Lincoln Electric Holdings, Inc. (LECO) Q3 2025 Earnings Report, Transcript and Summary

Greetings, and welcome to the Lincoln Electric 2025 Third Quarter Financial Results Conference Call. [Operator Instructions] 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 lincolnelectric.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 discussed financial measures that do not conform to U.S. GAAP. And a 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 3. 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 Americas Welding and Harris Products 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 4 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% higher sequentially, but still below last year's sales level. Looking at end market organic sales trend, we continue to see 3 of our 5 end markets, representing approximately 60% 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 remained challenged due to slow capital spending, we are pleased to see consumable volume growth outpaced domestic production rates in Americas. We are encouraged by the industry's latest October model launch survey that points to a reacceleration 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 5-year Higher Standard 2025 strategy. Our global team has done an outstanding job over 5 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 will pass the call to Gabe Bruno to cover third quarter financials in more detail.

Thank you, Steve. Moving to Slide 5. Our third quarter sales increased 7.9% to $1.061 billion 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 6. We Americas Welding sales increased approximately 9% driven by 9.6% higher price and a 1.4% contribution from our Vanair acquisition, which anniversaried August 1. 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. Americas Welding segment's third quarter adjusted EBIT increased 5% to $132 million. The adjusted EBIT margin declined 60 basis points to 18.2%, primarily due to the challenging prior year 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 Americas 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 year comparisons and growth pockets in Asia Pacific, including high single-digit percent growth in China. The segment continued to navigate challenged 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 flow 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 are executing well on our capital allocation strategy. In the quarter, we invested $136 million in growth, reflecting CapEx investments and 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.

[Operator Instructions] Your first question comes from the line of Angel Castillo from Morgan Stanley.

This is Oliver Jiang on for Angel this morning. I guess maybe just to start, how -- curious as to how you're seeing kind of demand trends unfold kind of the first month into the quarter. Specifically around kind of construction and infra, it sounds like that's actually gotten better, just going off the slide. So, any, just curious if you can share some color there.

Yes. I guess, just in general, Oliver, as we mentioned, we saw continued strength as we wrapped up the third quarter and into this fourth quarter. 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 Americas segment as well. We're seeing some progressive trends as we wrapped up the third quarter and into the fourth quarter. The last thing I'd mention in 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 10% to 15% of our business exposed. So while it's traditional seasonality within our Harris 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 2 cities. We saw a lot of strength in the Americas Welding segment, more challenge in the international overall 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 encouraging to see kind of that order rate tick up. And that could potentially, if it trends throughout the rest of the quarter, it sounds like revenues will be higher sequentially. Curious as to like how that translates to margin just from an incremental perspective? I know there's some higher fixed costs there, but yes, just curious if you can share some color as well.

Yes. So the automation business does have a 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 preengineered systems. So we might see a little bit of an uptick sequentially from third quarter to fourth quarter in automation, but I think 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 Americas segment, as you know, 80% of our Automation business is within the Americas 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.

Your next question is coming from the line of Bryan Blair from Oppenheimer.

It would be great to hear a little more on how your team is 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 the growth in consumables, that's certainly notable 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.

Yes, Bryan, thanks for that. No, we're well positioned, as you know, as markets begin to expand. The question is when. When we think about consumables 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 could look like. On the automation equipment side, I mean, 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 a 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.

Yes, Bryan, 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 up cycle.

Understood. That's very helpful color. The broad acceleration in automation orders that that's certainly encouraging. And it's been multiple quarters of, I guess, wait-and-see posture from customers on that front. I'm just curious if you're hearing any consistent rationale for moving forward with what the orders now for the conversion of high levels of quoting activity to now solid order flow and mentioning that it's broad acceleration, not just auto. We know that, that's been pending and platform changeovers, et cetera. There will eventually be investment there. Just curious, auto and other sectors is, again, there's any consistency to customer rationale for now moving forward after multiple quarters of being kind of on pause.

No, I would add, Bryan, 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 capabilities we offer do differentiate ourselves. And so we -- our quoting activity is broad and very high still and seeing the progression of more commitment to capital is a good sign.

And Bryan, I'd also add that you saw CAT's 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 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.

Your next question is coming from the line of Saree Boroditsky from Jefferies.

Pricing has obviously been very strong in Americas. 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.

Yes. I'd say, Saree, our initial concern, right, was that price and 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 reduction in 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. How you would expect to see a slower recovery? Would it be kind of a recovery? Or would you see some strong growth coming out of this downturn?

Well, it's always difficult, Saree, 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.

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

Your next question is coming from the line of Nathan Jones of Stifel.

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 of 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 investments you made in throughput and being more efficient. Maybe does that change the we should expect lower incremental margins in the short term and maybe higher than historic incremental margins as volume improved from those investments? Just any color or commentary you can give us about how we should think about incremental margins?

Yes. I would look to, when -- I think about our current environment, where we have high teens incremental margins and the trajectory of what we're talking about with modest volume 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 30, 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 to date. So we'll see if high teens type of incrementals in this kind of environment.

I guess my follow-up question will be on Europe. 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 on your view of any inflection in European volume growth.

Yes. Sure, Nathan. 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 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. We're planning for it.

Your next question is coming from the line of Mig Dobre from Baird.

First question, I guess 2 parts to it. So can we put a finer point maybe on the volumes that you expect in the fourth quarter in Americas? The short-cycle business is improving, but apparently, automation is going to be down again year-over-year, even though maybe better sequentially. So net-net, what should we be thinking in terms of volume -- and I guess the second part of the question is in 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, what might be different this time around?

Yes. So Mig, 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% 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 Americas side, we do expect sequential, as you note, automation growth, but still probably low double digits behind the prior year as 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 will be up 100, 200 basis points fourth quarter versus third quarter, all in with all the puts and takes. And we do expect an improvement in the operating margin profile. I expect, as I mentioned, Americas to be in the higher end of that 18% to 19% 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 LIFO charge's 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 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 Americas segment in particular, as how people should be thinking about incrementals.

Yes. So I would follow a more traditional 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 cost related to that. So we do expect, as I mentioned in my comments, to LIFO charges in the fourth quarter to follow the same trending we've had in the last couple of quarters, last year would be a credit. But I can't really speak to 2026, until we start seeing the inflationary trends and then what 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.

Your final question is coming from the line of Steve Barger from KeyBanc Capital Markets.

This is actually Christian Zyla on 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 1 of your earlier questions, how are you thinking about the fourth quarter now? Is it -- is stable from 2Q still a fair level? Or should we be thinking about 4Q in parts of '26 closer to 3Q level?

Yes. In terms of 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. We had talked about a pacing after the second quarter that was more in line with $215 million per quarter. We were below that in the third quarter, just the timing of how we recognized the 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 ahead of where the pacing that we had talked about in the second quarter, but still implies a mid-single-digit decline for the full year. So -- and then that's sort of 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 than what we had communicated at the -- after the second quarter call.

Got it. That's great color. And then last question, just on your Harris business, your ability to get pricing has been incredible. The last 6 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 catch-up pricing? Do you think this dynamic continues into the next quarter and next year, presumably?

Yes. So in general, Chris, remember, Harris has 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.

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 disconnect.