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Lincoln Electric Holdings Inc  (NASDAQ:LECO)
Q3 2018 Earnings Conference Call
Oct. 25, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Lincoln Electric 2018 Third Quarter Financial Results Conference Call. At this time, all participants are in 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.

Amanda Butler -- Vice President of Investor Relations and Communications

Thank you, Sherink, and good morning, everyone. Welcome to Lincoln Electric's 2018 third quarter 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 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 our Chief Financial Officer, Vince Petrella. Chris will begin the discussion with an overview of third quarter results and Vince will cover the quarter performance in more detail. Following our prepared remarks, we're 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 SEC filings on Forms 10-K and 10-Q.

In addition, we discuss financial measures that do not conform to U.S. GAAP, and a reconciliation of non-GAAP measures to the most comparable GAAP measure is found in the financial tables in our earnings release, which again is all available on the Investor Relations section of our website at lincolnelectric.com.

And with that, I'll turn the call over to Chris Mapes.

Christopher Mapes -- Chairman, President and Chief Executive Officer

Thank you, Amanda. Good morning, everyone. We're pleased to report that we achieved solid progress in the third quarter across a number of key initiatives and metrics. One year following the acquisition of Air Liquide Welding, our teams are doing an excellent job capitalizing on growth, driving innovation, mitigating inflation, and successfully executing a rigorous integration program in Europe. While we still have work ahead of us, I'm proud of everything we've accomplished and then confident that our team, our strategy, and our programs are yielding the right results for long-term success in industry leadership.

Looking at the third quarter. Sales increased 10.1% to $737 million, driven primarily by strong mid-teens percent organic growth in our Americas Welding segment. Our initiatives to richen mix, drive operational improvements, and mitigate inflationary pressures through pricing measures were effective. Our combined efforts along with strong Americas volume performance allowed us to exceed dollar-for-dollar recovery of rise in clause and expand profit dollars and margins in the quarter.

Both gross profit and adjusted operating income increased approximately 16%. We increased our adjusted operating income margin by 80 basis points versus the prior year to 14.2%, which yielded a 21.8% incremental margin in adjusted operating income.

Adjusted EPS increased 30.1% to $1.21 on strong Americas organic growth, the benefits of global initiatives, acquisition synergies, and tax reform.

The team continue to drive improvement in our working capital ratios. Our initiatives yielded a 13% improvement in cash flows from operations, and 112% cash conversion of net income. Overall, the team's solid execution generated a 410 basis point improvement in ROIC to 19.3%.

Moving to slide four. Industrial market demand continue to remain strong this quarter in the Americas region, as well as in the Asia Pacific region of the International Welding segment. In Americas, we capitalized on a double-digit percent increase in organic sales across all of our major end market categories; automotive, heavy industries, general fabrication, and in energy.

Looking at product trends on a consolidated basis, demand was equally strong across consumables and equipment systems suggesting solid production volumes and capital investment in a tight labor market. Automation sales increased year-over-year at a mid-single-digit percentage rate with strong demand for integrated systems in the heavy industry and general fabrication sectors, which outpaced automotive demand.

In Asia Pacific, an improved oil and gas and mining sector combined with our enhanced commercial presence and a broader portfolio and driving double-digit percent organic growth in the region. Harris Products Group continued to do well in their markets but faced challenging prior year comparisons after several quarters of strong organic growth.

While we are capitalizing on broadening demand in our end markets, we did report a double-digit volume decline in our International Welding segment, primarily from the active integration of the Air Liquide Welding acquisition. With six manufacturing facility closures now completed across our European platform, along with several distribution centers and commercial back office and IT system consolidations under way, we are executing our integration rapidly as planned.

Our customers remain our priority during this time and our teams are working hard to ensure that we are meeting their needs. We are confident that our program is effective and we will continue to push our integration activities forward through mid-2019 to achieve our targeted operational synergies by 2020.

It is the success of this program, along with the excellent execution of our 2020 strategy and the many industry-leading solutions that will be showcased at the FABTECH Expo in Atlanta in early November, which demonstrates how well the organization can operate through the cycle. It gives me great confidence that we are on the right side of the growth curve, and are on track to generate superior value for our stakeholders.

