Lincoln Electric Holdings Inc (LECO) Q3 2026 Earnings Call Transcript

Greetings, and welcome to the Lincoln Electric 2026 Third Quarter Financial Results Conference Call. This call is being recorded. It is my pleasure to introduce your host, Amanda Butler, Vice President of Investor Relations and Communications. Thank you. Amanda, you may begin.

Thank you, Melissa, and good morning, everyone. Welcome to Lincoln Electric's Third Quarter 2026 Conference Call. We released our financial results earlier today, and you can find our release and this call slide presentation at LincolnElectric.com in the Investor Relations section. Joining me on the call today is Steve Hedlund, our Chairman 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 as well as in our FCC filings on Forms 10-K and 10-Q. In addition, we do discuss financial measures that do not conform to U.S. GAAP. A reconciliation of non-GAAP measures to the most comparable GAAP measure is found in the financial tables in our earnings release, which, again, is available in the Investor Relations section of our website at LincolnElectric.com. And with that, I'll turn the call over to Steve Hedlund.

Thank you, Amanda. Good morning, everyone. Turning to slide three, we reported record third-quarter sales and earnings performance with adjusted EPS increasing 21% to $2.98. Our results highlight two important trends we navigated in the quarter. First, accelerating demand in core areas of the business, and second, challenging operating conditions that we are diligently managing. Our strong earnings were driven primarily by operating leverage from mid-teens percent organic sales growth, led by 9% volume growth. This is the first quarter in over two and a half years that volume growth has outpaced price and volume momentum remains robust through October. However, energy, logistics, and electronic component costs continue to increase with unprecedented AI data center demand, creating spot shortages for some raw materials. While our supply chain and operations teams demonstrated great teamwork and agility in managing these supply challenges, the additional cost impacted our gross profit margin. We implemented price actions during the quarter in all three segments, which will enable us to achieve price cost neutrality in the fourth quarter. We improved our adjusted operating income margin by 60 basis points to 18% at a 22% incremental margin, which was in line with our September update and delivered top quartile ROIC at 23.9% up 170 basis points compared with the prior year. We also focused on long-term growth and returns as we executed our capital allocation strategy. We invested $41 million in growth and returned $143 million to shareholders in the quarter. We remained focused on serving our customers, advancing our RISE strategy, and positioning the company for long-term success. Turning to slide four to cover growth drivers in the quarter, organic sales growth was broad with growth across all three reportable segments, product areas, and in all five end markets. Organic growth was largely driven by higher volume demand in the Americas region, in Asia Pacific, and in select product areas in the Harris product segment. Sales in the U.S. increased over 20%. Asia Pacific continued to expand with growth in China, India, and North Asia. Core Europe was relatively steady versus prior year, and we are starting to see benefits from European import tariffs and some defense spending. The Middle East was more resilient than expected with a $1 million sales headwind in the quarter. Capital spending continued to improve with high teens percent organic sales growth on automation, resulting in $232 million in automation sales in the quarter. Equipment organic sales growth also accelerated to a low teens percent rate in the quarter. Strong order rates in both automation and equipment in the third quarter have elevated our backlog to new record levels, which positions us well for 2027. Consumable volumes increased at a mid-single-digit percent rate on a consolidated basis and performed higher in Americas and Asia Pacific, where we are seeing the strongest level of industrial and infrastructure activity. Looking at end-sector trends on a consolidated basis, all five end markets grew in the quarter. General fabrication organic sales grew mid-20%, with the outperformance reflecting solid industrial production activity in the Americas, as well as data center-related projects and rising HVAC demand in Harris. Energy and non-residential structural steel organic sales increased mid-teens percent with energy outperforming in America's welding and oil and gas due to strong project activity given the region's optimal positioning in the energy marketing. Heavy industries and transportation both grew at a low double-digit percent rate. Heavy industries continue to see strengthening in construction and mining to support infrastructure, data center, and mineral investments, while agricultural demand appears to be stabilizing. Transportation automotive growth benefited from easier prior year comparisons in both production rates and in timing of automation shipments. We expect growth to continue in the fourth quarter as well. Separately, the October Domestic Auto Industry Survey indicated a pickup in 2029 and 2030 model launches following two years of unprecedented compressors. That outlook is consistent with the increase in quoting activity we are seeing for long lead time automation systems for transportation customers. Moving to slide five, at the Fabtech trade show last week, we launched over a dozen new solutions that address customer pain points and expand the addressable markets we serve. For example, ArcTracker Air provides customers with an easy-to-deploy platform that enables them to track productivity across their welding operations, regardless of the mix of brands or type of welding equipment in use. We also launched a hotwire submerged arc welding solution for our heavy industry sector customers that delivers up to 50% improvement in deposition rates using their existing installed base of Lincoln equipment with only modest incremental investments. Our new InstructArc Extended Reality Welding Trainer supports workforce development and training by providing a more realistic simulation of the welding experience. And finally, I am most excited about the launch of ExpertLink, our physical AI solution that will revolutionize welding automation. Featured initially on our Cooper Cobot, ExpertLink enables a welding robot to adapt on the fly to real-world conditions like an experienced human welder would. This capability significantly reduces barriers to adoption and broadens the market for cutting and welding automation. We will be integrating expert-linked technology across our automation portfolio over the next few years, which will further differentiate the value of our innovation and support our rise growth objectives. I will now pass the call to Gabe Bruno to cover third-quarter financials in more detail.

