Lincoln Electric Holdings, Inc.

in the Investor Relations section. Joining me on the call today is Steve Hedlund, President and Chief Executive Officer, and 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 filing on Forms 10-K and 10-Q. In addition, we discussed 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. Steve?

Thank you, Amanda. Good morning, everyone. Turning to slide three, we generated solid third quarter results with strong profit performance, cash generation, and a 134% cash conversion rate despite a broad deceleration in demand due to challenging end market dynamics and our mixed profile. All results highlight the resilience of our business model through the cycle, through the strong execution of our strategic initiatives, disciplined cost management, adjustments made to employee-related costs, which now align incentive compensation with business conditions, and the initial benefits of our temporary cost-saving measures. As a result, we achieved a slight increase in our gross profit margin and a 17.3% adjusted operating income margin, which is modestly lower versus prior year and relatively steady sequentially. The incentive compensation adjustment had a 70 basis point favorable impact to our adjusted operating income margin. While not an easy quarter, I am extremely pleased with our performance as we are holding margins above our higher standard average target of 16% despite top line challenges. We are also maintaining our balanced capital allocation strategy despite the weaker cycle, investing in both internal growth projects and acquisitions, and continue to return $91 million in cash to shareholders in the quarter through our dividend and share repurchases. ROIC at 21.4% remains strong and continues to reinforce our disciplined capital stewardship. Turning to slide four, the 8% decline in organic sales in the third quarter reflects broad weakness among a large mix of our customer base impacting all product areas. We continue to see a more cautious posture from our general industry customers given macroeconomic uncertainty, which is delaying discretionary equipment purchases. Our heavy industry customers continue to curtail their production levels to right-size inventories in their dealer channels, which continues to impact consumables demand. And automotive sector customers continue to delay capital projects despite high quoting activity, as they rebalance their product plans across ICE, EV, and hybrid powertrains. We are seeing very different sales trends by channel mix, which has impacted our sales performance relative to the market as a whole. Our OEM sales declined at double the rate of our distribution channel sales. Most notable is in America's welding, where our distribution channel organic sales performance was steady year over year, demonstrating the strength of our brand, products and programs and the region's relative resilience. Given slowing OEM customer orders and industrial weakness in key regions like Europe, we remain cautious through the first quarter of 2025 as we expect these trends to persist in the short term. And given the long cycle nature of automation, current shifts in the automotive sector's plans could impact automation portfolio sales through the first half of 2025. As we progress through the fourth quarter, we will be monitoring industrial production rates, PMI sentiment, and sector-specific announcements to better gauge when the market will pivot back to growth and when automation orders will accelerate. In the interim, I am pleased by the margin performance our teams are delivering through the strong execution of our Lincoln business system and strategic initiatives. And we are aggressively deploying our cost savings playbook which has a track record of mitigating the impact of lower volume and reshaping the business for superior profit performance once end markets recover. Turning to slide five, during the third quarter, we initiated both temporary and permanent cost savings actions. We're expected to generate $40 to $50 million in combined annualized savings with approximately three quarters in the America's welding segment and the balance primarily in international welding. The savings will be approximately half temporary and half permanent and run at $10 to $14 million per quarter, starting to ramp at the low end of the range in the fourth quarter. We recognized approximately a $2 million benefit in the third quarter. We have aggressively implemented temporary cost savings through a significant reduction in discretionary spending, by aligning productive hours with demand, and by maintaining net attrition through slower replacement hiring of voluntary turnover. We will maintain this posture until conditions improve. We expect substantially all of the temporary cost savings benefits will be in America's welding. In addition, we are implementing structural changes to align the business to market conditions, strengthen our ability to serve customers, and improve our cost structure to outperform in the next growth cycle. We launched our structural cost savings initiatives in the third quarter and incurred $20 million in rationalization charges and expect an additional $6 million of non-cash charges in the fourth quarter. These initiatives include stream landing or organization to better align with business conditions and the consolidation of several manufacturing and warehouse facilities across North America and international locations. Both our temporary and permanent cost savings do not include changes to incentive compensation expenses. Despite short-term cyclical headwinds, we remain focused on innovation and long-term profitable growth, which is also a hallmark of our playbook. Turning to slide six, I'm pleased to report that we launched over 35 new products at a recent industry trade show. This represents our largest launch of new products in the last five years, and I'm confident that our R&D investments and acquisitions will continue to differentiate our brand, extend our leadership position, and generate superior returns. Our portfolio of new solutions focused on driving higher productivity in customer operations, as well as strategically expanding our presence in under-penetrated areas like TIG, laser, plasma, and thermal heating, including the launch of our FlexLase handheld laser. We also showcased how we are integrating technologies from recent acquisitions including Zeman, Forey, Red Viking, VanAire, and Enrotech to deliver unique solutions to the market. This included a fully automated production line featuring four different automated functions highlighting the breadth of our in-house capabilities as an automation system integrator. Lastly, we emphasized sustainability and how improved safety, ergonomics, recyclability, as well as energy efficiency and lower emissions are integral to our product designs. Before I pass the call to Gabe to cover third quarter results and discuss our outlook for the balance of the year, I would like to reiterate the confidence we have in our business, our strategic initiatives, and our long-term growth prospects. The strong execution of our strategic initiatives have positioned the company to outperform in the upcycle and exceed profit performance goals. And now I will pass the call to Gabe Bruno.

