Lincoln Electric Holdings, Inc. ($LECO)

Good morning, everyone. Welcome to day 3 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, Bryan.

And thank you for joining us. I guess, to kick things off for anyone newer to the LECO story, maybe introduce the history, at least the recent history of the company, what really drives your business and how you differentiate strategically? And even for those who have experience with LECO, perhaps dive into the recently launched RISE strategy.

Yes. So Bryan, it would be great to start that way. So 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. And so 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. And that's an automation where the heavy invested in automation capabilities and then broad base of leveraging technologies in metals and in power sources and in software to be able to differentiate our footprint. As you mentioned, Bryan, we just recently launched what we're calling our RISE strategy. And it truly is anchored on the foundation that we have now in 130 years in business, and how do we accelerate our growth as well as shaping the operating model for the long term. And so just to go through what the RISE stands for, the R stands for reimagining how work gets done. And that's challenging how we engage throughout our businesses. And are they, 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 and how do we continue to innovate and differentiate ourselves in the marketplace. And so we are investing. 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. And then 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 in service. And then lastly, the E stands for elevating our team are focused on developing our organization to improve the level of engagement and foster an environment our teams, our employees around the world want to drive the kind of performance that we -- our objectives are set on. And so when you think about objectives, so the RISE is a strategy, we have established new 2030 objectives that anchor on the fundamentals of our strategy. And then first of all, is to drive accelerated growth. So our objectives top line is to drive a CAGR in the high single digits, low double digits. That is both organic and inorganic type of growth. On the organic side, we looked at 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, it could be a footprint in region, it could be across different parts of the markets and it's broad-based. On the operating side, 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. And so our objective is to move to a high 20s type of incremental margin. And a lot of the work we're doing around center-led or enterprise initiatives, we expect to provide about 1/3, a 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, and that would take us to a plus 20% operating profit for our business. And so that is what anchors on the acceleration from the RISE strategy. And 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 want to focus on, first, growth. We've more than doubled the level of internal investment over the last 5 years. And so we're looking for opportunities to invest in our business, to introduce new products, to drive capacity, drive operational improvements. And so we want to prioritize growth through internal investment as well as through acquisitions. And then as you know, we have been increasing our dividend rate consistently since going public in 1995. And then returning any excess strategic cash to our shareholders through repurchases. So a very balanced capital allocation strategy. And 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, Bryan.

Excellent walk-through. That sets the stage well. Your team has exposure across pretty diverse end markets and you are global [indiscernible]. Maybe touch on what you saw in Q1 and what's contemplated in your 2016 outlook across key end markets and geographies.

Yes. So I'll start broadly on end markets and maybe touch on a little bit on the geographies. So 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 30% type of growth. And that was across capital investment, projects, equipment as well as on the consumables side. And so we're excited about what we're seeing. We're cautiously optimistic that some of the key trends within general industry are going to lead to growth. And so we're optimistic what it means, particularly in the Americas side of our business. So one of the measures that I'd like to share -- I shared last week, Bryan, on our earnings call, is that within the general industry segment, in Americas, the consumable volumes were up low double digits. And now you've seen PMI with the -- with their 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 territories as well as seeing steadiness in growth on the industrial production side. So good drivers in general industries, we did in the month of April turned positive on standard equipment and volumes. So that was a good trajectory. We do see that as positive drivers within general industries in general. Then think about heavy industries. Heavy Industries was up mid-single digits. We've been navigating, as you know, destocking across ag and construction. And it looks as though we have hit the trough and now are positioned for growth, and we pointed to growth in the back half of 2026. The comps are easier. But it appears that the market, particularly heavy industries, off-road type of investment are starting to turn more positive. So we're excited about that. On the energy side, in the first quarter, we saw more of a flattish steady type performance. We're bullish on energy. 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. So we remain bullish, and we do expect that volumes will improve on energy as the year progresses. And then we were down mid-teens in transportation, automotive, as well as structural, and that's driven by a lot of project activity. And so the timing, for example, the comps last year were more challenged on the automotive side first quarter. So that was a driver there. But 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, and that's a low single-digit down in production levels across the automotive industry. So that's kind of a walk through end markets. In terms of geographies, we're more bullish on the Americas segment, not only in core welding, as I pointed to a couple of key drivers there and general industries and the sort. But also the automation component, of which 80% of our automation portfolio is within the Americas segment. And 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. So the automation business is positioned for growth in 2026. On the Harris side, we talked about some tough comps in Q2. We had the initial stocking of new customers in Q2 of last year. So we expect some tough comps on the Harris side. But 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. And on the EMEA side, more -- 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 supply chain challenges, and we just want to see more consistency there as well. And then you have the Middle East type of conflict that had an impact to us in the first quarter. And so we're monitoring how that progresses and the impacts on the EMEA region as well.