And now, I'll pass the call to Vince.

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Chris. Moving to slide five. Our consolidated third quarter sales increased 10.1% on 7.1% higher price, 40 basis points of volume growth, and a 4.4% benefit from one month of results from the Air Liquide Welding acquisition. This performance was partially offset by a 1.7% unfavorable impact from foreign exchange.

Our third quarter gross profit increased 15.5% and our gross profit margin increased 160 basis points to 34.1% as compared with 32.5% in the prior year. The increase reflects benefits of mix, volume, and pricing measures in the Americas and integration initiatives. We incurred a $3.5 million LIFO charge reflecting raw material inflation and the estimated impact of US trade tariffs. Price/cost trending improved in the quarter, contributing 60 basis points to gross margin. This compares to a 40 basis point headwind in the second quarter of this year.

Our SG&A expense increased 10.7% to $148.1 million, or 20.1% of sales, primarily due to higher compensation costs and acquisition-related expenses.

Reported operating income declined 25.7% to $100.8 million, or 13.7% of sales, as prior year results included the benefit of our bargain purchase gain related to the Air Liquide Welding acquisition. Excluding special items, operating income results in the quarter increased 16.5% to $104.4 million, or 14.2% of sales, an 80 basis point increase versus the prior year. Margin expansion reflected the benefits of volume improvements in the Americas, favorable mix, pricing management, and operational initiatives.

Our third quarter effective tax rate was 26.3% as compared with 18.8% in the prior year. Excluding special items, our third quarter tax rate was 23.3% as compared with 31.3% in the prior-year period. The lower tax rate reflects the impact of the US Tax Act and unfavorable discrete tax items in the prior year. We continue to expect our 2018 effective tax rate to be in the mid-20% range subject to the future mix of earnings and the timing and extent of discrete tax items, including stock option exercises.

Third quarter diluted earnings per share declined 32.7% to $1.07 compared with $1.59 in the prior year, which benefited from special item income of $0.66 per share, including the bargain purchase gain in the prior-year period. On an adjusted basis, diluted earnings per share increased 30.1% to $1.21 compared with $0.93 per share in the prior year on higher organic sales, favorable mix and the lower effective tax rate.

Now, moving to the geographical segments on slide six. Americas Welding segment's third quarter adjusted EBIT dollars rose 20.5% to $89.3 million. The adjusted EBIT margin increased 90 basis points to 18.4%, on 14.9% higher organic sales. Demand remained strong in the quarter and we started to see Energy rebound on higher oil prices. Most end markets, including Energy experienced strong organic sales increases in the quarter. Both consumables and equipment systems volumes increased in the mid- to high-single-digit percent rate.

Automation solutions improved modestly as ongoing high-growth and projects were heavy and general industry customers were partially offset by slower demand in automotive. Pricing performance reflected the benefits of prior pricing actions and the surcharge applied to recover tariffs.

Moving to slide seven. The International Welding segment's adjusted EBIT increased slightly to $10.7 million on pricing management and profitable growth in Asia Pacific. Adjusted EBIT margin declined by 20 basis points versus the prior year to 5%. The benefits of Asia Pacific growth, our pricing actions, and integration initiatives helped to mitigate the impact of lower volumes in Europe, stemming from actions we are taking to shape the business for our long-term success.

Moving to The Harris Products Group. Third quarter adjusted EBIT declined 6.1% to $8.7 million. EBIT margin declined 60 basis points to 11.6% versus the prior year. While volumes held relatively steady against challenging prior year comparisons, lower commodity prices compressed margin performance.

Moving to slide nine. Cash flow from operations increased 13.4% in the third quarter to $106 million, and we achieved 112% cash conversion ratio on net income. Average operating working capital was 18.3% of sales, a 220 basis point improvement compared to the prior-year period end.

Moving to slide 10. We continued to invest in the business in the third quarter with $17.4 million in capital expenditures. We now estimate full year capital spending to be in the range of $60 million to $70 million.

We also returned approximately $97 million to shareholders in the quarter, with an 11% higher dividend payout rate, and an acceleration in share repurchases to $71 million. In the first nine months of 2018, we repurchased approximately $121 million of our shares. We will continue to pursue buybacks opportunistically based on our expected cash generation, our uses of cash, as well as share price performance through 2018.