Thank you, Steve. Moving to slide six, third-quarter sales increased 15% to $1,221,000,000. dollars sales growth reflected approximately nine percent higher volumes and six percent higher price we anniversary the acquisition of alloy steel in august which contributed 50 basis points to sales growth growth profit increased nine percent to 425 million dollars on higher sales our growth profit margin compressed 190 basis points to 34.8 percent primarily due to the timing of our new price increases which went into effect late in the quarter and unfavorable mix on a year-to-date basis we are lagging on neutral price cost target by 100 basis points and expect to achieve a neutral price cost position in the fourth quarter SG&A expense was relatively steady versus prior year at 206 million dollars while SG&A as a percent of sales improved 260 basis points to 16.9% as a result of sales leverage. SG&A expense included an additional $5 million in corporate investments related to the rollout of our RISE strategy and related initiatives. Given current RISE investment activity and business performance, we are maintaining our quarterly SG&A estimate at $210 to $215 million, with corporate expenses likely in the $4 to $5 million dollar range in the fourth quarter. Reported operating income increased approximately 20 percent to $211 million, primarily on higher sales leverage. Adjusted operating income increased 19 percent to $220 million, and our adjusted operating income margin improved 60 basis points to 18 percent, with a 22 percent incremental margin. Third quarter diluted earnings per share increased 19 percent to $2.63. Adjusted earnings per share increased approximately 21 percent to a record $2.98. We recognized a four-cent benefit from share repurchases, and there was no impact from foreign exchange translation. Moving to our reportable segments on slide seven. america's welding sales increased approximately 16 percent to 801 million dollars primarily from 13 percent higher volume and 2.4 percent higher price america's volume growth was broad-based across all product groups and end markets and in key market channels equipment and automation each delivered high teens percent volume growth supported by strong capital spending consumable volume growth increased to a mid-to-high single-digit percent rate as industrial activity accelerated. Price reflects the benefit of the May price action. We expect price in Americas to be in the low-to-mid single-digit percent range in the fourth quarter, reflecting third-quarter price actions. America's adjusted EBIT increased approximately 27% to $167 million. Adjusted EBIT margin expanded 190 basis points to 20.1 percent. The increase was driven by higher organic sales and improved automation performance, which was partially offset by price-cost headwinds. We expect America's welding margin to perform in a 20 to 21 percent EBIT margin range for the fourth quarter, given sales momentum and improved price-cost performance. Moving to slide eight, international welding segment sales increased 3% to $227 million on 1% lower volume, 2.4% higher price, and approximately 2% benefit from acquisition. Within international welding, continued strength in Asia-Pacific was offset by weak capital spending across Europe and lower sales to the Middle East. The ongoing conflict reduced segment sales by approximately $5 million in the quarter. We continue to expect a $6 to $7 million sales headwind in the fourth quarter. Adjusted EBIT decreased 7% to $24 million. Adjusted EBIT margin compressed 100 basis points to 10.3%, primarily