Operator: 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.
Amanda Butler: Thank you, Melissa, and good morning, everyone. Welcome to Lincoln Electric's Q3 2026 conference call. We released our financial results earlier today, and you can find our release and this call's 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. 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.
Amanda Butler: 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?
Steve Hedlund: Thank you, Amanda. Good morning, everyone. Turning to slide three, we reported record Q3 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.
Steve Hedlund: We implemented price actions during the quarter in all three segments, which will enable us to achieve price cost neutrality in the Q4. 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 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.
Steve Hedlund: Organic growth was largely driven by higher volume demand in the Americas region, in Asia-Pacific, and in select product areas in the Harris Products segment. Sales in the US 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 Q3 have elevated our backlog to new record levels, which positions us well for 2027.
Steve Hedlund: 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 AI 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.
Steve Hedlund: 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, AI data center, and mineral investments, while agricultural demand appears to be stabilizing.
Steve Hedlund: 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 Q4 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 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, 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.
Steve Hedlund: We also launched a hot wire 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 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.
Steve Hedlund: 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 Q3 financials in more detail.
Gabe Bruno: Thank you, Steve. Moving to slide six, Q3 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 Q4. 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.
Gabe Bruno: 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 range in the Q4. 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. Q3 diluted earnings per share increased 19% to $2.63. Adjusted earnings per share increased approximately 21% to a record $2.98. We recognized a $0.04 Benefit from share repurchases, and there was no impact from foreign exchange translation. Moving to our reportable segments on Slide 7.
Gabe Bruno: 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 Q4, reflecting Q3 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.
Gabe Bruno: We expect Americas Welding margin to perform in the 20% to 21% EBIT margin range for the Q4, 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 acquisitions. 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 Q4. Adjusted EBIT decreased 7% to $24 million. Adjusted EBIT margin compressed 100 basis points to 10.3%, primarily due to lower volumes and in automation performance.
Gabe Bruno: Sequential performance versus the Q2 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% range for the Q4. Moving to the Harris Products Group on slide 9. Q3 sales increased 29% to $193 million, primarily from a 3% increase in volumes and approximately 26% higher price. Price primarily reflects higher metal input cost and 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 Q4, further aided by an easier prior year comparison. Adjusted EBIT increased 21% to $34 million on higher sales.
Gabe Bruno: 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 Q4 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.
Gabe Bruno: 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 net 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.
Gabe Bruno: We expect price cost will be neutral in Q4, which will support year-over-year growth margin expansion in the period, as well as a mid-20% incremental adjusted operating income margin. We are increasing our 2026 CapEx range to $140 to $150 million as compared with our initial assumption of $110 to $130 million. We have invested $112 million in the first nine months and are continuing to invest to upgrade operating capacity and capabilities in Q4. 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. I would like to turn the call over for questions.
Operator: Ladies and gentlemen, at this time, we will be conducting a Q&A 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 will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Bryan Blair with Oppenheimer. Your line is now open. Please go ahead.
Bryan Blair: Thank you. Morning, everyone.
Gabe Bruno: Morning, Bryan. How are you?
Bryan Blair: I was hoping you could offer some more color on the momentum and outlook for your automation strategy. 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. Then given your backlog position with current reads, where do you see automation revenue shaking out for 2026? What is the preliminary outlook to the extent you are willing to speak to that for 2027?
Gabe Bruno: Yeah. So Bryan, I just would reiterate the level of growth we have seen, very active quoting activity and broad-based. We pointed to the mix of end market progression, including the automotive market. So we are 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 have seen on longer lead time items would progress into orders as the months progress. So we are 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 am very much positioned to continue to expand the margin profile of our business. We exited the Q3 at a low double-digit type EBIT profile, and we expect more of the same in the Q4.
Steve Hedlund: Yeah, Bryan, 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 are seeing improvement across the legacy base of the business. We are 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 are not entirely consistent lot to lot, due to upstream variation.
Steve Hedlund: Historically, that has made it hard for them to adopt robotic solutions, whether that is an industrial robot or a cobot. We are really excited about the launch of the XpertLINC platform that is going to address that pain point and significantly open the market up for the long term.
Bryan Blair: That is encouraging. Appreciate the color. 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 rebuild efforts and redundancy/security investments may be for your business, at least over the medium term?
Gabe Bruno: Yeah, just in general, Bryan, you saw that while in the International Welding segment, we had a headwind of $5 million. Overall, we were down one. We saw strength in exports coming out of the Americas Welding and Harris segments. We are 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 are 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.