In addition, our Board approved a 21% increase in our dividend payout rate, which reflects our ongoing confidence in the long-term strong cash flow generation capabilities of the Company. We expect to maintain a balanced capital allocation strategy in 2018, prioritizing growth investments, and returning cash to shareholders through our dividend program and share repurchases.

With that, I would like to turn the call over for questions. Sherry?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Jason Rodgers with Great Lakes Review.

Jason Rodgers -- Great Lakes Review -- Analyst

Good morning.

Christopher Mapes -- Chairman, President and Chief Executive Officer

Good morning, Jason.

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Good morning, Jason.

Jason Rodgers -- Great Lakes Review -- Analyst

Wonder if you could talk about International volumes a little bit. I wondered how much of the decline there was due to market weakness versus integration activities, and if you're seeing conditions improving or deteriorating there?

Christopher Mapes -- Chairman, President and Chief Executive Officer

Well, Jason, I think as we've -- as we shared with the integration of Air Liquide Welding since the acquisition last August, we had an expectation that we were going to aggressively move forward with the integration to make the improvements in that business to drive the types of business model and returns that we were looking for over the course of driving those benefits by 2020.

I think we've also shared that, look, it's very difficult while we're in the middle of the integration as I shared in my remarks the number of facilities that we've closed and the back office operations and logistics facilities as we're shaping that business. There is no question that our integration activities are portion and probably a large portion of -- some of the challenges that business saw in the third quarter.

I'm looking at data probably like other individuals where we see that, quite frankly, Germany, from an Industrial Production Index has trended down slightly over the last two or three months. We've seen another signs that there is some softness in some other areas of the core market in Europe, where it's very difficult for us to really have a good guidance and how much of that is absolutely the market versus absolutely our integration activities.

But let me be clear that, we expected that it would be down in the quarter. I'm very excited about the business and where we're driving that business model and our ability to drive the performance improvements that we outlined when we move forward to bring Air Liquide into the Lincoln Electric business and confident that we'll be able to execute on that strategy as we are moving through '19.

Jason Rodgers -- Great Lakes Review -- Analyst

And it was good to see you got ahead of the raw material cost increases with pricing. What's the expectations for the fourth quarter? Should we see even larger benefit?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

I would say that the fourth quarter we ought to expect to see a same or similar type of price/cost environment for the business with some positive results in the range of what we trended into in the third quarter.

Jason Rodgers -- Great Lakes Review -- Analyst

And if I could just squeeze one more in. As far as Air Liquide, what did it contribute to EPS in the quarter? Are you still expecting $0.06 contribution for the fourth and any early thoughts for next year? Thanks.

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Yes, Jason. It was only one month of acquisition activity in the quarter. The bulk of that business is being fully integrated into the Lincoln business. But if we were to make an estimate of that one month, I would put it at $0.02 per share that was contributed by the Air Liquide business.

Jason Rodgers -- Great Lakes Review -- Analyst

Okay. Thanks.

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

You're welcome.

Operator

Thank you. Our next question comes from Joe O'Dea with Vertical Research.

Joseph O'Dea -- Vertical Research Partners -- Analyst

Hi, good morning.

Christopher Mapes -- Chairman, President and Chief Executive Officer

Good morning.

Joseph O'Dea -- Vertical Research Partners -- Analyst

On pricing, I think in each of the past four quarters you have taken some price action. And just where do you feel you stand at this point? Are there additional price actions that you're taking in the fourth quarter? And how do you think that sets up for next year just given what you've had to do so far, the ability to continue taking price up as we move into next year?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Joe, my view is that, based on what we see in terms of the inflationary environment and commodity prices starting to moderate, we won't see significant pricing actions in the fourth quarter from what's been taken in the first three quarters of the year. There will be spot cases here and there of having to take some pricing actions, but the broad price increases that we've seen this year, I think, will moderate into the fourth quarter from what we see on input costs so far in this quarter.

