Good morning, everyone. Welcome to day three of the 21st Annual Oppenheimer Industrial Growth Conference. Next up we have the Lincoln Electric team, led by CFO Gabe Bruno. Gabe, great to see you as always.
Great to see you too also, Brian.
Thank you for joining us. I guess to kick things off for anyone newer to the LECO story, maybe introduce the, you know, the history, at least the recent history of the company, what really drives your business and how you differentiate strategically. Even for those who, you know, have experience with LECO, perhaps dive into the recently launched RISE strategy.
Yeah. Brian, it'd be great to start that way. Just to remind those who are interested in our story is that we are the global leaders in arc welding solutions, and we also are the leader in an industry in fabrication and automation types of technologies. Think of us as one of the broad-based offering in our portfolio that is eager to solve our customers' challenges, pain points, and differentiate ourselves through technology. That's an automation. We're the heavy invested in automation capabilities and then broad base of leveraging technologies in, in metals and in power sources and in software to be able to differentiate our footprint.
As you mentioned, Brian, we just recently launched what we're calling our RISE strategy. It truly is anchored on a foundation that we have now 130 years in business. How do we accelerate our growth as well as shaping the operating model for the long term? Just to go through what the RISE stands for, the R stands for reimagining how work gets done. That's challenging how we engage throughout our businesses. Are there, for example, center-led opportunities that we could introduce best practices and capabilities that we can leverage across all of our businesses around the globe? The I stands for, as I mentioned, we lead by technology. How do we continue to innovate and differentiate ourselves in the marketplace.
We are investing, you know, we're the market leaders in technology, the welding experts, and we want to continue to accelerate our ability to differentiate our offering, our products, to position ourselves for enhanced growth. The S stands for serving customers and differentiating how we go to market with our customers and improving supply chain practices, improving how we serve our customers, and being that market leader in our industry and service. Lastly, the E stands for elevating our team. We're focused on developing our organization to improve the level of engagement and foster an environment that our teams, our employees around the world, wanna drive the kind of performance that our objectives are set on.
When you think about objectives, the RISE's strategy, we have established new 2030 objectives that anchor on the fundamentals of our strategy. First of all is to drive accelerated growth. Our objectives top line is to drive CAGR into high single digits, low double digits. That is both organic and inorganic type of growth. On the organic side, we look to 300 to 400 basis points of CAGR through bolt-on strategies that have served us well in broadening our footprint. It could be a technology, could be a footprint in region, could be across different parts of the markets, and it's broad based. On the operating side, you know, we have a long track record of improving the operating margin profile of our business.
If you go through each cycle, on average, we have improved operating margins by 200 basis points per cycle. Our 2030 objectives are to accelerate that to 300 basis points of improved margins through the cycle. On top of that, historically, our incrementals have hovered around mid-20s, our objective is to move to a high 20s type of incremental margin. A lot of the work we're doing around center-led or enterprise initiatives, we expect to provide about 1/3, little more than 1/3 of the improvement in our operating model and then the balance through positioning in the markets as well as growth. That would take us to a +20% operating profit for our business. That is what anchors on the acceleration from the RISE strategy.
On top of that, be very disciplined around managing our balance sheet, cash flows. Our 100% cash conversion is our objective. We have a very balanced capital allocation strategy where we wanna focus on, first, growth. We've more than doubled the level of internal investment over the last five years, and so we're looking for opportunities to invest in our business, to introduce new products, to drive capacity, drive operational improvements. We wanna prioritize growth through internal investment as well as through acquisitions. As you know, we've been increasing our dividend rate consistently since going public in 1995 and then returning any excess strategic cash to our shareholders through repurchases. Very balanced capital allocation strategy.
Lastly, that translates into mid-teens type compounder and earnings, and that's how we think about objectives and think about our EPS disciplines around that as well. Those are our objectives for 2030, Brian.