due to lower volumes and an automation performance. Sequential performance versus the second quarter was better than seasonal trends due to a pickup in demand in our alloy steel acquisition and incremental structural savings we expect international welding margin performance to be in the 12 to 13 percent range for the fourth quarter moving to the harris products group on slide nine third quarter sales increased 29 percent to 193 million dollars primarily from a 3% increase in volumes and approximately 26% higher price. Price primarily reflects higher metal input costs in consumables, particularly silver. HVAC and gas equipment demand supported volume growth, while the retail channel remained challenged on soft housing trends. We expect HVAC demand to remain strong in the fourth quarter, further aided by an easier prior year comparison. Adjusted EBIT increased 21% to $34 million on higher sales. Adjusted EBIT margin declined 100 basis points to 17.3%, which was below our expected range due to unfavorable mix and operational inefficiencies. We expect the Harris segment to operate at approximately an 18% margin in the fourth quarter at current metal prices. Moving to slide 10, cash generation was strong with $216 million in cash flows from operations. Working capital improved to 16.6% of sales on higher sales levels as well as improved inventory positions. We achieved 107% cash conversion for the quarter and are at 99% on a year-to-date basis, which is in line with our 100% target for the year. Moving to slide 11, we invested $41 million in capital expenditures and returned $143 million to shareholders, including $43 million in dividends and $99 million in share repurchases. Adjusted return on invested capital improved to 23.9%. Our dividend is an important component of our capital allocation strategy. The board recently announced the company's 31st consecutive annual increase in the dividend payout rate, raising the annualized rate by 10% to $3.48 per share. The increase reflects confidence in the execution of our RISE strategy, the strength of our cash generation, and our commitment to return value to our shareholders. The first payment at the increased rate is payable in January 2027. Moving to slide 12 to discuss our 2026 operating assumptions. We are raising both our full-year sales growth rate and our capital expenditure range to reflect stronger demand trends and higher rise strategy investments. We now expect next sales growth to be in the low teens percent range for the full year, which aligns with our performance year-to-date. We are maintaining the updated assumptions we provided in September for price costs and our adjusted income incremental margin. We expect price costs will be neutral in the fourth quarter, which will support year-over-year gross margin expansion in the period, as well as a mid-20% incremental adjusted operating income margin. We are increasing our 2026 capital expenditure range to $140 to $150 million as compared with our initial assumption of $110 to $130 million. dollars. We have invested $112 million in the first nine months and are continuing to invest to upgrade operating capacity and capabilities in the fourth quarter. Our full year interest expense, tax rate, and cash conversion assumptions are unchanged. Looking ahead, our priorities are to execute on our RISE initiatives, serve demand in growing areas of the market, and invest for long-term returns. We continue to expect strong earnings performance as we advance those priorities. And now I would like to turn the call over for questions.

Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question, simply press star one on your telephone keypad. If you would like to withdraw your question, press star one again. 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. Please remember to unmute your device locally. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Brian Blair with Oppenheimer. Your line is now open, please go ahead.

Thank you. Morning, everyone.

Morning, Brian.

I was hoping you could offer some more color on the momentum and outlook for your automation strategy. It seems like demand is broadening. You mentioned kind of the medium-term outlook with changeover activity in the automotive space. Maybe touch on quoting activity across other end markets there. And then given your backlog position, current reads, where do you see automation revenue shaking out for 2026? And what's the preliminary outlook to the extent you're willing to speak to that for 2027?

Yeah, so Brian, so I just would reiterate the level of growth we've seen, very active coding activity and broad-based. And we pointed to the mix of end market progression including uh the automotive market so we're pleased to see the long-term trajectory of model launches turning positive in 2029 and in 2030 which leads us to believe that a lot of the quoting activity that we've seen along the lead time miners would progress into orders as the months progress so we're we're really keen on a continued progression of growth in our automation business and think about that in the high single digits organic type growth. I'm very much positioned to continue to expand the margin profile of our business. We exited the third quarter at a low double digit type EBIT profile and we expect more of the same in the fourth quarter.

Yeah, Brian, I would just add that Gabe's comments really apply to the historical base of the business, which has been a large portion of automotive automation projects, some for heavy industries, particularly supporting mining, construction, agricultural equipment. We're seeing improvement across the legacy base of the business. We're also very excited about the opportunity to grow the addressable market, particularly in the general industries, general fabrication space, by making the technology more easy for customers to adopt. One of the big problems those customers have is their parts aren't entirely consistent lot-to-lot due to upstream variation. And historically, that's made it hard for them to adopt robotic solutions, whether that's an industrial robot or a cobot. And we're really excited about the launch of the expert-length platform that's going to address that pain point and significantly open the market up for the long term.

That's encouraging. Appreciate the color. Sure. And then in terms of your Middle East exposure, we know the headwind that has been there, and you framed anticipated Q4, in fact, looking forward to the hopeful resolution of the war, how should we think about how much of a catalyst to rebuild efforts and redundancy slash security investments may be for your business, at least over the medium term?

Yeah, just in general, Brian, you saw that while in the international segment, we had a headwind of 5 million. Overall, we were down once. We saw strength in exports coming out of the Americas and Harris segments. So we're well positioned. You can think about the headwinds turning into volume opportunities for us as projects progress in their investment trajectory as well as any rebuilding. So we're well-positioned in the Middle East, and we look to growth as the conflict is resolved and the markets return to some basis of what is normal. Understood. Thanks again.

Your next question comes from the line of Angel Castillo with Morgan Stanley. Your line is now open. Please go ahead.

Hi, good morning, and thanks for taking my question. I wanted to touch on the pricing power a little bit, maybe just to unpack the price-cost dynamic in a bit more detail. Just, you know, you noted passing through a little bit more price toward the end of the quarter. So just curious, as you're having discussions with, you know, customers, OEMs, or distributors, just can you kind of update us on what you're seeing or hearing in terms of, you know, overall kind of elasticity to kind of price? Given the organic volumes, it would suggest that you're not really seeing any deterioration there, But, you know, given how much inflation we've been having, we'd be curious to see, you know, your thoughts on your ability to continue to kind of push price.

Yeah, Angel, I would say that our channel partners and our end users are experiencing the same inflationary pressures that we are. So this isn't coming as a shock to them. Nobody likes talking about pricing because it takes your attention away from other matters. but we're not getting a tremendous amount of pushback in either case because people understand certain parts of the economy are running hot with the AI data center build out, and it's a constant surprise the breadth of commodities and products that are impacted by that. So it's never a dull moment, and we're doing our best to be agile and stay on top of it, but it's a constantly chasing target that we're going after.

Yeah, so I would add and affirm what we've updated the markets since September is we expect in the welding business about 100 basis points incremental pricing impact that would lead us into a price cost neutral posture in Q4. So we've maintained that posture. But as you know, we'll continue to monitor the persistent inflationary dynamics and response as appropriate.

That's very helpful. And maybe just on that note, as we think about kind of, you know, your preliminary thoughts or what you're able to see into 2027, can you talk about the kind of key kind of cost buckets and what you're seeing across all of those? I think you noted earlier maybe some pockets of kind of shortages of supply, so just any kind of thoughts on, you know, what kind of inflation or cost inflation you're kind of anticipating into next year?

