructure package and the U S.
Look I'm not getting a feel that we've got anybody doing any build.
The I'm not getting a feel that there is any.
The front running associated with that particular type of opportunity.
I think that quite frankly that would be another catalyst for us within the business, but I can't tell you that when I think about the business or the conversations I have and our customers that we've had people that are trying to get ahead.
<unk> of that by accelerating activity into their business.
See the infrastructure Bill is the potential.
Additional opportunity for us as it relates to the demand profile for the business. The other thing I would share as it relates to that question.
The other challenge associated with that as the supply chain challenges.
And does that that the industries are having so our customers are having the supply chain challenges also mitigate some of their abilities to be able to maybe move as quickly as they would like so it actually may elongate out some of that demand, but I don't think theres any early activity on on infrastructure.
Okay.
I think from the time.
Your next question comes from the line of Nathan Jones with Stifel.
Hey, good morning, and this is Adam Farley on for Nathan.
Good morning, Adam Adam.
And I wanted to go back to our employee costs.
And some color on what Youre seeing.
And there is and increased wages.
The new employees to add and then similarly could you talk about maybe the labor you on the net.
Net income.
Not from.
You kind of break it up a little bit and but I think you're just asking to add some color on employee cost and trends and.
And just comment.
Great and as we've talked previously I run rate for expectations on increases merit raises and otherwise about $12 million annually and we're pretty much on track with that our incentive compensation is also a key driver and we and we're at about $17 million higher for the 6 months, we expect about 35 million.
Currently and the profile of our business. So we're running very much and track to where our expectations, whereas and based on our last conversations and.
And I guess the comment that we did mention our incremental margins and the higher <unk> is that built into all of those considerations employee costs incentive comp.
And otherwise.
Okay. That's helpful.
Maybe on supply chain.
Are you seeing the impacts from supply chain constraints on the ability to ship to customers on time.
Could you be realizing and higher revenue, if the supply chain and allowed us.
Yes look I think there's no question that if our supply chain was completely optimized at this point, we probably would have been able to move part of that backlog out to the marketplace.
So the answer to that would be yes, the amount of that maybe is not as easy for me too.
To give you a data point, but there's no question in my mind that if supply chain.
Chains had been optimized we probably would have been able to have more.
<unk>.
And more revenue and the in the quarter as we move those products into the marketplace.
Okay. Thanks for taking my questions.
And again and good luck to ask a question you may do so by pressing star.
And 1 on your telephone keypad.
Your next question comes from the line of Walter Liptak with Seaport.
Hi, good morning, guys.
Good morning.
Wanted to just ask a couple of follow ons. The first 1 on the infrastructure Bill.
The it looks like it could happen do you guys.
Some of the insight into what that might mean for some of your markets your customers your.
Construction markets et cetera, like is there and then.
Does anybody really.
Have there been any good studies I guess that you've seen about what the E&P infrastructure channel might do for you.
I'll tell you Walt that's a great question, we've talked about it internally and obviously talked about the host of market participants about that piece remember that about 15% to 20% of our revenue are exposed into that particular segment. So it and obviously can be significant enough that it has an impact for us.
We are really waiting to see more specifics around the bill and exactly how and when those.
Would come to the marketplace, if the bill moves forward, but in general we recognize there could be there could be a real favorable catalysts for us if we see that bill passed here before the end of the year as.
Long as it's passed in a manner, which actually is talking about physical infrastructure improvements.
Okay, alright, great Thanks and.
And then just to follow on on the.
Earlier questions about the.
The summer shutdowns and the seasonality and I Wonder if you could talk a little bit just about what you're hearing.
Hearing from your customers and the U S and <unk> and <unk>.
Europe about the summer shutdowns, because I've heard from a couple of companies that they're going to shut down early in the third quarter and with the supply chain's catch up and then.
They are hoping that they can run all out.
And into the end of the year and that take.
As long or even any winter shutdown is that we have.
Recurring too or is that something else.
Around the the.
And the seasonality.