All right. Excellent walkthrough. That sets the stage well. Your team has exposure across, you know, pretty diverse end markets and you are global in the end. Maybe touch on what you saw in Q1 and what's contemplated in your 2026 outlook across key end markets and geographies.
Yeah. I'll start broadly on end markets and maybe touch on a little bit on the geographies. I start off with general industries. General industries is about 1/3 of our business. You saw that our performance in the first quarter was high 30s percent type of growth, and that was across capital investment, projects, equipment, as well as on the consumable side. We're excited about what we're seeing. We're cautiously optimistic that some of the key trends within general industry are gonna lead to growth. We're optimistic what it means, particularly in the Americas side of our business.
One of the measures that I like to share, I shared last week, Brian, on our earnings call, is that within the general industry segment in Americas, the consumable volumes were up low double digits. Now you've seen PMI with the readings, and this past Friday is the fourth month in a row where the sentiment around PMI has been positive in an expanding type of territory, as well as seeing steadiness in growth on the industrial production side. Good drivers in general industries. We did in the month of April turned positive on standard equipment and volumes. That was a good trajectory. We do see that as positive drivers within general industries in general. Think about heavy industries. Heavy industries was up mid-single digits.
You know, we've been navigating, as you know, destocking across ag and construction. It looks as though we have hit the trough and now are positioned for growth. We pointed to growth in the back half of 2026. The comps are easier. It appears that the market, particularly in heavy industries, off-road type of investment are starting to turn more positive. We're excited about that. On the energy side, you know, in the first quarter, we saw more of a flattish, steady type performance. We're bullish on energy. When we look at across all the markets, whether it's in oil and gas or power generation, those are opportunities for us. In the Americas component in energy, we were up mid to high teens.
We remain bullish, we do expect that volumes will improve on energy as the year progresses. We were down mid-teens in transportation, automotive, as well as structural, and that's driven by a lot of project activity. The timing, for example, the comps last year were more challenged on the automotive side first quarter, so that was a driver there. We expect more choppiness across project activity in both structural and transportation as the year progresses. On industrial production within the automotive end market, we expect to follow kind of what the market is describing as production, that's a low single-digit down in production levels across the automotive industry. That's kind of a walk-through end markets.
In terms of geographies, you know, we're more bullish on the Americas segment, not only in core welding, as I pointed to a couple of key drivers there in general industries and the sort, but also the automation component, of which 80% of our automation portfolio is within the Americas segment. We had talked about strength in backlog coming into 2026, some of the longer cycle projects positioning for growth in the back half of the year. We're optimistic that as we exit the second quarter, the level of activity would point to some modest growth overall. The automation business is positioned for growth in 2026. On the Harris side, we talked about some tough comps in Q2.
You know, we had the initial stocking of new customer in Q2 of last year, so we expect some tough comps on the Harris side. We do expect progressively improving volumes, particularly in the back half of the year on the Harris side. On the international side, more bullish on Asia. Project activity, whether it's in energy in Southeast Asia or India and Australia, are more positive. On the EMEA side, less constructive about kind of where we see consistency in demand. We did point to, within core Europe, some pockets of improving order trends, just not sure whether or not that's pre-buying going on with inflationary or supply chain challenges, and we just want to see more consistency there as well.
You have the Middle East type of conflict that had an impact to us in the first quarter. We're monitoring how that progresses and the impacts on the EMEA region as well.
Okay. All makes sense. You quickly touched on our automation. We'll certainly, you know, get back to that topic and driver for your, for your team. You stressed cautious optimism as you began the walkthrough of markets. Maybe speak to that a little bit more and, if you're willing to share, you know, what data points your team is really watching to see whether, you know, the, you know, perspective or potential, volume inflection into the back half is real across your core markets.
Yeah. You can appreciate, Brian, we're actively monitoring daily order rates, shipments, and just normal activity day to day. As we exited the first quarter, we saw an increasing level of daily orders activity, particularly in the Americas segment and into April. I pointed to volume improvements in consumables, and that typically leads to improvements in standard equipment investment. We saw an improvement in volumes in April also on the equipment side. That leads us to some optimism progressively. Now, same time, we talked about the impact of the conflict in the Middle East being about $8 million-$10 million type of an impact.
