Greetings and welcome to the Lincoln Electric 2025 Third Quarter Financial Results Conference Call. All lines have been placed on mute and this call is being recorded. It's my pleasure to introduce your host, Amanda Butler, Vice President of Investor Relations and Communications. Thank you and you may begin.

Thank you, Janice, and good morning, everyone. Welcome to Lincoln Electric's Third Quarter 2025 Conference Call. We released our financial results earlier today, and you can find our release and this call slide presentation at linconelectric.com in the Investor Relations section. Joining me on the call today is Steve Hedlund, our Chairman, President, and Chief Executive Officer, as well as Gabe Bruno, our Chief Financial Officer. Following our prepared remarks, we're happy to take your questions. But 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 and uncertainties which 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. The reconciliation of non-GAAP measures to the most comparable GAAP measure is found in the financial tables in our earnings release, which again you can find on our investor Relations website at lincolnelectric.com. And with that, I'll turn the call over to Steve Hedlund. Steve?

Thank you, Amanda. Good morning, everyone. Turning to slide three, we reported solid third quarter results this morning. Sales increased 8% driven by pricing, benefits from our M&A strategy, and resilient demand for short cycle portions of our product portfolio in the America's Welding in Harris product group segments. While we are still navigating a period of challenged capital spending in our automation portfolio and sluggish demand in the EMEA region, our results demonstrate the strength of our operating model. We are effectively offsetting inflation and volume headwinds through commercial and operational agility. We are achieving our targeted neutral price cost position and generated an incremental $8 million in permanent savings this quarter. This resulted in both higher gross profit and operating income margins, a 15% increase in our adjusted earnings per share performance, and record cash flow generation with 149% cash conversion. Our strategic investments and operating model continue to compound earnings, are delivering top quartile ROIC performance, and are supporting a balanced capital allocation strategy that invests in long-term growth while returning cash to shareholders through the cycle. Let's turn to slide four to discuss organic sales performance in the third quarter and into October. Organic sales increased 5.6% on higher price and narrowing volume declines. Volumes reflected ongoing stabilization in the demand for our short-cycle consumables, most notably in Americas and the Harris Products Group segments, as well as in our North American industrial gas distribution channel. An encouraging area of improvement was the low single-digit percent volume growth we achieved in welding equipment in the Americas, which has shown continued momentum in October. Our automation portfolio continues to be challenged from deferred capital spending in the automotive and heavy industry sectors. In the third quarter, we generated approximately $200 million in global automation sales. This was slightly below expectation and primarily due to project timing, which will be recognized in the fourth quarter. We were encouraged by a broad increase in automation order rates in late September and through October. If this trend continues, we expect fourth quarter automation sales to be approximately 15 to 20 percent higher sequentially, but still below last year's sales level. Looking at end market organic sales trend, we continue to see three of our five end markets representing approximately 60 percent of revenue, achieving steady to higher organic sales growth in the quarter. While largely price-driven, we did achieve volume growth across general industries, the HVAC sector, and in midstream energy. Construction infrastructure organic sales were steady in the quarter from a high single-digit percent increase in Americas, which was offset internationally. Heavy industries organic sales trends improved on easier prior year comparisons, price and higher customer production activity in construction and agricultural equipment, which we are encouraged to see. While automotive remain challenged due to slow capital spending, we are pleased to see consumable volume growth outpace domestic production rates in Americas. We are encouraged by the industry's latest October model launch survey that points to a re-acceleration in new model launch plans through 2029. This aligns with an increase in long-cycle automation orders we closed in October. If this momentum continues, it's just an inflection to growth for auto capital spending in our business in early to mid-2026. To summarize before passing the call to Gabe, we are in the final quarter of our five-year higher standard 2025 strategy. Our global team has done an outstanding job over five very dynamic years that have spanned a global pandemic and a global trade war. I am proud that our initiatives have delivered, and we are on track to achieve most of our financial and sustainability targets. Since 2020, our strategy baseline year, our operating income margin has increased 500 basis points and has averaged 16% across that time frame, which is on target. Our earnings have more than doubled at a high teens percent annual compounded growth rate, and we have generated over 165% in total shareholder returns through the third quarter. Our relentless focus on serving customers, driving innovation and continuous improvement, and winning together positions the company for superior performance in the next growth cycle. And now I'll pass the call to Gabe Bruno to cover third quarter financials in more detail.