Bryan Blair: Understood. Thanks again.
Operator: Your next question comes from the line of Angel Castillo with Morgan Stanley. Your line is now open. Please go ahead.
Angel Castillo: Hi, good morning and thanks for taking my question. I wanted to touch on the pricing power a little bit and maybe just to unpack the price cost dynamic in a bit more detail. You noted passing through a little bit more price toward the end of the quarter. Just curious, as you are having discussions with customers, OEMs or distributors, can you update us on what you are seeing or hearing in terms of overall elasticity to price? Given the organic volumes, I would suggest that you are not really seeing any deterioration there. Just, but given how much inflation we have been having, would be curious to see your thoughts on your ability to continue to push price.
Steve Hedlund: Yeah, Angel, I would say that our channel partners and our end users are experiencing the same inflationary pressures that we are. 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 that certain parts of the economy are running hot with the AI data center build-out. It's a constant surprise the breadth of commodities and products that are impacted by that. 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.
Gabe Bruno: Yeah. Angel, I would add to that and affirm what we've updated the markets in 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 respond as appropriate.
Angel Castillo: That's very helpful. Maybe just on that note, as we think about kind of 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 supplies. Just any kind of thoughts on what kind of inflation or cost inflation you're kind of anticipating into next year?
Gabe Bruno: Well, Angel, I would say, just not getting to specifics about inflationary type conditions into 2027, but I would say that we're very well postured with what we're seeing in the markets 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 in automation growth in the high single digits. So we're very well postured for that kind of trajectory as we get into 2027.
Angel Castillo: Very helpful. Thank you.
Operator: Your next call comes from the line of Neal Burk with UBS. Your line is now open. Please go ahead.
Neal Burk: Hey, good morning. Thanks for the question. Maybe another way to ask about automation growth trends. Is there any way to bifurcate between more cyclical improvement on one hand, but also more secular growth from increased automation adoption? I ask because the comments about the automotive end markets seem more cyclical. I am not sure if that quoting activity is hitting revenue yet, but automation sales are broadly outperforming your other product categories. Despite low double-digit growth broadly, outperformance of automation on top of that. So just trying to get at how much of this high teens automation growth is cyclical versus more automation adoption driving secular growth.
Steve Hedlund: Yeah, Neal, 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, then trying to figure out whether they were going to go headlong into the hybrid platform, whether they were going to return to ICE, et cetera. 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 did not know exactly what they were going to do. As a result, that really created a period where the end users were unable to make a decision regarding automation CapEx. We are now getting through that, and we are seeing the resumption to more normal level of activity. So on a year-over-year basis, it does look like a significant step up.
Steve Hedlund: 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. 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.
Steve Hedlund: 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.
Gabe Bruno: Neil, just to add to that, when you think about the mix of our business, you've heard us emphasize the intentionality of driving more activity in small, mid-size fabricators and general industries 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. All the investments we're making in the technologies will progress our positioning in general industries.
Neal Burk: Thank you. That's helpful. One follow-up on margin. You're expecting improvement from low to mid 20% incremental margins for the company in Q4. 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?
Gabe Bruno: Yeah, Neal, 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. Very much focused on expanding our margins. As you know, as part of our 2030 objectives, 300 basis points. That implies about 60 basis points per year of improvement. That is really our focus. You will continue to see a level of execution that is anchored around that 60 basis points improvement on an annual basis.
Steve Hedlund: Yeah, Neal, I would say as 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. The persistent inflation we have seen in the business has been a constant game of Whac-A-Mole in terms of being hit with surprise cost increases from our suppliers, who are seeing themselves increase demand from AI data centers. We are competing for the same parts as people building AI data centers in many cases. We have been aggressive in taking price actions to cover that. We have just been constantly one step behind, which is not a position we would like to be in. We believe that we have taken enough price to cover what we already know in the business.
Steve Hedlund: We will be diligent about continuing to manage price going forward, and we are very focused on driving productivity in the operations, whether that is manufacturing or the back office operations of the company, to help us hit that incremental margin target.
Neal Burk: Great. Thank you.
Operator: Your next question comes from the line of Mig Dobre with Baird. Your line is now open. Please go ahead.