Well, Angel, I would say just not get into specifics about inflationary type conditions into 2027. But I would say that we're very well postured with what we're seeing in the market for what our strategic framework on organic sales are, which I would just reiterate, it's mid to high single digit type organic growth, of which would lean on an acceleration and automation growth in the high single digits. So we're very well postured for that kind of trajectory as we get into 2027. Very helpful. Thank you.

Your next call comes from the line of Neil Burke with UBS. Your line is now open. Please go ahead.

Hey, good morning. Thanks for the question. Maybe another way to kind of ask about automation growth trends. I mean, is there any way to kind of bifurcate between, you know, more cyclical improvement on one hand, but also more secular growth from increased automation adoption? You know, I asked because the comments about the automotive end market seem more cyclical. I'm not sure if that quoting activity is hitting revenue yet, but, you know, automation sales are broadly outperforming your other product categories, you know, despite low double digit growth broadly, outperformance of automation on top of that. So just trying to get at, you know, how much of this high team's automation growth is cyclical versus more kind of automation adoption driving secular growth?

Yeah, Neil, you know, cyclical is an interesting word. Important to realize that we had an unprecedented two-year period where the automotive manufacturers were walking back their commitment to transition from ICE to EVs and then trying to figure out whether they were going to go headlong into the hybrid platform, whether they're going to return to ICE, et cetera. And that caused what we described as an air pocket of decision-making among those end users. They knew they were going to do something. They didn't know exactly what they were going to do. And as a result, that really created a period where the end users were unable to make a decision regarding automation CapEx. We're now getting through that, and we're seeing the resumption to more normal level of activity. So on a year-over-year basis, it does look like a significant step up. I would say it's more a return to normalcy in the automotive market. In terms of using technology to broaden the applicability of automation, I think we're still in the very early innings of that. It started first with the launch of Cobots and the Cooper software that made a Cobot easier to program. We got a lot of feedback from customers. that an operator still had to have a fair amount of welding knowledge to be able to set the feeds and speeds on the welding procedure in order to make the cobot useful to them. So we were hard at work at trying to address that with a physical AI solution, and we're very confident that that platform is going to significantly broaden the market going forward.

But again, that's a product that was just launched last week, so I don't think we're seeing the benefit of that yet in our order book and you know just to add to that when you think about the mix of our business you've you've heard us emphasize the intentionality of driving more activity and small mid-sized fabricators in general industries in general in general and structural and heavy fab so you're seeing a progressive mix in those end markets in a smaller percentage of their overall mix in automotive although automotive is an important part of our mix of business so all the investments we're making and the technologies will progress our positioning in general industries thank you

that's helpful and one follow-up on margin you're you're expecting improvement from low to mid 20 incremental margin for the company and 4q i know there's a lot of moving parts around cost inflation which continues, but based on where we are today, is kind of mid-20s the right way to think about incrementals going into next year, or are there enough sort of price-cost tailwinds or normalization to maybe think about approaching your high-20 incremental target for the long term?

Yeah, so Neil, I would start with that mid-20s as we exit Q4, but our line of sight is to drive to that high 20s incremental margin so very much focused on expanding our margins as you know as part of our 23 objectives 300 basis points that implies about 60 basis points per year of improvement so that's really our focus so you'll continue to see a level of execution that's anchored around that 60 basis points improvement on an annual basis.

Neil I would say is pleased as we are with the performance of the business particularly with organic growth resuming we recognize that the incremental margins are a little shy of where we would like them to be and the persistent inflation we've seen in the business has been a constant game of whack-a-mole in terms of being hit with surprise cost increases from our suppliers who are seeing themselves increase demand from data centers so we're competing for the same parts as people building data centers in many cases. And so we've been aggressive in taking price actions to cover that. We've just been constantly, you know, one step behind, which is not a position we'd like to be in. So we believe that we've taken enough price to cover what we already know in the business. We'll be diligent about continuing to manage price going forward. And we're very focused on driving productivity in the operations, whether that's manufacturing or the back office operations of the company to help us hit that incremental margin target. Great. Thank you.