Thank you, Steve. Moving to slide five, our third quarter sales increased 7.9% to $1,061,000,000 from 7.8% higher price, a 1.7% benefit from acquisitions, and 60 basis points from favorable foreign exchange translation. These increases were partially offset by 2.2% lower volumes. Gross profit dollars increased approximately 11% to $389 million, and gross profit margin expanded 90 basis points to 36.7%. A $2.5 million benefit from our savings actions, as well as diligent cost management and operational initiatives, substantially offset the impact of lower volumes and a $5 million LIFO charge in the quarter. We expect a similar LIFO trend in the fourth quarter. SG&A expense increased 11% or approximately $21 million versus the prior year, primarily from a challenging prior year comparison due to lower employee costs. In the prior year, we had a decrease in variable costs associated with incentive compensation programs, as well as an approximate $7 million adjustment to long-term performance-based incentive programs. The year-over-year increase was partially offset by a $6 million benefit from our permanent savings actions. SG&A expense as a percent of sales was 19.5%, in line sequentially. Reported operating income increased 21%. The year-over-year increase primarily reflects special item charges in the prior year period. Excluding special items, adjusted operating income increased approximately 9% to $185 million. Our adjusted operating income margin increased 10 basis points to 17.4%, reflecting a 19% incremental margin. We reported an effective tax rate of 26.1%, which is 250 basis points higher versus prior year, primarily from an approximate $9 million special item tax expense from the election of provisions from the One Big Beautiful Bill Act. This election also reduces tax payments by approximately $25 million per quarter, starting in the third quarter and through the first quarter of 2026. Excluding special items, our effective tax rate was 21.1%, which was a 250 basis point improvement versus the prior year. We reported third quarter diluted earnings per share of $2.21. On an adjusted basis, EPS increased 15% to $2.47. Our EPS results include a $0.07 benefit from share repurchases, and a $0.01 unfavorable impact from foreign exchange translation. Moving to our reportable segments on slide six, America's welding sales increased approximately 9% driven by 9.6% higher price and a 1.4% contribution from our Van Air acquisition, which anniversary to August 1st. Volume declines narrowed to approximately 2%. The increase in price reflects actions taken through the first half of the year to address rising input costs that fully matured in the third quarter. We anticipate price levels to hold sequentially in the fourth quarter. We will continue to monitor trade policy decisions and take appropriate actions as needed. America's welding segment's third quarter adjusted EBIT increased 5% to $132 million. The adjusted EBIT margin declined 60 basis points to 18.2 percent, primarily due to the challenging prior comparisons from lower employee costs related to incentive compensation programs previously discussed and lower automation volumes. These factors offset the benefits of diligent cost management and $4 million in permanent savings. We expect America's welding to continue to operate in the 18% to 19% EBIT margin range for the remainder of the year. Moving to slide 7, the international welding segment sales increased 1.6% as an approximate 4% benefit from our alloy steel acquisition and 2% favorable foreign exchange translation were partially offset by 4% lower volumes. Volume compression narrowed in the quarter on prior comparisons and growth pockets in Asia-Pacific, including high single-digit percent growth in China. The segment continued to navigate challenge European demand trends. Adjusted EBIT increased approximately 29% to $26 million. Margin increased 230 basis points to a more normalized rate of 11.3%, which reflects mix, seasonality, and $3 million of permanent savings. We expect International Welding's margin performance to continue to operate in the 11% to 12% range for the balance of the year. Moving to the Harris Products Group on slide 8. Third quarter sales increased 15% with 2% higher volumes and nearly 12% higher price. Volumes reflect HVAC sector strength this year and our expanded retail channel presence. We expect softening HVAC production in the fourth quarter. Price continued to increase on metal costs and price actions taken to mitigate rising input costs. Adjusted EBIT increased approximately 28% to $28 million and margin improved 190 basis points to a record 18.3% on volume growth, effective cost management, and strategic initiatives. The Harris segment is expected to operate in the 16% to 7% range for the balance of the year due to seasonality and reduced HVAC production activity previously mentioned. Moving to slide 9, we generated record cash flows from operations in the quarter, aided by lower tax payments. Year-to-date cash flows have increased approximately 13% with a 119% cash conversion ratio. Average operating working capital improved 50 basis points to 18.6% versus the comparable prior year period. Moving to slide 10, we're executing well on our capital allocation strategy. In the quarter, we invested $136 million in growth, reflecting CapEx investments in our final investment in alloy steel. Our adjusted return on invested capital increased to 22.2%. We also returned $94 million to shareholders through a combination of our dividend and $53 million in share repurchases. Looking ahead, we announced our 30th consecutive annual dividend payout rate increase, which is 5.3%, starting early next year. We continue to expect superior shareholder returns through our strategic growth initiatives and our capital allocation strategy. Moving to slide 11 to discuss our operating assumptions for the year. We are maintaining our top line and margin assumptions given performance to date, order trends, effective cost management, and benefits from our savings programs. We expect traditional seasonality in our sales performance as we move from the third quarter to the fourth quarter with a modest sequential improvement in our operating income margin. We are increasing our interest expense assumption to a low $50 million range due to recent borrowings for the alloy steel transaction, and we are increasing our cash conversion range to above 100% to better align with performance. To wrap up, our manufacturing footprint and supply chain strategy have proven to be well-positioned and resilient in this operating environment. Combined with diligent cost management and a focus on long-term growth, we will continue to effectively manage any headwinds and leverage opportunities to drive superior long-term value.