That's what gives us a little bit of maybe some more strength on the America side, but maybe some cautious in terms of how this progresses. Monitoring daily order activity, monitoring the progression of real volume versus pricing, that's pretty key for us. On the equipment, the capital investment side of things, looking for consistency and seeing how the quoting activity translates into real orders and the positioning for capital investment across the automation portfolio as we progress into the year. Strong backlogs coming into the year, want to continue to see the strength of transition from quoting activity to orders. Those are internal metrics, but obviously we're looking to the macros as well.
I mean, confidence from investment standpoint, from a CEO confidence perspective or from a consumer confidence perspective, those are important for seeing the trajectory of real activity. Monitoring, you know, what's happening in the automotive industry and production and investment, what's happening across different, the PMI indices, industrial production indices, and are we seeing consistency, and has that lined up to what our business activity is? You got the internal, you got the macro, and staying really on top of that to see what that means for us as we progress throughout this year.
Yeah. All makes sense. Again, it's quite the mosaic. I'd be remiss if I didn't quickly ask about tariffs. Given the current framework, at least assuming it stays as it now is, what's the net impact to LECO operations relative to what was in place prior to the latest change?
Yeah. Very modest type impact. Don't look at that as a driver to how we've positioned pricing, for example. The broader implications are, in our pricing strategy have been about inflationary pressures more broadly. We saw that accelerate as we exited the first quarter. That's what drove a lot of the pricing action. Think of tariffs at this point, the actions that have been introduced in the markets as having a modest impact to our business.
Okay. To level set on your team's response to, you know, other inflationary pressures, how should we think about price realization Q2, Q3, or the back half, however it's best to frame that?
Yeah. I'll first just remind us that we increased our operating assumptions on sales. We went from mid-single digit type growth to high single digit type growth for 2026, that was driven by pricing. Think about that as between 300-400 basis points of increase in top line sales driven by pricing. Now, a lot of that is on the Harris side. You saw the uptick driven by metals, silver, copper on the Harris side. I'd say 3/4 of that is Harris, 1/4 of that are for the other actions we took. We exited the first quarter being behind price cost by about 90 basis points. We took pricing actions.
Those are now taking hold now in May, and that will mature throughout the second quarter into a full impact, and I pointed to the Americas segment, about 150 basis points on a quarterly type trajectory starting in Q3. If you take what we've seen in metals and Harris, the actions we've taken to bring our costs, price cost position back to neutral by Q3, that's what drove the increase in the pricing as part of our overall assumptions for the year. If you think about it quarter by quarter, you saw in the first quarter we were in excess of 10%. Think about second quarter as being kind of mid to high single digits in terms of pricing.
Think about mid-single digits as we have anniversary then, all the pricing actions for 2025 into Q3, and then low single digits into Q4. That's how we see the progression of pricing this year, which drove the increase in our assumptions.
Got it. Very helpful. Thank you. Remind us what the impact of Middle East conflict was on Q1? I know it was relatively modest, but what was that? What is your team watching over the near term? What are the key watch items going forward?
Yeah. Top line, impact's about $8 million in Q1. $5 million of that is within the International segment. The balance is driven by exports coming out of the Americas into the Middle East type region. Progressively, you know, as the conflict persists, you know, we expect about $8 million-$10 million a quarter type of an impact, and that's split again between International and the Americas segment. That's top line type of impact. We all know the other impacts in supply chain and inflation. Those are areas that also we're monitoring closely and part of our pricing dynamics that we've introduced into the markets, but it's really broad inflation that we're trying to address, just seeing how the conflict persists.
Okay. Understood. Now circling back to strategy, you know, high level question. We've always thought of Lincoln as very technology driven in the end. I think there's been more appreciation of that over recent past by investors. As we look forward, what are the, you know, standout opportunities for your team to further accelerate growth, you know, meet the kind of financial targets that you've put out with RISE? Is there anything that really stands out on that front?