Okay. It all makes sense. You quickly touched on automation. We'll certainly get back to that topic and driver for your team. You stressed cautious optimism as you began the walk-through of markets. Maybe speak to that a little bit more and if you're willing to share what data points your team is really watching to see whether the perspective or potential volume inflection into the back half is real across your core markets.

Yes. So you can appreciate, Bryan. We're actively monitoring daily order rates, shipments and just normal activity day-to-day. And as we exited the first quarter, we saw an increasing level of daily orders activity, particularly in the Americas segment and into April. And I pointed to volume improvements in consumables, and that typically leads to improvements in standard equipment investment. And so we saw an improvement in volumes in April also on the equipment side. So that leads us to some optimism progressively. Now at the same time, we talked about the impact of the conflict in the Middle East being about $8 million to $10 million type of an impact. And so that's what gives us a little bit of maybe some more strength on the Americas side, but maybe some cautious in terms of how this progresses. So monitoring daily order activity monitoring the progression of real volume versus pricing that's pretty key for us. Then 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 and want to continue to see the strength of transition from quoting activity to ours. And those are internal metrics. But obviously, we're looking to the macros as well. I mean confidence from an investment standpoint, from a CEO confidence perspective or from a consumer confidence, expensive perspective, those are important for seeing the trajectory of real activity. and then monitoring what's happening in the automotive industry in production and investment, what's happening across different PMI indices, industrial production and indices. And are we seeing consistency? And has that lined up to what our business activity is. So you got the internal, you get the macro and staying really on top of that to see what that means for us as we progress throughout this year.

All makes sense again. It's quite the mosaic. I'd be remiss but then 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?

Yes. So very, very modest type impact. So don't look at that as a driver to how we've positioned pricing, for example. The broader implications 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 actions. So think of tariffs at this point, the actions that have been introduced in the markets as having a modest impact to our business.

Okay. And then to level set on your team's response to other inflationary pressures. How should we think about price realization, Q2, Q3 or the back half, however, it's best to frame that.

Yes. So I'll first just remind us that we increase our operating assumptions on sales. So we went from mid-single-digit type growth to high single-digit type growth for 2026, and that was driven by pricing. And so think about that as between 300 to 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 air side. So like say 3/4 of that. 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. So we took pricing actions. Those are now -- taken hold now in May, and that will mature throughout the second quarter into a full impact and pointing to the Americas segment, about 150 basis points on a quarterly type trajectory starting in Q3. So if we take what we've seen in metals and Harris, what we've -- to the actions we have taken to bring our cost -- price/cost position back to neutral by Q3, that's what drove the increase in the -- in pricing as part of our overall assumptions for the year. Now 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 anniversaried then all the pricing actions for 2025 into Q3 and then low single digits into Q4. And that's how we see the progression of pricing this year, which drove the increase in our assumptions.

Got it. Very helpful. And 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?

Yes. So top line impact is 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. So progressively, as the conflict persists, we expect about $8 million to $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 on supply chain and inflation. So 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 and then just seeing how the conflict persists.

Okay. Understood. And circling back to strategy, 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 standout opportunities for your team to further accelerate growth, make the kind of financial targets that you've put out with RISE. Is there anything that really stands out in the front?