Mig Dobre: Good morning, everyone. Sorry, I want to go back to automation as well, guess that is what the focus of the day is. But I am just looking to make sure that I understand what you are communicating here. It sounds like essentially you pretty much said at the beginning of the year, acceleration in automation in the H2, that is happening. What I am hearing as incremental is your comment on auto and especially on 2028 and 2029. So I guess my question is, do you have enough near-term visibility to shipments to suggest that automation can continue on this growth trend in 2027? Or is this more 2028, 2029 business that you are booking, so our expectations really ought to be more about those out years?
Gabe Bruno: Yeah, so Mig, we are talking about the next 12 months. I am talking about high single digit type growth. We have seen enough in incoming orders and another record level of 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 build-outs still. But we have the confidence based on what we have seen in orders and our backlog levels that carry the momentum into 2027.
Steve Hedlund: Yeah. Mig, it is important to remember that, for some of the very long cycle projects, we are on percentage-of-completion accounting. So as we do the work in 2027 to get ready for a project that might be supporting a 2029 launch, we are recognizing some of the revenue in 2027. We also have more confidence in the general industry, general fabrication part of the business, 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 are seeing in the business right now, we have more confidence in that part of the business for 2027.
Mig Dobre: That is great. My follow-up, I want to talk a little bit about Harris Products Group. Here, obviously pricing has been very strong, but silver prices have pulled back. When should we expect negative pricing, if at all? Presumably we will have some, based on current commodity prices. Is there a rule of thumb about how that flows to EBIT in terms of the contribution to either incremental dollars or margin or EBIT dollars, however you want to frame it for us? Thank you.
Gabe Bruno: Yeah. Mig, I think it is important to note that our discussions are all based on what we currently see in the market. Let us say you are tracking the high 50s, low 60s, per troy ounce on silver prices. If you just use that kind of assumption in Q4, we are talking about low double-digit type price increases versus the mid-20s that we saw in Q3. That is the framework that gives us confidence at that 18% EBIT profile. That is kind of what we see at this point in the model, and we will have some positive impacts on volumes. We are starting to see that. But right now we see our business model at Harris at that 18% type profile.
Steve Hedlund: Mig, we will start anniversarying 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. On an EPS basis, you get a little bit of a tailwind from that. As we look forward, in the Harris business, we are aware that there is a looming comp issue on silver pricing, going into next year. But we are also seeing a strong pickup in demand for people who are providing cooling systems, data centers, and that is going to help that part of the business as we go forward.
Steve Hedlund: So, some various puts and takes as we think about the Harris business in 2027.
Mig Dobre: All right. I appreciate that.
Operator: Your next question comes from the line of Chris Dankert with D.A. Davidson. Your line is now open. Please go ahead.
[Analyst] (D.A. Davidson): Hey, good morning. This is Peter on for Chris today. Coming off FABTECH last week, have customers reacted to new product launches, including XpertLINC? I think secondly, in regard to physical AI, are these new products a result of customer-specific requests or the company trying to source new opportunities?
Steve Hedlund: 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. I would 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. All of the products we are launching are directly aimed against customer pain points, including XpertLINC, 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.
Steve Hedlund: So you could say that at some level it reflected our understanding of customer needs, but it was primarily internally driven.
[Analyst] (D.A. Davidson): That's helpful. I guess for my follow-up, in terms of the raised CapEx outlook for the year, could you provide some additional color on that?
Gabe Bruno: 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. We're very much focused on an increasing level of investment in our operations.
Steve Hedlund: 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. 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.
[Analyst] (D.A. Davidson): Great. Thank you. I will pass it on.
Operator: Your next question comes from the line of Nathan Jones with Stifel. Your line is now open. Please go ahead.
Nathan Jones: Good morning, everyone. I am going to go back.
Steve Hedlund: Good morning, Nate.
Nathan Jones: to a couple 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 2029 and 2030 are anything but a normal level. They are significantly above a normal level. Now there are 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? Would that be a 2028 event primarily? I know you said some long lead time stuff in 2027, but that would primarily be running through revenue in 2028 from that kind of thing.
Steve Hedlund: Nate, I would say, if you think about automotive in particular, there are two drivers of CapEx related to automation. One is model changeovers, which historically have happened pretty much like clockwork. We talked a little bit earlier in the call about the air pocket and the recovery from that. The second is production rates. As production rates increase, we see investments in capacity to help those customers keep up with demand. Right now, automotive build rates are still fairly low. So we are benefiting from the pickup now in model changeover investments, but we are not really seeing the big capacity-driven investments. So I think it is fair to say that we are encouraged by where the automotive portion of automation is headed.