That's exactly the challenge I've said from customer to customer from segment. The segment. It's it all sounds a little bit different right now I mean, some of the automotive companies that we.
We now have more challenges associated with some of the power electronics and the chips and their production process. We've heard some individuals' talking about potentially longer shutdowns and the summer.
Had some talk about quite frankly trying to accelerate pieces and other segments. So it's right now it's just very difficult for us to get a handle.
What the shutdown activity may look like and the third quarter or if quite frankly, if someone were to make decisions around longer shutdowns and the fourth quarter, but.
Know this at the end of the day that may create a slight level of choppiness, but it's not going to stop the momentum that we see within the business broadly are and the demand profiles.
As the industries and we'll just have to work with our customers and evaluate that as we're moving through the quarter.
Okay.
And in July did you see any of the Choppiness.
And as maybe some customers took the early shutdown.
Only a couple and I wouldn't say that it's material.
And across the entire portfolio of course, as you know on and international basis, most of that occurs and the latter part of the quarter versus.
Versus the July window.
Okay, Okay, great alright, thank you.
And our final question comes from the line of Steve Barger with Keybanc, Keith Bank capital markets.
Hey, Thanks for letting me back in.
Chris the pricing strength, obviously reflects the big steel price increase and the market.
Our steel analyst expect as more capacity is going to come online maybe imports pick up and service centers are getting restocked, which will bring steel costs back down so a do.
And do you expect lower steel and the back half and and.
And I play out for you.
Well I'll tell you, Steve Oh, I know that it looks like my our steel costs that Lincoln electric are going to be slightly higher and the third quarter than they were and the second quarter.
If those elements are starting to impact the marketplace, and we're not seeing them and the execution of running the biz.
How would this on a global basis moving into Q3, so look I've read some of the same things that that your team may be talking about but they just haven't started to materialize. Yet obviously, if we were to start to see major reductions and we'd be working with our customers and understanding exactly how and when that would flow through our business.
<unk> to be able to support them, but right now we're not seeing that type of activity and again Q3 steel price is slightly higher than Q2 steel prices for Lincoln Electric understood. Thanks, and then for the 5 years before 2020 Harris margin averaged 12, 2% and obviously that.
Business with volume and price and cost cuts last year and it's running ahead again this year.
Do you think the new up cycle normal for Harris is mid teen or cannot run the high teens.
And what happens at the precious metals moderate.
Yes, David I would tell you that we were always talking to our teams inside of.
The Lincoln electric much like we were talking to our automation teams that we expected them to get to our targeted average and our higher standard strategy, which you know is around that 15% target.
We believe theyre doing the things to be able to continue to operate at that level. There are some mix challenges inside that.
Step 2 is you may see a window of time as portions of the portfolio, maybe our expanded the need to be need to be addressed but in general.
And just love the performance of that business Love. The fact that our international business has made their first target, but expect to continue to drive our Harris business, where they would be operating at the average.
Average of the higher standard strategy.
Got it and.
I guess 1 last question on that I think new home sales took a step back because maybe price appreciation or something but what are what's the Harris team is seeing in terms of demand and the back half.
Well.
No in Europe, when Youre talking about new home sales the primary portion of that is.
That business the replacement market off the HVAC side, because thats still probably 75% to 80% of the total market within HVAC. So I still think that the hot summer that many of the large HVAC producers are seeing and talking about as theyre coming out with their second quarter earnings lead to still solid momentum within that business. So yes.
Much.
Generally the international business that business has some seasonality because of its exposure to HVAC and that new home construction as well as replacement components, but there appears to still be very solid momentum and the business as we're looking towards the end of the year.
That's great. Thanks.
This concludes our question and answer session I would like to turn the call back to Gabe Bruno for closing remarks.
I would like to thank everyone for joining us on the call today and for your continued interest and Lincoln Electric and we look forward to discussing the progression of our strategic initiatives and the future. Thank you very much.
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This concludes today's conference call you may now disconnect.
Okay.
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