Your next question comes from the line of Meg Dobre with Baird. Your line is now open. Please go ahead.

Sorry, I want to go back to automation as well. That's what the focus of the day is. But I'm just looking to make sure that I understand kind of what you're communicating here. It sounds like eventually you're pretty much at the beginning of the year acceleration and automation in the back half that is happening um what i'm hearing is incremental is your comment on auto and especially on 28 and 29 so i guess my question is do you have enough near-term sort of visibility to to suggest that automation can continue on this growth trend in 2027 um or is this more 2028-29 business debt that you're booking. So our expectations really ought to be more about those out years.

Yeah, so Meg, we're talking about the next 12 months. I'm talking about high single digit type growth. We've seen enough in incoming orders and another record level backlog that gives us confidence of strong momentum going to 2027. The long lead time items will also have an impact depending on how the orders progress for fulfilling 2028 and 2029 buildouts still. So we have the confidence based on what we've seen in orders and our backlog levels that carry the momentum into 2027.

Yeah, Meg, it's important to remember that for some of the very long cycle projects, we're on percent completion accounting. So as we do the work in 2027 to get ready for a project that might be supporting a 29 launch, we're recognizing some of the revenue in 27 we also have more confidence in the general industry general fabrication part of the business uh that is a little shorter cycle right so more standard weld cells and cobots that we would ship in several weeks not several quarters and given the demand trends we're seeing in the in the business right now we have more confidence in that part of the business for 2027. that's great my follow-up um i want to talk a little bit about Harris products group.

And here, obviously, pricing has been very strong, but silver prices have pulled back. So when should we expect negative pricing, if at all, presumably we will have some, based on current commodity prices? And is there a rule of thumb to how how DAF flows to EBIT in terms of the contribution to either incremental dollars or margin or EBIT dollars, however you wanna frame it for us.

Yeah, so Meg, I think it's important to note that our discussions are all based on what we currently see in the market. So let's say you're tracking in the high fifties, low sixties per troy ounce on silver prices. If you just use that kind of assumption in Q4, we're talking about low double digit type price increases versus the mid 20s that we saw in q3 that's the framework that gives us confidence at that 18 percent ebit profile and that's kind of what we see at this point in the model we'll have some positive impacts on volumes we're starting to see that but right now we see our business model here at that 18 percent type profile and then And we'll start anniversary-ing against some of the big run-up in silver earlier this year as we turn into 2027.

The way that we manage pricing in that part of the business is to try to maintain a fairly constant gross margin percentage on those sales. Obviously, if silver prices double, you have twice as many dollars running through the P&L, so you get some nice SG&A leverage. And on an EPS basis, you get a little bit of a tailwind from that. So as we look forward in the Harris business, we're aware that there's a looming comp issue on silver pricing going into next year, but we're also seeing a strong pickup in demand for people who are providing cooling systems and data centers, and that's going to help that part of the business as we go forward. So some various puts and takes as we think about the Harris business in 27.

All right. I appreciate that.

Your next question comes from the line of Chris Dankert with DA Davidson. Your line is now open. Please go ahead.

Hey, good morning. This is Peter on for Chris today. Coming off Fabtech last week, what customers reacted to new product launches, including ExpertLink and everything? And secondly, in regard to physical AI, are these new products a result of customer-specific requests or the company trying to source new opportunities?

Yeah, great question, Peter. I would say the reaction to customers across the board to the products that we highlighted at Fabtech was extremely positive and very encouraging. And I'd like to give kudos to the team that was working the booth there. I thought they did a tremendous job sharing their passion for our products and helping customers resolve their issues around productivity and quality and the like. And all of the products we're launching are directly aimed against customer pain points, including ExpertLink, which was not necessarily customer-driven in the sense of people asking specifically for it. That more reflects our decades of experience in the welding industry and our knowledge of what tends to go wrong when people try to automate their cutting and welding processes. So you could say that at some level it reflected our understanding of customer needs, but it was primarily internally driven.