And now I would like to turn the call over for questions. ladies and gentlemen at this time we would like we will be conducting a question and answer session if you would like to ask a question during this time simply press star followed by the number one on your telephone keypad if you would like to withdraw your question press the pound key to ensure that everyone has an opportunity to participate we ask that you ask one question and one follow-up question and then return to the queue your first question comes from the line of angel castiglia from morgan sandy please go ahead hey uh this is oliver jang on for for angel this

morning um thanks for taking my question i i guess maybe just to start you know how um curious as to how you're seeing you know kind of demand trends unfold um you know kind of the first month into the quarter um specifically around kind of construction and infra it sounds like that's actually gotten better just going off the slide so um any any just curious if if you can uh share some color there.

Yeah, just in general, Oliver, as we mentioned, you know, we saw continued strength as we wrapped up the third quarter and into this fourth quarter. You know, we've been looking to strength out of our automation business, and we're starting to see an acceleration of orders that are broad-based. And so while it's still pretty early in the quarter, we're optimistic that we're seeing strength progressing in capital investment. We're seeing in our core business in America's segment as well. We've seen some progressive trends as we wrapped up the third quarter into the fourth quarter. The last thing I'd mention on terms of order trends, and we do expect, as I mentioned in my comments, to see some compression on the HVAC part of our business from the production levels expected to soften in this fourth quarter. When we think about that, we think about about 10 to 15 percent of our business exposed. So while it's traditional seasonality within our hair segment. We do expect incremental softness within the HVAC markets.

And Oliver, just to add specifically on your question about construction infrastructure, it's really a tale of two cities. We saw a lot of strength in the America's wealthing segment, more challenge in the international overall, you know, up and positive, which is encouraging, but again very regionally distinct.

That's really helpful and maybe just as a follow-up in automation it sounds like you know encouraging to see kind of that order rate take up and that could potentially if it trends you know throughout the rest of the quarter it sounds like revenues will be higher sequentially.

