Lincoln Electric Holdings Inc (LECO) 2002 Q1 法說會逐字稿

Welcome to the Lincoln Electric Company's first quarter earnings conference call. All participants will be able to listen only until the question-and-answer session of the conference.

This conference is being recorded at the request of Lincoln Electric Company. If anyone has any objections, you may disconnect at this time.

I'd now like to turn the call over to Mr. Jay Elliott, Chief Financial Officer of Lincoln Electric Company. Sir, you may begin.

Thank you,

.

Good morning to all of you joining the call. Welcome to Lincoln Electric's first quarter results conference call. We'll get in to the numbers in a minute.

But first of all let me remind you that certain statements made during this call and during our discussions with you may well be forward-looking. You also should be aware of the risk factors associate with our business. These risk factors are provided in our press release and more generally, in our SEC filings, including our 10-Ks and 10-Q reports.

Tony Massaro, Chairman and CEO of Lincoln, will lead-off the discussion this morning. Following Tony's remarks, I will then discuss specifics of the financials. Let me also add that joining us today is John Stropki, Executive Vice President of Lincoln, and President of North America.

Let me know introduce Tony Massaro. Tony?

Thanks, Jay.

Good morning everyone and thank you for joining us today. We're very pleased with our first quarter results given the economic situation that we have faced. As I'm sure all of you know, the U.S. industrial economy still trails behind the beginnings of a general economic recovery. Despite this slowness and excluding the special charges that we took in the quarter, Lincoln was able to produce very good operating results.

I think this points to the effectiveness of a number of programs that we have in place to increase market share and to take cost out of our operations.

As has been the case with numerous companies this earnings season we took a charge to write-down goodwill due to the newly established financial accounting standards.

We also had a charge related to a voluntary retirement program offered to our U.s. employees in order for us to further reduce our on-going costs.

The special charges resulted in a net loss of $27.1 million in the first quarter of 2002 on sales of $248.4 million. However, if you exclude the effects of the change in accounting and the rationalization charges, our net income was $17.5 million, or 41 cents per diluted share, which is in line with expectations, and in my opinion, much better than anyone else in our industry.

This compares with net income of $22 million or 52 cents per diluted share, and $252.6 million in sales a year ago in the same quarter.

You must remember that the first quarter of last year was our best quarter of the year, so the comparison must be cautioned.

Although there are signs that the general economy is starting to recover, as we have said before, we still believe any improvement in the domestic industrial market will come in the second half of the year.

In the meantime, we continue to reduce costs in our operations and drive other programs to insure long-term shareholder value.

The effects of the change in accounting standards was approximately $37.6 million net of tax. Charges of approximately $7 million net of tax were incurred related principally to the voluntary retirement program which affected about three percent of the U.S. workforce, and asset impairment charges.

We anticipate that the rationalization program will result in future annual cost savings of over $5 million. This represents a very good return on our investment, and it supports our goal of continuous shareholder value improvement.

I should note that the voluntary retirement program offered to the U.S. workforce was very well received, and a win-win for everyone. This was made possible by our efficiency gains driven by our investments in new operating systems, Six Sigma, and

manufacturing technology.

Now turning to operations, sales for Lincoln's U.S. operations in the quarter were $155.6 million compared with $166.2 million in the same quarter a year ago.

Our export sales were $15 million compared with $14.9 million in the year ago quarter.

We are seeing some positive movement in different parts of the company. An example is our Harris Unit which is doing quite well in sales growth, especially with the high growth retail sector.

The strong dollar, however, continues to impact export sales for all of our U.S. based operations.

Non-U.S. sales for the quarter were $92.8 million compared with $86.4 million in the first quarter of 2001. However, as measured in local currencies, our non-U.S. sales were up 11 percent compared with the same quarter last year.

This is very good news as we continue to increase our presence in non-U.S. markets. We continue to generate substantial cash-flow from operations with $27.7 million in the quarter. That's compared with $14.3 million in the same quarter last year.

Cash-flow improvement from operations is a continuing reflection of our focus on managing working capital in these difficult times. I mentioned our drive to improve and grow our global operations and presence. During the quarter, we formally completed the previously announced acquisition of Bester, our welding equipment manufacturing operation in Poland.

As discussed earlier, Bester is giving us a solid strategic manufacturing platform for serving Poland and eastern Europe. It also gives us low-cost equipment for our domestic retail markets which we previously purchased from non-Lincoln entities.

And despite the current political situation in Venezuela, we are experiencing positive results from our newest acquisition, Messer Venezuela. We anticipate that this is an area that will continue to grow for us.

You should know that the process of integrating both of these acquisitions into the Lincoln network is going quite well.

In addition, a number of our other international businesses are showing improved results, specifically, Australia, Canada, Mexico and Brazil.

Several of our operations in Europe also continue to perform in this difficult global economy.

In Asia we added several major orders for welding equipment to be used on the huge West to East pipeline project in China. The pipeline business across the globe is providing sales growth opportunities for our welding products.

While we continue to pursue growth opportunities and new geographic markets, and by developing new customer segments, we are also pursuing opportunities for incremental growth in mature markets through the introduction of new products.

On that subject, we introduced a number of new products at the American Welding Societies annual industry show held in Chicago last month.

This drive to bring new products to the marketplace is the result of our industry leading product development and R&D programs, and is definitely a source of competitive advantage for us.