Joseph O'Dea -- Vertical Research Partners -- Analyst

Just given the lag effect of costs, do you -- the cost inflation we have seen, is that fully reflected in the P&L in the third quarter at this point? And so, moving forward we don't have that lag effect of continued inflationary pressure barring any additional moves in commodity prices?

Christopher Mapes -- Chairman, President and Chief Executive Officer

Yeah. I think that, look, we've seen the commodity price inflation in the P&L. I don't see any lag associated with that. I think we recognize it as we're moving through the rest of '18 and moving into '19 we'd expect that we'd still have some other inflationary pressures around wages or other things that will be impacting the business. But we would expect that we would be utilizing our Lincoln business system to be able to try to minimize, if not, eliminate that through productivity actions that we'll be driving in various places around the world.

And that's probably the other comment that I would make is that, we certainly have areas around the world that may or may not see different types of inflation and my comments certainly around the broad business and our ability to be able to manage that as we move through the rest of '18 and into '19.

Joseph O'Dea -- Vertical Research Partners -- Analyst

And then last one on volume. When we look at kind of Europe and some of what's going on there just on the integration activities, but stepping back, 4Q is a tougher comp on volume. How are you thinking about the volume set up moving forward and kind of the activity you're seeing so far this quarter and just continued trends and sort of seeing continued improvement in volume demand side of things moving forward in both Americas and International ex some of the integration stuff?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Right. So, as far as International is concerned, I expect more of the same, if not, a greater deterioration year-over-year from an International perspective based on where we are in our integration activities with Air Liquide and where those underlying markets are as Chris addressed a little bit earlier. So, I expect from a volume perspective, we see a double-digit declines in our International business.

The Americas will continue to come up against more difficulty comparisons as we exit the third quarter into the fourth and then into the 2019. My expectations on the Americas is that, we will still see growth, albeit at a moderating rate as we continue to roll through 2018 based on the comparisons that we will come up against.

The end markets continue to show a positive momentum and strength. The oil and gas has started to pick up for us. So we do have reason for optimism that this expansion and our growth in the Americas will continue into fourth quarter and into 2019.

Joseph O'Dea -- Vertical Research Partners -- Analyst

Thanks very much.

Operator

Thank you. Our next question comes from Nathan Jones with Stifel.

Nathan Jones -- Stifel, Nicolaus & Co., Inc. -- Analyst

Good morning, everyone.

Christopher Mapes -- Chairman, President and Chief Executive Officer

Good morning.

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Good morning.

Nathan Jones -- Stifel, Nicolaus & Co., Inc. -- Analyst

Maybe if I could just follow-up a little bit on the International volume picture here. I know it's pretty tough to separate out the disruption effect versus market effect in International Welding. But could you possibly give us a little more color around the volume impact from low margin, no margin product lines that you've exited versus the combined of those other two?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

I would say, as I think Chris mentioned in his comments, we believe that substantial portion of these declines are related to our reshaping of the business and integrating the Air Liquide lines, manufacturing locations, distribution channels into the Lincoln business. It is challenging, Nathan, to be able to parse out the underlying market demand, but I -- my personal view is that, in our core legacy business we've seen some softening and I would put that at somewhere in the low- to mid-single-digit type of performance in the European marketplace. So, some of the contribution is from the market, but the majority of what we're seeing in International is exiting the lower margin businesses and integration activities that need to stabilize as we work through the fourth quarter and into the first half of next year.

Nathan Jones -- Stifel, Nicolaus & Co., Inc. -- Analyst

Maybe following on to that, you've seen accelerating volume declines in International, and I think that you've done a good job of explaining that and getting people to understand that. And you talked about double-digit and maybe a little bit saving in the fourth quarter. When do we hit the peak of that and start to see those volumes decline diminish as you let comps and as the integration nears completion?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Right. So, I think, Nathan, at this point it's worth noting that for the first time you're seeing a year-over-year change in the Air Liquide business that we purchased through that volume line. So, when we acquired the business effective August 1 of last year, you would have only have seen the sales being reported in the acquisition column. So, you wouldn't have seen any kind of volume compression as we shape that business. So, this is the first quarter again that you see the Air Liquide acquisition integration activities flow through volumes, and pricing for that matter, because for a year it shows up in that acquisition column. So, I think it's important to note that the acceleration is also caused by the reporting for the first time of that business being part of the year-over-year comparisons.