I'm curious as to like how that translates to margin just from an incremental perspective i know there's some higher fixed costs there but um yeah just just curious if you can share some color as well yeah so the um the automation business does have higher fixed costs so higher incrementals and also higher decrementals a lot of that business is a fairly long cycle projects right so as we take orders particularly on the automotive side you'll start to see the revenue and margin impact of that increased activity next year more so than fourth quarter there are some short cycle portions of the business in terms of cobots and more pre-engineered systems so we might see a little bit of an uptick sequentially from third quarter

to fourth quarter on automation but i think the the big benefit from the renewed capital spending will come next year rather than fourth quarter just to add oliver when you look at short term the mix of business within the america segment as you know eighty percent of our automation business is within the America segment. So while the incremental activity that Steve points to we won't see realized into 2026, as we mentioned, the sequential improvement, we do expect between 15% to 20% improvement in the Q3 levels, which would provide a more improving mix in the margins within the automation segment.

That's really helpful. Thanks, guys. I'll pass it on.

Your next question is coming from the line of Brian Blair from Oppenheimer. Please go ahead.

It would be great to hear a little more on how your team's thinking about cycle positioning and the potential for demand recovery and acceleration into 2026. I understand comps are relatively easy. That certainly influences optics, but, you know, the growth in consumables, that's certainly notable. You know, in the quarter, equipment grew for the first time, I believe, since the fourth quarter of 23. So there seems to be some real underlying momentum, respecting that you haven't offered 2026 guidance. Just any color on the puts and takes of the backdrop and your thoughts on the setup going into next year would be appreciated.

Yeah, Brian, thanks for that. But we're well positioned, as you know, as markets begin to expand. The question is when. And when we think about consumers as being a key indicator for short cycle activity, pretty positive with all the dynamics in the market to see some positive trends there. So we're well positioned for growth, although we need to see more consistency before we have more confidence in what an expansion can look like. On the automation equipment side, and that's where we're seeing good activity with some consistency there, we do expect to see a posture to return to growth there. So it really is about being in position to accelerate our performance with growth. And we're well positioned, we've been shaping our model, but we want to see a little bit more consistency in the order activity before we point to a more consistent growth pattern in our business.

Yeah, Brian, as we've navigated through this part of the cycle, we've tried to be very thoughtful about how we can strengthen the business for the long term. We've talked about some of the controls we put on discretionary spending and looking for structural cost savings, basically by changing how we get the work done so that we can become more efficient, more productive, get the cost reductions, but not compromise our ability to capture demand in an upcycle.

Understood. That's very helpful, Keller. And the, you know, broad acceleration in automation orders, that's certainly encouraging. And it's been, you know, multiple quarters of, I guess, wait and see posture, you know, from customers on that front. I'm just curious if you're hearing any consistent rationale for moving forward with the orders now for the, you know, conversion of high levels of quoting activity to now, you know, solid order flow. So in mentioning that it's broad acceleration, you know, not, you know, just auto, we know that that's been, you know, pending and, you know, platform changeovers, et cetera, eventually the investment there.

I'm just curious, auto and other sectors is, again, there's any consistency to, you know, customer rationale for now moving forward after, you know, multiple quarters is being kind of on pause. now i would add brian just it's broad-based as we mentioned not just automotive although you did note that with program launches announced just in this month of october versus april is probably mid-teens overall uplift in activity so that's pretty positive but it is broad-based and we believe that our key theme of how we introduce high quality solutions within automation automation capabilities we offer do differentiate ourselves. And so our coding activity is broad and very high still, and seeing the progression of more commitment to capital is a good sign.

Hey, Brian, I'd also add that you saw a CATS release yesterday, right? The heavy industry part of our portfolio is starting to get more confidence in their future production rates, therefore more willing to spend capital. That also has a trickle-down effect in the general industries. And I think, you know, we're also seeing this is maybe more anecdotal because we don't necessarily track it this way. But we are starting to see some investments as companies look to reshore or nearshore production.

All makes sense.

Thanks again.

Your next question is coming from the line of Sari Buruditsky from Jefferies. Please go ahead.

Good morning. Thanks for taking the question. Pricing has obviously been very strong in America. Because, you know, I think when you started the year, you expected some demand destruction with higher pricing. So curious if you're seeing this or if it's been more inelastic.