That's helpful. And I guess for my follow-up, in terms of the raised CapEx outlook for the year, could you provide some additional color on that?

Yeah, so you've seen a trend, Peter, over the years of our continued investment in our operations, and I point to the ROIC performance. So we will invest in capacity and any capabilities, including automation within our own facilities and new products, to be able to drive organic growth. So we're very much focused on an increasing level of investment in our operations.

Yeah, Peter, I would say that historically the rate limiting factor on organic internal CapEx, which is the highest returning investments we make in the business, the rate limiting factor hasn't been our willingness to invest, it's our capacity to execute the projects. And we've been working very diligently to improve our capability and capacity to execute these projects on time, on budget, and to do more of them faster. So that's why you're seeing a pickup in the CapEx investment. Great. Thank you.

I'll pass it on.

Your next question comes from the line of Nathan Jones with Stiefel. Your line is now open. Please go ahead.

Good morning, everyone. I'm going to go back to a couple of questions on automation. I think, Steve, you talked about the automotive side of this getting back to a more normal level. I think the planned model launches in 29 and 30 are anything but a normal level. They're significantly above a normal level. Now there's questions about whether or not they can get them all launched. Can you talk about the opportunities that creates a little bit further out for the automation side of the business, just given the magnitude of those product launches? And would that be a 28 event primarily? I know you said some long late-time stuff in 27, but that would primarily be running through revenue in 28 from that kind of thing.

And, Nate, I would say if you think about automotive in particular, right, there's two drivers of CapEx related to automation. One is model changeovers, which historically have happened pretty much like clockwork, right? And we talked a little bit earlier on the call about the air pocket and the recovery from that. The second is production rates, right? as production rates increase we see investments and capacity to help those customers keep up with demand and right now automate automotive build rates are still fairly low right so we're benefiting from the pickup now in model changeover investments but we're not really seeing the big capacity driven investments so i i think you know it's fair to say that we're we're encouraged by where uh the automotive portion of automation is headed um it's still early innings and we're hopeful that we're going to continue to grow that business both in automotive and in the other end markets that we serve okay the second one i wanted to ask was more around the you know that ai

powered cobot um outlook and how that could change the growth profile i think over the years a lot of the automation increase in the addressable market has been you know improvements in the software that enabled more automation or material handling that enabled more parts of the market to be automated. Can you talk about how you think this AI-powered cobot, something that can be a bit more flexible and weld, something that's maybe a little less predictable, plays out over the next few years in terms of increasing the TAM that is addressable by automated welding that maybe isn't today, if that makes sense.

Yeah, fair question, Nate. Look, I'm really excited about it because over the years, as I've talked to customers, their biggest frustration is my parts aren't perfect, and I know my parts aren't perfect. And if I had a human doing the welding operation, they would see, you know, for example, the gap getting wider. They would slow down. They would weave. They would increase the wire feed speed. They know what to do to adapt to those parts. the problem with a robot or a cobot historically is you've given it one path and one set of parameters, and it just repeats those irrespective of what the actual reality of the parts in front of it is. So that's been a huge pain point for customers. Historically, your only real option was to invest in fixturing or tooling to force the parts back into tolerance, which automotive can afford to do given the production volumes. But if you're a high mix, low volume manufacturer, It's just been uneconomical and infeasible for them to automate certain parts of their operation. The feedback that we were getting at the show was this is an absolute game changer. It basically allows a robot to operate like a human would and adapt on the fly with no additional programming, no additional training. And so people are really excited about it. How much it will increase the TAM? Great question. And as we go through the course of 2027, we'll probably have a better perspective on that when we see what customers are – how they're actually deploying ExpertLink and what applications they're using it for.