Now, to the second part of your question. I still believe that we're going to continue to see this kind of compression on a year-over-year basis in volumes in the fourth quarter. I believe that the first half of next year will be largely a recovery period, where we will start to stabilize the business that's been integrated. And then in the second half of next year, I expect that we'll start to see a more normalized growth pattern barring any other macro exogenous effects on our business that is not internally a focus. So first half of next year to stabilize, second half, I think we'll start talking about our integrated business.

Nathan Jones -- Stifel, Nicolaus & Co., Inc. -- Analyst

So in broad strokes, is it then reasonable to assume that 1H '19 because Air Liquide will be reported on an organic basis from a volume perspective. The volumes there would be down single digits and then maybe flat to up or something like that in the second half? All else equal?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

I think it'd probably still be double-digit because we're comparing it against the business that had not been significantly restructured yet. And then in the second half of the year, I think certainly we can expect that we'll have a stable business, again depending upon the backdrop of the macro. In this kind of environment, yeah, I would expect it to be flat or down mid-single digits, but that's my expectations for the second half of next year. Again, barring GDP and oil prices and (multiple speakers).

Nathan Jones -- Stifel, Nicolaus & Co., Inc. -- Analyst

Of course. That's helpful. Thanks very much, Vince.

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

You're welcome, Nathan.

Operator

Thank you. Our next question comes from Mig Dobre with Baird.

Mircea Dobre -- Robert W. Baird & Co. -- Analyst

Yes. Good morning. It's Mig Dobre. I'm going to, if I may, stick with this discussion on International volumes, and Vince, I mean, I remember coming out of last quarter your expectations were for volume declines in the back half, somewhat similar to what we've seen in 2Q '18. Those expectations have changed a bit, obviously. And I'm sort of wondering if this has to do with the environment, or if this has to do with certain things that you're doing to ALW that are either accelerated or maybe a little bit different than what you were thinking three months ago?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

No, I think it's consistent with my response to Nathan. I think it's a little bit of both. I think the environment as far as we see in our legacy business in Europe has probably softened a little bit more and our activities in the integration has accelerated as well. So, I would tell you that that the Air Liquide integration is tracking against our expectations and it's in line with what I would have thought the closure of six facilities and the integration of these businesses would result in as far as a year-over-year organic volume decline would be concerned.

Mircea Dobre -- Robert W. Baird & Co. -- Analyst

Okay. Okay, that's helpful. And then a quick question on LIFO. $3.5 million charge in a quarter. I don't quite remember what it was in the front half, but how are you thinking for the full year here? What should we expect in the fourth quarter? And then, I'm also wondering, if material costs stay where they are right now, what is the LIFO impact next year, either additional charges or benefits?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. So, I think we've taken up about $9 million to -- $9.5 million of LIFO charges through the three quarters period, which means that the rate of our charges are slowing as compared to what we took in the first half of the year. My expectations are that those will continue to moderate as we finish off the fourth quarter.

As far as next year is concerned, though, Mig, the charges that we take next year are wholly and solely dependent upon where we end the year and then what inflation does in 2019. So, there isn't an estimate that can be made at this point in time. But, if our costs exit the year at a certain level and they don't change next year, then we have no charges. So, it's fully dependent upon where we finish on December 31, 2018 and where we move on in '19 from there. So, my expectations are for 2019, that hopefully we'll see a flat inflationary environment from a raw material perspective.

Mircea Dobre -- Robert W. Baird & Co. -- Analyst

Got it. And last one, if I may. On slide four, you're talking about the various end sector performances and, obviously, as we're looking at the financials here, pricing played a pretty good part in the quarter in driving organic growth. I'm sort of wondering when you're looking at auto, heavy industry, general fab, energy, all these end markets that you called out, on a volume basis leaving pricing alone, how are things trending? Which one of these businesses is still accelerating versus maybe starting to level off?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Well, our two largest end market segments were actually our two biggest increases year-over-year organically and even taking out price, both automotive and transportation and heavy fabrication had our biggest increases on a year-over-year basis. So, that's very encouraging. And I know automotive has had spotty reporting in this marketplace, but from a core Lincoln business perspective, taking out our automation business, which was a little soft in that space, we've seen very strong year-over-year improvements not only in the Americas from a direct perspective, but in International as well.