I'd say, Sari, our initial concern, right, was that price on volume would fully offset each other. And I think we've seen demand from a volume standpoint be a little bit more resilient than that. So trailing the production of volume, trailing the increase in price and giving us a net increase in organics. I think what we're starting to see now is the volume not being less negative, but actually starting to flip towards being positive. Now, part of that is easier comps as we started to enter the slowdown this time last year. But I think there's general optimism amongst our customer base that we're starting to see the first innings of a turn in demand.

I appreciate that color. And I know you talked a little bit about 2026 volume recovery earlier, but just curious now that we're in our second year of volume decline, you saw some momentum, you know, how you would expect to see a recovery, you know, would it be kind of a slow recovery? Would you see some strong growth coming out of this downturn?

Well, it's always difficult for me to predict kind of the trajectory of any expansion, But a couple of signs that I'd point to, short cycle activities we've already talked about in consumables, it begins a cycle of growth that leads into investment. So, for example, when we see on our part of our business in the Americas where consumable volumes are improving on the automotive end market, that points to production and then it leads to growth in capital investment. When we see heavy industries stabilize and then we start to point to modest levels of activities and growth in different pockets of heavy industries, that's also a positive indicator. We saw the same thing in general industries where consumable activity turned positive. So when you see persistent, consistent levels of industrial production activity, then we expect to see more accelerated capital investment. So we're starting to see that. We need to see a little bit more consistency there. But that does lead us into a more optimistic view of where the markets are trending.

Sri, I'd expect to see a slow build of volume growth rather than an avalanche of everything suddenly breaking loose.

Appreciate the color. Thank you.

Your next question is coming from the line of Nathan Jones of Stiegel. Please go ahead.

Good morning, everyone.

Hey, Nathan. Good morning, Nathan.

Yeah, I guess I'll start with a question on incremental margins. Currently, you're looking at volume declines and price increases driving organic growth. And obviously, you don't get any operating leverage on price, particularly if it's offsetting increased costs, right? You get volume leverage off volume. So maybe some advice on how we should think about incremental margins as the growth is primarily driven by price as we head into maybe the first half of next year. And then that flips to maybe more volume driven growth in the second half of next year. You talked about, you know, investments you've made in throughput being more efficient. And maybe does that change the, you know, we should expect lower incremental margins in the short term and maybe higher than historic incremental margins as volume improves from those investments? Just any color or commentary you can give us about how we should think about incremental margins.

Yeah, I would love to think about our current environment where we have high teams, incremental margins and in a trajectory of what we're talking about with modest volumes declines. In general, as you know, Nathan, when we see volumes approaching that mid single digits, we're going to be in that mid 20s incremental margins. There is upside with automation. And as we continue to shape our international segment, which leads into upwards of 30s, low to mid 30s type incrementals, but you should see more accelerated incrementals as you see an acceleration of growth. Outside of that, you see more of what we've done today.

So see if high teens type of incrementals in this kind of environment. thanks for that i guess my follow-up question will be on europe um you know your main competitor reported yesterday a bit more bullish on the outlook for improved volume in europe going into next year maybe just any commentary uh on your view of of any inflection in european volume growth Thanks for taking my questions.

Yeah, sure, Nathan. You know, the commentary from the European governments about increasing defense spending and the like is encouraging. But at this point, it's still commentary. We're not seeing that translate into order intake, you know, for us. So I guess we would be cautiously optimistic that maybe Europe might get better, but we're not in any way counting on it or planning for it.

Your next question is coming from the line of Mie Dobre from Baird. Please go ahead.

Thank you for fitting me in here. First question, I guess two parts to it. So can we put a finer point maybe on the volumes that you expect in the fourth quarter in America? You know, the short cycle business is improving, but apparently automation is going to be down again year over year, even though it may be better sequentially. So, Ned, Ned, what should we be thinking in terms of volume? And, you know, I guess the second part of the question is international. If I understood correctly, the way you're thinking about margin in the fourth quarter is really not all that different than what we've seen in Q3. Now, I know the business does have a little bit of seasonality typically, and the fourth quarter is usually better than the third. So I'm wondering, again, you know, what might be different this time around?