Thank you, Steve. Moving to slide seven, our third quarter sales declined 5%. to $984 million, primarily from 8.7% lower volumes. Pricing was 1% higher and acquisitions contributed 3% to sales. Gross profit dollars decreased approximately 4% to $352 million, with a 35.8% gross profit margin, which increased 40 basis points versus the prior year. Margin improved on effective cost management and operational efficiencies, which offset the unfavorable impact of softer volumes. We also recognized a $1.2 million LIFO benefit in the quarter. Our SG&A expense held relatively steady at $186 million as higher SG&A from acquisitions was largely offset by lower employee related costs. Employee related costs include a reduction in variable labor costs and related profit sharing programs and an approximate $7 million adjustment to other performance-based incentive programs, which are largely recorded in corporate. SG&A as a percent of sales increased 80 basis points versus prior year to 18.9% on lower sales. Looking ahead to the fourth quarter, we do not expect another significant adjustment to our performance-based incentive programs and would expect corporate expense to be closer to $3 million. Reported operating income declined 15%, or $26 million, to $146 million. The decline was substantially due to $24 million in special item charges, primarily from a $20 million rationalization charge, which Steve previously discussed, and a $3 million charge for the step-up in the value of acquired inventories. Excluding special items, adjusted operating income declined approximately 7%, or $14 million to $170 million, and our adjusted operating income margin declined to a modest 40 basis points to 17.3%. The margin includes a 70 basis point benefit from the incentive compensation adjustment. Interest expense net in the quarter increased 11%, to $12 million, reflecting the $150 million of debt issued in August. We continue to expect our interest expense net for the full year 2024 to be relatively flat versus the prior year. We reported a net $1.6 million of other expense in the quarter, primarily due to a $4 million non-cash pension settlement charge from the termination of a non-US pension plan, which offset other incomes. Excluding special items, other income was $2.3 million as compared with $800,000 in the prior year. Our third quarter effective tax rate was 23.6% due to mix of earnings, which compares with an adjusted effective tax rate of 19.5% in the prior year. Year to date, Our adjusted effective tax rate is 22.2%, and we continue to expect our full year 2024 adjusted effective tax rate to be in the low to mid 20% range, subject to the mix of earnings and anticipated extent of discrete tax items. Third quarter diluted earnings per share was $1.77. Excluding special items, adjusted diluted earnings per share was $2.14. EPS results include a 10 cent benefit from the incentive compensation adjustment. Moving to our reportable segments on slide eight. America's welding sales decreased 4% in the quarter, primarily due to 8.6% lower volumes with compression across all three product areas, reflecting slowing production rates among many large end customers in heavy industries and transportation, as well as lower equipment and automation orders. Price and the benefits of our Red Viking and Van Aire acquisitions contributed approximately 5% sales growth. We expect to be price positive and recognize an uptick sequentially in acquisition sales in the fourth quarter. America's welding segment's third quarter adjusted EBIT declined approximately 8% to $126 million. The adjusted EBIT margin decreased 90 basis points versus prior year to 18.8 percent, reflecting the impact of lower volumes and acquisitions, which were partially offset by effective cost management, lower employee-related costs, and operational improvements in automation. As discussed in September, we expect a segment to generate an EBIT margin in the 18 to 19 percent range for the year. Moving to slide nine. International welding sales declined approximately 11% on 12% lower volumes. Regional automation sales growth and relatively steady demand in Asia Pacific was offset by persistent weak industrial demands in Western Europe and Turkey. Price declined 60 basis points in the quarter. The adjusted EBIT margin of 9% reflects the impact of lower volumes and mix in a seasonally weaker quarter due to holiday schedules. The team is effectively managing costs and recognize the initial benefits of their cost savings measures. Given the extent of volume compression, we expect the segment's full year 2024 EBIT margin performance to be in the 10 to 11% range. Moving to the Harris Products Group on slide 10, third quarter sales increased approximately 4%, led by 7% higher price on rising metal costs predominantly silver, which was partially offset by 3% lower volumes. Volume declines reflect relatively stead HVAC sector demand, which was offset by a challenging prior comparison in the retail channel and softer industrial sector demand. Adjusted EBIT increased approximately 8% to $22 million. The adjusted EBIT margin increased 50 basis points to 16.4%, primarily due to effective cost management and operational efficiencies. We continue to expect the team to generate EBIT margins in the 16% to 17% range for the balance of the year. Moving to slide 11, we generated $199 million in cash flows from operations in the quarter, resulting in a 134% cash conversion. Our average operating working capital increased to 19.1% from higher working capital from acquisitions as well as lower sales levels. Moving to slide 12. We invested $136 million in growth in the quarter from $36 million in CapEx and $100 million in acquisitions. We returned $91 million to shareholders through our higher dividend payout and approximately $50 million of share repurchases. For the first nine months, we have demonstrated the discipline and balanced approach to our capital allocation strategy through the cycle, which continues to generate strong returns at 21.4% at quarter end. We remain confident in our strong cashflow generation and our long-term value creation and recently announced our 29th consecutive annual dividend rate increase to $3 per share in 2025. As we look to the balance of the year, We continue to expect our full year 2024 organic sales to decline mid to high single digit percent as outlined in September. Given the deceleration in the third quarter, we expect fourth quarter organic sales to decline in the high single digit percent range. We have updated our assumption on profit performance and are now expecting our full year 2024 adjusted operating income margin to be relatively steady versus prior year at around 17.1% at a high team's decremental margin. This reflects the benefits of our cost savings playbook and reductions in employee-related costs. We are maintaining all other assumptions. While we navigate this portion of the cycle, we will continue to monitor risk and are confident in our ability to adjust our operating posture to changing market conditions, as well as maintain ample liquidity and a strong balance sheet to continue to invest in growth, operational excellence, and return cash to shareholders. And now I would like to turn the call over for questions.