Christopher Mapes -- Chairman, President and Chief Executive Officer

Mig, we've been against that trend in automotive now for several quarters and I feel strongly it's just because of our success of being able to drive some unique solutions into that space. As Vince mentioned earlier, we're seeing a broad improvement in Energy globally. I believe that's a direct correlation to some of the increases we've seen in those crude prices on a global basis. And even, then in a micro segment perspective, I mean, things like railcars certainly look like they're trending more favorably. So, I think as we've shared, we still see broad strength in a host of the segments that are driving the business here at Lincoln Electric.

Mircea Dobre -- Robert W. Baird & Co. -- Analyst

Much appreciated. Thank you.

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

You're welcome.

Operator

Thank you. (Operator Instructions) Our next question comes from Walter Liptak with Seaport Global.

Walter Liptak -- Seaport Global Securities LLC -- Analyst

Thanks. Good morning, guys.

Christopher Mapes -- Chairman, President and Chief Executive Officer

Good morning, Walt.

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Good morning, Walt.

Walter Liptak -- Seaport Global Securities LLC -- Analyst

I wanted to ask on the International as sort of a follow on to your comments, Chris, about profitability. By 2020, what is your expectation for the profit run rate? It looks like your operating profit is running in about the $50 million range, something like that, so it stepped up a little bit this year including Air Liquide Welding. But, after this restructuring is done, the integration is done, what would be a normal run rate for you?

Christopher Mapes -- Chairman, President and Chief Executive Officer

When we're talking about the International business, we've been on a path to make some improvement. Certainly our Air Liquide Welding integration is a big piece of that profitability improvement, and we've placed the targets out there for the improvements in that area of the business. We've also seen improvements in our China business, as well as improvements in our Southeast Asia business.

We've been certainly working inside of our European business, talking about how we need to drive that business into a double-digit operating profit profile business for us in Europe and that's certainly the expectation that we have for the first step in improving the profitability of the business for us in International.

So, I view that, well, much like I view the improvements that we've made at The Harris business over the last several years, that we've got this step change opportunity with the integration of Air Liquide, and then we have a host of other initiatives globally to try to bring that International business to where we see steady continuous improvement in the profitability as we move forward. That is certainly -- the Air Liquide Welding integration is the big piece of that, but I'll tell you we've also launched technical centers in Southeast Asia and we're driving improvements in that marketplace. We've launched a new technical center in Shanghai, and are beginning to see some improvements in that area of the China market. So, I wouldn't want to imply that that's the only initiative that we have, but certainly Air Liquide is a large initiative.

Walter Liptak -- Seaport Global Securities LLC -- Analyst

Okay. Understood. Yeah, a good point. Just to be clear though, you're talking about double-digit operating margins by 2020 for International overall?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Yes.

Christopher Mapes -- Chairman, President and Chief Executive Officer

Yeah. 10%.

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah.

Walter Liptak -- Seaport Global Securities LLC -- Analyst

Okay. All right. That's double-digits. Okay. And just to delineate your energy business and get a refresher. What is oil and gas as a percentage of revenue now for Lincoln direct and indirect?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

It's a -- on a direct basis, it's low-double digits now.

Walter Liptak -- Seaport Global Securities LLC -- Analyst

Okay. And then presumably there's some indirect too, have you been able to quantify that?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Well, total energy would be probably 20%-ish and then oil and gas would be low-double digits.

Walter Liptak -- Seaport Global Securities LLC -- Analyst

Okay. Got it. And just to delineate it and so, shipbuilding, pipeline, offshore, land upstream, which ones are you seeing the pickup in? And, I guess, -- yeah, which one are you seeing the pickup in?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

We actually, Walt, saw strong performance, double-digit improvement in all three categories of oil and gas, both up, mid and downstream. From a contribution perspective, midstream in this discrete quarter had probably the biggest impact but it's gratifying to see that upstream really had a very strong result, particularly in the Americas in the quarter. So, we're seeing it across the board. But the place that was soft for us over the past handful of quarters has been upstream and we just had a nice -- we had a nice pickup in the third quarter in upstream.