Yeah, think about, as you mentioned, Brian, remember technology, a driven business and the I in RISE is all about innovation and to differentiate ourselves. Think about heavy experience, expertise in metals, in power sources and software, and what that means for us, not only in growing our core welding business. For example, you know, we talk about Vitality Index. Our Vitality Index, for example, in equipment from 2025 was 58%, so that's new products introduced in equipment over the last five years. In 2025, that represented 58% of our sales. You can see the velocity of technology investment within our business. We've taken that, and we've looked at adjacencies, and I'll use a couple examples here.
The acquisition last year, Alloy Steel Australia, that's in Wear Solutions, so that's leveraging our inherent knowledge into materials, into metals, and how do we now expand a footprint that's attractive for us? This is a mid-20s type of an EBIT profile, which gives us a lot of opportunity for growth. In power, we invested, we acquired a business called Vanair couple of years ago that was into mobile power. We had already had done some joint development with Vanair. It was just a great opportunity to expand our footprint into a channel in leveraging all of our technology and know-how and how do we continue to develop our presence in the market.
That's been key for us is leveraging the core capabilities, the expertise we have as welding experts, as being deep into solutions within our customers, and then using that as an avenue for growth. Same thing with our 3D printing and additives, so we're very excited about the potential in this business, and it's leveraging key capabilities. Then think about automation. Automation, its footprint had originated in welding, fabrication and robotic capabilities, and we have been expanding our footprint and capabilities within the automation portfolio. We've expanded now where about 40% of our offering is tied to welding fabrication.
The other, the balance is about other ways that we solve and provide solutions for our customers, whether it's material handling and maybe AGVs or end-of-line testing. We continue to broaden the footprint within our automation space. We're introducing, what it now incorporates vision capabilities, AI capabilities, and what we're calling LEAP. Those are a part of a techquisition that we made a couple of years ago. We continue to enhance with our own welding knowledge and experience in technology to enhance our welding offering within an automation space. We're very much a technology-driven organization. That I for innovation is a key part of our strategy.
Understood. Now you just mentioned tech acquisitions and, you know, within the RISE strategy, you're targeting 300 - 400 basis points annualized revenue contribution from inorganic sales, tech acquisitions and others. Maybe speak to the confidence in being able to drive that going forward.
Yeah, you're right. We have a 300 - 400 basis points of CAGR incorporated into our long-term growth objectives. Over the last 10 years, we achieved 480 basis points, you can say that we're kind of pulling back a little bit, we're not because it's a law of larger numbers. We're very much committed to broad-based investment for growth, and that includes whether it's in our core welding business or at Harris or within automation, is how do we leverage our capabilities to drive a footprint of expanding capabilities? The examples that I provided are in core welding. I mentioned Vanair, that's part of our Americas welding business. I mentioned Alloy Steel, that's part of our international welding business.
At the same time, as you know, we've had a very consistent level of investment in automation, targets that continue to broaden out our footprint within the automation space. The techquisition, you know, we've coined that term it seems, and it's really looking about how does technology and certain elements of technology that we can look to in an inorganic sense that would complement how we're introducing solutions. I mentioned acquisition Inrotech a couple of years now ago, that had vision capabilities. Our leadership across our automation business are looking at ways to continue to introduce technology, and maybe they're small types of businesses, but they can offer up capabilities to broaden our platform. That becomes an opportunity for us to drive growth through inorganic investment. We're very much committed.
There isn't a day go by where we're not having some level of dialogue on the pipeline and how each of our teams are engaging in opportunities. Very much focused on driving that, the 300 - 400 basis points of CAGR, and we've been very successful at that.
Yeah. Now circling back to automation, a very exciting aspect of the LECO story, legitimate differentiator. We remain very bullish, you know, through the cycle and what it means for Lincoln Electric. Just stepping back, what really differentiates your team's capabilities? You know, how have you built out the, you know, product technology capability suite that you have? You know, what gives you confidence in, you know, continued outgrowth, you know, to further scale? We'll get to profitability after.