Yeah, so, Meg, I'll answer the international margin question first. So, you're right. We do expect traditional seasonality in the fourth quarter, which is an uptick from third, and then on top of that, incremental sales from the acquisition we've made. So, we mentioned operating within that 11 to 12 percent range. I expect us to probably be on the higher end of that range, but still within that framework from an international segment standpoint. On the America side, we do expect sequential, as you note, automation growth, but still probably low double digits behind the prior years. We had a record level of automation sales and margins in 2024's fourth quarter. So sequentially, I would think of the fourth quarter, as I've mentioned, to be seasonally adjusted, so it'll be up 100, 200 basis points, fourth quarter versus third quarter, all in with all the puts and takes. And we do expect improvement in the operating margin profile. I expect, as I mentioned, Americas to be in the higher end of that 18 to 19 percent range.

Okay, that's helpful. And then my second question, and you'll have to excuse my ignorance here on the accounting dynamics, but from a life of charges standpoint, is this something that we should be contemplating in 2026 as well, or are we starting to lap some of these issues? And, you know, you talked a little bit about incremental margins on a volume recovery, but I do know that there are some temporary cost takeouts, which I guess presumably revert as volumes increase. So, without maybe asking for specific guidance on 2026, just level setting expectations here for the America segment in particular is how people should be thinking about incrementals.

Yeah, so I would follow a more traditional and incrementals framework, as I've mentioned in previous question, Mig. On LIFO, LIFO accounting gets reset every year. So we're pointing to the valuation of inventories and the costing related to that. So we do expect, as I mentioned in my comments, to LIFO charges in fourth quarter to follow the same trending we've had in the last couple of quarters. Last year, the credit. But I can't really speak to 2026 until we start seeing the inflationary trends and then reset what a LIFO accounting would look like. On temporary cost savings, that's built into our model. So as volume improves, then we'll allow for temporary costs to come back into the business. But that's all part of our incremental framework that we have as a business.

Appreciate it.

Your final question is coming from the line of Steve Barger from KeyBank Capital Markets. Please go ahead.

This is actually Christian Zylon for Steve Barger. My first question is on your automation business. Kind of a long one. Last quarter, your comments implied automation to be down about mid-single digits year over year. Where did the underperformance come from? Maybe I missed it. Was it all related to automotive CapEx? And then with your comments about October activity in answer to one of your earlier questions, how are you thinking about the fourth quarter now?

Is stable from 2Q still a fair level, or should we be thinking about 4Q and parts of 26 closer to 3Q's level? yeah in terms of our our sales mix we did see the compression largely in automotive but also in heavy industries so you've got that mix and the strengthening we pointed to chris was broad based and we had talked about a pacing uh after the second quarter that was more in line with 215 million dollars per quarter um we were we were below that in the third quarter just the timing of how we recognized revenue we're going to recoup that in a little bit more into the fourth quarter so i would say we're a little bit of ahead of where the pacing that we had talked about in second quarter but still implies that mid single digit decline for the full year so and then that's where the comments in terms of order activity really come into really more of a 2026 profile business so we're trending just a little bit better and what we have communicated after the second quarter call.

Got it. That's a great caller. And then last question, just on your Harris business, your ability to get pricing has been incredible. The last six quarters have averaged high single digits. Is this primarily demand driven pricing or how would you break down the pricing ability from demand tariffs and maybe some catcher pricing? Do you think this dynamic continues into the next quarter and next year, presumably? Thank you.

Yes. In general, Chris, Remember, Harris has a good portion of the business that's tied to commodity silver and copper, and we have a mechanical pricing model that adjusts to changes in the markets, particularly in silver and copper. So the movement in pricing is largely reflective of changes in the commodities in the broader markets.

Got it. Thank you.

This concludes our question and answer session. I would like to turn the call back to Gabe Bruno, Chief Financial Officer, for closing remarks.

I would like to thank everyone for joining us on the call today and for your continued interest in Lincoln Electric. We look forward to discussing the progression of our strategic initiatives in the future. Thank you very much.

Ladies and gentlemen, that concludes our call for today. Thank you all for joining. You may now discuss.