Walter Liptak -- Seaport Global Securities LLC -- Analyst

Okay. Is your upstream offshore or is it land based?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

It's all. It's both. We've seen a compression for some time now in offshore. For the first time that I can remember in a few quarters and at least in the Americas, we saw offshore pick up slightly.

Walter Liptak -- Seaport Global Securities LLC -- Analyst

Okay. Great. And then on your capital allocation slide, share repurchase stepped up. Can you remind us how much is the Board approval and how much do you have left on it?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

We still have ample. At this kind of a run rate, we probably have two or three years that we have left on our share buyback activity.

Walter Liptak -- Seaport Global Securities LLC -- Analyst

Okay. All right. Thank you.

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

You're welcome.

Operator

Thank you. And our next question comes from Matthew Trusz with G.research.

Matthew Trusz -- G.research LLC -- Analyst

Good morning. Thank you for taking the questions.

Christopher Mapes -- Chairman, President and Chief Executive Officer

Yeah. Good morning.

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Good morning.

Matthew Trusz -- G.research LLC -- Analyst

In the Americas, how are things doing other than the United States, talking about South America mostly?

Christopher Mapes -- Chairman, President and Chief Executive Officer

Well, the South American market has had some challenges associated with it. I mean, we're -- everyone's very familiar with the challenges associated with some of the inflationary pressures in Argentina and some of the challenges associated with Brazil. I will tell you that we're seeing -- beginning to see some improvements in those markets for Lincoln Electric. We're seeing some of those improvements coming from the mining sector that we are seeing in portions of those particular areas and then I'll tell you that we saw an improvement across all our product lines in Brazil. So, that certainly is still a smaller business for us, but we believe that Brazil has got some stability. We'll work through the inflationary pressures that are there in Argentina and again, mining has started to show some improvement, which is a big portion of the welding space when you look at Peru and Chile.

Matthew Trusz -- G.research LLC -- Analyst

Okay. Thank you. To follow-up on the automotive discussion, could you provide a little more detail on the technologies that you're rolling out there? And then as far as when we think about the stage or ending of roll-out that you are in, are they pretty well penetrated with your customers or are you just getting started?

Christopher Mapes -- Chairman, President and Chief Executive Officer

No, look, the automotive space is a very broad space globally. Look, we've got some thin gauge, galvanized capabilities, we've got some other technologies that we have launched in the automotive space to try to improve productivity for our customers. Most of those solutions involve us taking our machine technologies and many time software solutions that we have embedded within that machine technology to really drive and improve process performance for various applications either into the Tier 1 OEM or down into the Tier 2 or the Tier 3.

We've been focused on that space extensively over the last two years to three years with some of these new application and technologies that we've been bringing to the marketplace and we've seen those benefits certainly mature into the business. But I do not believe that we have fully penetrated. Matter of fact, we're trying to bring some of those capabilities into the European market at this time. So, we're still excited about being able to continue to drive those solutions and other solutions to improve upon the position in global automotive.

Matthew Trusz -- G.research LLC -- Analyst

Great. Thank you, Chris.

Operator

Thank you. Our next question comes from Bryan Blair with Oppenheimer.

Bryan Blair -- Oppenheimer -- Analyst

Thank you. Good morning. Thanks for taking my question.

Christopher Mapes -- Chairman, President and Chief Executive Officer

Good morning.

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Good morning, Bryan.

Bryan Blair -- Oppenheimer -- Analyst

Just wanted to touch on automation a bit more. What is your current annual revenue there and what's the run rate exposure to automotive?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

It's still roughly $400 million of run rate and the exposure to automotive is roughly 50%, 60% right now.

Bryan Blair -- Oppenheimer -- Analyst

Okay. So still slightly weighted to that end market?

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Yes.

Bryan Blair -- Oppenheimer -- Analyst

Okay. And you've had pretty strong growth consistence this quarter in heavy industry, general industry, now offsetting some of the slowdown in automotive. As you look to 2019, are you confident in continued growth in automation revenue?