Okay. Let's talk about growth and our footprint. Go back a few years ago, I mean, we were hovering around a $400 million business. We talked about driving to a $1 billion objective. We went through some challenges in the market, you know, the EV/ICE transition, and then you had some pause in commitment to capital in 2025. We're very much committed to driving growth through our automation business. That's the first place I would start off, our commitment to the execution of an automation strategy, which is market leading in our industry. We've got the largest footprint within our industry. Lots of deep experience.
I mentioned we started off in welding fabrication, so think about the robotic capabilities, the how we've then expanded into more deeper customer needs, and that's material handling or testing and the sort. We have broadened the footprint to be able to engage with our customers in a broader sense. We also have been very intentional to broaden adoption within automation capabilities. Just a couple of years ago, we introduced Cobots. It's with our proprietary type software that makes it easier for small, mid-size fabricators to get into automation capabilities. We've been very intentional about leveraging technology, expanding our footprint, and looking for ways to differentiate within the markets, and as I mentioned, very much invested in growth.
We see automation as an opportunity to accelerate growth at 2x what we would define as core welding, and we continue to shape our model to be able to achieve the longer term objectives we have for the business.
Yeah. Very helpful. You have the, you know, within the RISE strategy, targeted mid-teens operating margin for automation. What are the key, you know, levers to get there? As we think longer term, there's a pretty heated debate as to whether, you know, the strategy's kind of capped in that profitability range. Is that the case? If not, you know, how do we see mid-teens progress to something even more robust and drive that much more value over time?
Yeah. Great, Brian. Taking steps, right? Our current objective is mid-teens type of EBIT for the automation business. How we get there, you know, we weren't that far away from that as we had approached kind of the $940 million plus of sales a couple of years ago. We know the path to get there. One is the volume leverage. I mean, we have built out our fixed cost structure to achieve $1 billion and plus. We need to get some leverage. We need to increase the level of volume and pull through out of the business, and we'll do that with consistent growth. We also have strategic positioning. There are pockets within our automation portfolio that are higher margin type opportunities from an organic perspective.
We'll also look to inorganic opportunities to richen kind of the mix of profitability within the portfolio. That'd be another anchor that we'll focus on. The third point I'd make is on execution. You know that we've talked about our Lincoln Business System and the disciplines around project management and from quote to execution, how well are we managing the portfolio. We'll continue to put a lot of pressure on our teams to sharpen the level of execution across the projects that we engage in. Those three elements will define us getting to that mid-teens type of EBIT profile. From there, you know that we have a continuous improvement type of focus.
I mentioned kind of big picture, the expansion in our operating margins through each cycle, and that goes for all of our businesses. We'll think through the same thing, once we are consistently in that mid-teens performance within automation of how do we continue to increase that. In the same way that we do for each of our segments in our businesses, we expect to continuously improve the level of discipline around operating excellence as well as growth.
Understood. Really good color throughout, Gabe. Have a little bit of time left. Any message you'd like to leave the group with today?
Yeah, look, we're very much focused in creating value, as you know, Brian, as we talked about some of the key levers within our RISE strategy to accelerate growth, to also expand the operating margins of our business. That, when I talk about the EPS compounder, I think that's sometimes, it's less understood. That is despite where we are at in this cycle, we have proven time and time again that we're gonna expand margins irrespective of kind of where the volumes are in this cycle, and we're gonna be very disciplined on capital allocation, and that will drive a compounding effect on our earnings. So we've been very consistent with that. In a very disciplined way, we're very excited about where the future is headed and the organization.
The launch of RISE strategy in this first quarter has been well-received, not only externally in the markets, but across our team, our employees across the company, and we're excited about where the future holds for us.
All right. We look forward to seeing it as well. I think that's.
All right.
That's very much close. Thank you, Gabe.
Thank you, Brian.