Lincoln Electric Holdings Inc 2026 Q3 Earnings Call

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 are 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 SEC filings on forms 10-K and 10-Q. In addition, we do discuss financial measures that do not conform to US 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. With that, I will turn the call over to Steve Hedlund.

Steve? Thank you, Amanda. Good morning, everyone.

Turning to slide 3, 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 2 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 remain focused on serving our customers, advancing our RISE strategy, and positioning the company for long-term success. Turning to slide 4 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 and Asia Pacific, and in select product areas in the Harris Products 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 Americas Welding and oil and gas due to strong project activity given the region's optimal positioning in the energy market.

Heavy industries and transportation both grew at a low double-digit percent rate. Heavy industries continued 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 compression. 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 5. 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, Arc Tracker 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 Hot Wire SAW 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 XR welding trainer supports workforce development and training by providing a more realistic simulation of the welding experience. Finally, I am most excited about the launch of XpertLINC, our physical AI solution that will revolutionize welding automation. Featured initially on our Cooper cobot, XpertLINC 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 XpertLINC 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 6. Third quarter sales increased 15% to $1,221,000,000. Sales growth reflected approximately 9% higher volumes and 6% higher price. We anniversaried the acquisition of Alloy Steel in August, which contributed 50 basis points to sales growth. Gross profit increased 9% to $425 million on higher sales. Our gross profit margin compressed 190 basis points to 34.8%, 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, 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 million-$215 million, with corporate expenses likely in the $4 million-$5 million range in the fourth quarter. Reported operating income increased approximately 20% to $211 million, primarily on higher sales leverage. Adjusted operating income increased 19% to $220 million, and our adjusted operating income margin improved 60 basis points to 18%, with a 22% incremental margin. Third quarter diluted earnings per share increased 19% to $2.63. Adjusted earnings per share increased approximately 21% to a record $2.98. We recognized a 4-cent benefit from share repurchases, and there was no impact from foreign exchange translation. Moving to our reportable segments on Slide 7.

Americas Welding sales increased approximately 16% to $801 million, primarily from 13% higher volume and 2.4% higher price. Americas' 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. Americas' adjusted EBIT increased approximately 27% to $167 million. Adjusted EBIT margin expanded 190 basis points to 20.1%. The increase was driven by higher organic sales and improved automation performance, which was partially offset by price cost headwinds.