I look forward to hearing about that next year. Thanks for taking the questions.

As a reminder, if you would like to ask a question, please press star 1 to be added to the queue. Your next question comes from the line of Steve Barger with KeyBank Capital Markets. Your line is now open. Please go ahead.

Steve, I just want to follow up on that last comment. With end markets broadening out and automation looking like it's picking up, is the sales team focused now on adding customers who haven't automated because they've been scared of the programming or just the difficulty of getting it to work? Or are you more focused on increasing the number of automated applications with customers who already get it because they've already bought systems?

Yeah, great question, Steve. I'd say both, right? So if we look at some of the businesses we have within the automation portfolio, for example, Zeman that does structural steel welding, we're going to deploy ExpertLink into their systems to make them even more effective than they are already, right? So to create competitive differentiation with other solutions that are targeting existing automation customers. And then more importantly is to look at all those customers that have attended a demo of a cobot and decided that's neat, but I just can't use that in my operations, right? I have too much part variability. I have too much, too many changeovers. This isn't going to work for me. And we've had a lot of customers get excited about what they believed the potential of a cobalt was and then disappointed with the reality of what it actually took to make one work. And so that's what we're trying to address with this technology platform is to really deliver on what the initial promise and premise of cobalt welding was, right? Very easy to use, doesn't take a skilled or trained operator, and significantly addresses real-world problems that our customers face.

Got it. Does ExpertLink have a subscription element to it, or is it a one-time sale?

It has a subscription element to it. The way that we're pricing it is the first-year subscription is included as part of the original purchase, And then there is an ongoing subscription fee that is about $3,000 a year per use or per cobot or robot arm.

Per device. And then, Gabe, one quick follow-up. I just want to make sure I understand. You get to neutral price costs in 4Q.

How much temporary gross margin pressures remain? uh and i guess what is the clean underlying incremental margin starting point for 2027 are you back to mid to high 20s yes i would say we would we would start off at mid 20s uh we do expect i don't know if you picked up on my comments uh steve that gross profit margin will exceed the prior year fourth quarter so we do believe that we took the pricing actions necessary to get to neutral. And as we progress into Q4 and into 2027, that we've achieved that mid-20s type incrementals.

Okay, got it.

Thank you.

You're welcome.

The last question comes from the line of Walt Liptak with Seaport Research. Your line is now open. Please go ahead.

Okay, thanks and good quarter, guys. I wondered, you guys called out equipment being up. uh really solid double digits and um you know coincidentally one of your competitors had a tornado and uh the market seems to have gotten impacted do you did you see a pickup related to that and is and help us understand if that's if that's what happened uh if there was if it's like a one-timey thing or if there was a market share gain uh related to that well you know it's very difficult to assess that.

What we do know is that we've seen consistent demand on standard equipment to track at the high teams level. So I won't comment on the competitive positioning, but we've got a robust level of activity and we see the same momentum going into Q4.

Okay.

All right. Great. And then just the last one, you know, you guys called out data center number of times and the impact on the welding markets. I wonder, have you been able to quantify it either at Harris or at, you know, kind of the welding business overall?

Yeah, so Walt, at Harris, we estimate between mid to high single digits of our Harris segment to be exposed to data center activity. And just to remind you, last year there was a the stocking progression in the fourth quarter 2025 so we've got easier comps but we're seeing a very good activity and we expect good momentum on the Harris side to progress into the fourth quarter on an overall basis we do have pockets of projects on the automation side supporting data center activity but a lot of the work we do is indirect into the markets and so we estimate about less than 5% of our overall business that's tied into data center activity.

Okay, great. Thank you.

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

Thank you, Melissa. I would like to thank everyone for joining us on the call today and for your continued interest in Lincoln Electric. Our focus remains on converting demand into profitable growth, improving our price-cost performance, and investing in differentiated solutions through our RISE strategy. We look forward to updating you on our progress. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.