Steve Hedlund: It is still early innings, and we are hopeful that we are going to continue to grow that business, both in automotive and in the other end markets that we serve.
Nathan Jones: Okay. The second one I wanted to ask was more around the AI-powered cobot 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 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 is 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 is not today, if that makes sense?
Steve Hedlund: Yeah. A fair question, Nate. Look, I am really excited about it because, over the years, as I have talked to customers, their biggest frustration is, "My parts aren't perfect, and I know my parts aren't perfect." If I had a human doing the welding operation, they would see, for example, the gap getting wider. They would slow down. They would weave. They would increase the wire feed speed. They would know what to do to adapt to those parts. The problem with a robot or a cobot historically is you have 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 has been a huge pain point for customers.
Steve Hedlund: 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. People are really excited about it. How much it will increase the TAM? Great question. As we go through the course of 2027, we'll probably have a better perspective on that when we see what customers or how they're actually deploying XpertLINC and what applications they're using it for.
Nathan Jones: Look forward to hearing about that next year. Thanks for taking the questions.
Operator: As a reminder, if you would like to ask a question, please press star one to be added to the queue. Your next question comes from the line of Steve Barger with KeyBanc Capital Markets. Your line is now open. Please go ahead.
Steve Barger: Thanks. Good morning. 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?
Steve Hedlund: Yeah. Great question, Steve. I would say both. If we look at some of the businesses we have within the automation portfolio, for example, Zeman, that does structural steel welding, we are going to deploy XpertLINC into their systems to make them even more effective than they are already. So to create competitive differentiation with other solutions that are targeting existing automation customers. More importantly is to look at all those customers that have attended a demo of a cobot and decided, "That is neat, but I just cannot use that in my operations. I have too much part variability. I have too many changeovers. This is not going to work for me." We have had a lot of customers get excited about what they believed the potential of a cobot was and then disappointed with the reality of what it actually took to make one work.
Steve Hedlund: That is what we are trying to address with this technology platform, is to really deliver on what the initial promise and premise of a cobotic welding was, right? Very easy to use, does not take a skilled or trained operator, and significantly addresses real-world problems that our customers face.
Steve Barger: Got it. Does XpertLINC have a subscription element to it, or is it a one-time sale?
Steve Hedlund: It has a subscription element to it. The way that we are 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.
Steve Barger: Per device. Yeah. Okay.
Steve Hedlund: Yeah.
Steve Barger: Gabe, one quick follow-up. I just want to make sure I understand. You get to neutral price cost in Q4. How much temporary gross margin pressures remain? I guess, what is the clean underlying incremental margin starting point for 2027? Are you back to mid to high 20s?
Gabe Bruno: Yes, I would say we would start off at mid 20s. We do expect, I do not know if you picked up on my comments, 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, then as we progress into Q4 and into 2027, that we have achieved that mid-20s type incrementals.
Steve Barger: Okay. Got it. Thank you.
Gabe Bruno: You are welcome.
Operator: The last question comes from the line of Walt Liptak with Seaport Research. Your line is now open. Please go ahead.
Walt Liptak: Okay. Thanks, and good quarter, guys. I wondered, you guys called out equipment being up really solid double digits, and coincidentally, one of your competitors had a tornado, and the market seems to have gotten impacted. Did you see a pickup related to that? And help us understand if that is what happened, if it is like a one-time thing, or if there was a market share gain related to that.
Gabe Bruno: Well, Walt, it is very difficult to assess that. What we do know is that we have seen consistent demand on standard equipment to track at the high teens level. I will not comment on the competitive positioning, but we have got a robust level of activity, and we see the same momentum going into Q4.
Walt Liptak: Okay. All right. Great. Just a last one. You guys called out data center a number of times and the impact on the welding markets. I wonder, have you been able to quantify it, either at Harris or at the welding business overall?
Gabe Bruno: Walt, at Harris, we estimate between mid to high single digits of our Harris segment to be exposed to data center activity. Just to remind you, last year, there was a destocking progression in Q4 2025, so we have easier comps. But we are seeing very good activity, and we expect good momentum on the Harris side to progress into Q4. 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 is tied into data center activity.
Walt Liptak: Okay, great. Thank you.
Operator: This concludes our question and answer session. I would now like to turn the call back to Gabe Bruno for closing remarks.
Gabe Bruno: 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.
Operator: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