Christopher Mapes -- Chairman, President and Chief Executive Officer

Yeah, very much so. Look, let's step away from talking about the segments for a second and, look, the underlying dynamics that are driving automation, which is the challenge associated with finding the skilled welder and the need to continually be able to drive productivity, especially with those individuals that might be viewing onshoring as part of their supply chain strategy as a requirement are looking toward automation.

So, I believe strongly that the long-term demand profile for automation is solid. And certainly, as we're seeing the strength of our segments as we're moving into the fourth quarter, I believe there'll still be capital investments in those general industries and heavy industries companies as they continue to place automation within their operations. So, it is always a little bit choppy, especially when you're talking about large projects. But we feel confident that we'll continue to show that mid-high single-digit growth in automation as we're building out this business longer term.

Bryan Blair -- Oppenheimer -- Analyst

All right. Very good. Thanks again.

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

You're welcome.

Operator

Thank you. And our final question comes from Steve Barger with KeyBanc Capital.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Hey, thanks. I'm just going to follow-up on that automation question. Do you think that the sales force or you, LECO, has a good handle on segmenting the market into high return and high conversion opportunities, or is there a big opportunity to get more process-oriented in terms of how you go to market? Just thinking about targeting customers.

Christopher Mapes -- Chairman, President and Chief Executive Officer

Yes, yes. Steve, that's a very good question.

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Good question.

Christopher Mapes -- Chairman, President and Chief Executive Officer

And I would tell you, I want both. So, look, we believe the maturity of the automation industry as it relates to welding and welding process improvement, they're going to be those customers that seek out a process solution that might be viewed as more entry level, more of their first step into automation, and we want to make sure that we provide that solution to that customer base.

And, Steve, that's an important segment for us because many of those customers then are going to see an adoption rate and may then very well move into the multi-arm cells or quite frankly, more complex type automation systems, and we want to be their partner on that journey. But we certainly look at also those customers who are further along in developing automation and that's where we're trying to bring our latest solutions and our technologies into that group to not only improve upon the automation sales they have, but to bring them other capabilities or competencies where we might be using Weld Sequencer, we might be using other IoT type applications to provide them an enhanced capability from their current automation status.

But, look, it's a -- I think it's a great question, but it's one that when we talk about it internally, we want to drive products and solutions for each pieces of those automation segments.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yeah. Do you think the organization is collecting data from customer response in an efficient way to really optimize that sales process across regions?

Christopher Mapes -- Chairman, President and Chief Executive Officer

Look, I think it's one of those things that you can always be better at. It's one of those challenges from a continuous improvement perspective that as leaders and managers we need to make sure it's -- that people see that data is important and critical. But I fully have confidence that our employees around the world are in the manufacturing facilities of our customers, talking to them about those challenges. And we've made a large investment here over the last couple of years in implementing Salesforce.com on a global basis and certainly that tool provides us with a collaboration tool to enhance upon those communications. So, we have visibility to those opportunities much more quickly than what we had in the past.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Got it. Great. Well, I appreciate it. Thanks very much.

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Steve.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back to Vincent Petrella for closing remarks.

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Sherry, and thanks to everyone for joining us on the call today and for your continued interest in Lincoln Electric. Look forward to discussing our progress at the end of the year, next year in 2019.

Operator

And ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect and have a wonderful day.

Duration: 45 minutes

Call participants:

Amanda Butler -- Vice President of Investor Relations and Communications

Christopher Mapes -- Chairman, President and Chief Executive Officer

Vincent Petrella -- Executive Vice President, Chief Financial Officer and Treasurer

Jason Rodgers -- Great Lakes Review -- Analyst

Joseph O'Dea -- Vertical Research Partners -- Analyst

Nathan Jones -- Stifel, Nicolaus & Co., Inc. -- Analyst

Mircea Dobre -- Robert W. Baird & Co. -- Analyst

Walter Liptak -- Seaport Global Securities LLC -- Analyst

Matthew Trusz -- G.research LLC -- Analyst

Bryan Blair -- Oppenheimer -- Analyst

Steve Barger -- KeyBanc Capital Markets -- Analyst

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