Yes. So think about, as you mentioned, Bryan, remember technology-driven business. And the I in RISE is all about innovation and to differentiate ourselves. And so 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, we talk about Vitality Index, our Vitality Index, for example, equipment from 2025 was 58%. So that's new products introduced in equipment over the last 5 years in 2025, that represented 58% of our sales. So you can see the velocity of technology investment within our business. But we've taken that and we've looked at adjacencies and I'll use a couple of examples. You had the acquisition last year, Alloy Steel [ in ] Australia. That's in [ wear ] solutions. So that's leveraging our our inherent knowledge into materials, into metals and how do we now expand a footprint that's attractive for us. It's 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 a couple of years ago that was into mobile power. So we had already had done some joint development with Vanair and 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. So 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 in Additive. 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, but we continue to broaden the footprint within our automation space. We're introducing what now incorporates vision capabilities, AI capabilities and when we're calling LEAP. And those are part of a techquisition that we made a couple of years ago, and we continue to enhance with our own welding knowledge and experience in technology to enhance the our welding offering within an automation space. So a very much a technology-driven organization that eye for innovation is a key part of our strategy.

Understood. You just mentioned techquisitions. And within the RISE strategy, you're targeting 300 to 400 basis points annualized revenue contribution from inorganic sales techquisitions and others? And maybe speak to the confidence in being able to drive that going forward.

Yes. So you're right. So we have 300 to 400 basis points of CAGR incorporated into our long-term growth objectives. Over the last 10 years, we achieved 480 basis points. So we say that we're kind of pulling back a little bit, but we're not because it's a law of larger numbers. But 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. So I mentioned Vanair, that's part of our Americas Welding business. I mentioned Alloy Steel. That's part of our International Welding business. And at the same time, as you know, we've had very consistent level of investment in automation targets that continue to broaden out our footprint within our -- the automation space. The techquisition, 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 are introducing solutions. So I mentioned acquisition in real tech a couple of years now, a goal that had vision capabilities. And so our leadership across our automation business are looking at ways to continue to introduce technology and maybe there are small types of businesses, but that can offer up capabilities to broaden our platform. And so that becomes an opportunity for us to drive growth through inorganic investment. So we're very much committed in 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. And so very much focused and driving the 300 to 400 basis points of CAGR, and we've been very successful at that.

Yes. And now circling back to automation, a very exciting aspect of the LECO story. Legitimate differentiator. We remain very bullish through the cycle and what it means for Lincoln Electric. Just stepping back, what really differentiates your team's capabilities? How have you built out the product, technology capability suite that you have? And what gives you confidence in continued outgrowth further scale and then we'll get to profitability after it.

Okay. So let's talk about growth in our footprint. So go back a few years ago. I mean, we were hovering around a $400 million business. We talked about driving to $1 billion objective. We went through some challenges in the market, all the EV-ICE transition and then you had some pause in commitment to capital in 2025, but we're very much committed to driving growth through our automation business. So that's the first place I would start up. Our commitment to the execution of an automation strategy, which is market leading in our industry. So 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, how we have then expanded into more deeper customer needs, and that's material handling or testing in the sort. So 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. And just a couple of years ago, we introduced Cobots. It's with our proprietary type software that makes it easier for small midsized fabricators to get into automation capabilities. So we've been very intentional about leveraging technology, expanding our footprint and looking for 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.

Very helpful. And you have the -- within the RISE strategy, targeted mid-teens operating margin for automation, what are the key levers to get there? And then as we think longer term, there is a pretty heated debate as to whether the strategy is kind of capped in that profitability range. Is that the case? If not, how do we see mid-teens progress to something even more robust and drive that much more value over time?

Yes. So great, Bryan, so I've taken steps, right? Our current objective is mid-teens type of EBIT for the automation business. And how we get there, we weren't that far away from that as we had approached kind of the $940 plus million of sales a couple of years ago. And so 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. So 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. Then we also have strategic positioning. So 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. So that would be another anchor that we'll focus on. And the third point I make is on execution. You know that we talked about our Lincoln business system and the disciplines around project management and from quote to execution, how well are we managing the portfolio. And so 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. And so those 3 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. And so we'll think through the same thing. Once we are consistently in that mid-teens performance with an automation of how do we continue to increase that. And 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. Have a little bit of time left, any message you'd like to leave the group with today?

Yes. Look, we're very much focused on creating value, as you know, Bryan. And 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. And that -- when I talk about the EPS compounder, I think that sometimes is less understood. And that is despite where we are at in the cycle, we have proven time and time again that we're going to expand margins irrespective of kind of where the volumes are in the cycle, and we're going to be very disciplined on capital allocation, and that will drive a compounding effect on our earnings. And 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 a great way to end. Thank you, Gabe.

Thank you, Bryan.