To help us achieve our strategic goals we recently secured a private placement of $150 million, taking advantage of the low interest rates in the debt market. Proceeds from the placement will be used for general business purposes including potential acquisitions and share buy-back programs.

As I mentioned before, we continue to improve our operations and take out costs where ever possible. Our Six Sigma program for example continues to seat itself within our culture. Since starting in the year 2000, we have trained over 100 employees, including 50 black belts.

In addition, last month we were presented the Evolution in Manufacturing award from SBN Magazine and

for our powerful new e-business platform and re-designed Web site.

Lastly, you should be aware that the company paid a quarterly cash dividend of 15 cents per share on April 15, 2002 to shareholders of record on March 31, 2002.

And I'd like to remind you that the annual meeting of shareholders is a few weeks away and will be held at 10:30 a.m., Wednesday, May 1, at the Wellington Center in Highland Heights, Ohio, a few minutes from our headquarters, and I'd like to invite all of you to attend.

Now let me turn the call back over to Jay, who will continue with the financial review. Jay?

Thank you, Tony.

While we have yet to see an expanding economy in the industrial sector of largest market, the United States, we have been able to make sales and margin gains outside of our domestic market.

Through cost control and balance sheet management we have been able to generate a very positive net operating cash-flow. We continue to position ourselves for the upturn when it returns in the U.S. domestic market.

We have been able to take advantage of a continuing growing world market for welding outside of the U.S.

Gross profit margins declined in '02 in total versus what was achieved in '01's first quarter. This decline masks an increase in margins outside of the U.S., rising to 22.1 percent versus 20.6 in the prior year's first quarter because of the decline which occurred in the larger U.S. operation.

A comparison of margins achieved in the first quarter of '02 versus those of the fourth quarter of '01 shows the same level of profitability in total and within and outside of the U.S. market.

A more competitive and demanding market exists in '02 versus the first quarter of '01.

We are continuing to schedule production at levels below our sales to reduce inventory. This has reduced overhead absorption and caused a lower gross profit in the first quarter of '02 versus '01, but margins as noted have been maintained at the same level achieved in the last quarter of last year.

The percentage of SG&A to total sales for the consolidated company is the same this quarter versus a year ago, excluding the rationalization charge. It was 19.9 percent.

The percentage in the U.S. has risen to 21.5 percent versus 20.8 percent in the

quarter of the prior year, and this was off-set by a decline in the percentage outside the U.S.

Outside the U.S. it was 17.8 percent versus the prior year's 18.4 percent.

The major factor in this diversion

has been a continuation and slow down in U.S. sales versus the prior year's like period. This is in contrast to a growth in sales outside of the U.S. when compared to the prior year.

The U.S. division is in the position to make reductions in head count because of the increased efficiency created by our ERP computer system. Rather than waiting for attrition to correct the excess

, we implemented a rationalization program this quarter.

The program also included

disposals to reflect changes in products offered by type and/or geographic location. Approximately 80 percent of the cost and benefit for the total program is in the domestic market.

At the operating profit level a 30.2 percent point drop was present versus the prior year's like quarter. And a 1.2 percentage drop was present versus the fourth quarter.

This follows the changes as described for gross margins and SG&A.

As Tony mentioned, we had a net cash-flow from operations of $27.7 million in the quarter versus the prior year's $14.3 million, which demonstrates the success in the management of the investment in our business.

Less money was invested in accounts receivable as a consequence of the lower sales level. We did experience a somewhat lengthening of several days in outstanding receivables, as our customers have taken steps to try to preserve their own balance sheets.

Even though we had lower sales in total, we have been able to decrease our investment in inventory and benefited from an almost $9 million positive cash-flow in investment from it in the quarter as we restricted the operating level of our plants.

We required $5.6 million of capital investments in the quarter to continue our programs of modernization and efficiency improvements. This was less than the $7.8 million invested in the prior year's first quarter.

We also had the opportunity to increase our global coverage through the completion of the acquisition of our new subsidiary in Poland where $8 million was invested in the quarter.

In addition, we made use of some of our positive cash-flow to re-purchase $2.5 million of common shares as part of our ongoing share re-purchase program, and of course, paid dividends of $6.4 million.

This positive net operating cash-flow less investments in existing plants, new acquisitions, share buy-backs and dividends, when added to the $150 million long-term facility which we created and drew on in the first quarter, has positioned us with amble resources to take advantage of growth opportunities for the company.

As we'll continue, and we'll also support continuing to provide the fruits of our successful business endeavors to our shareholders.

In summary, my comments in reality are very similar to what they have been over the last several quarters. Business is hard to find, business conditions are difficult. But your company is managing the situation quite well with cost control, cost reduction, new product introduction, geographic expansion, and cash-flow generation.

This all continues to position us more positively in the marketplace and to ready ourselves for the opportunities that the future will present.

At this point, I'd like to open the call to our listeners for their questions.

, would you please do so?

Thank you. At this time we are ready to begin the formal question-and-answer session. If you would like to ask a question, you may press star, one on your touch-tone phone. You will be announced prior to asking your question.

To withdraw your question, you may press star, two.

Again, to ask a question, please press star, one.

Our first question comes from Gary McManus of JP Morgan. Sir, you may ask your question.

Hi, Tony and Jay.

Hi.

You know, conspicuous in its absence is the, you know, outlook statement which you had in the fourth quarter release. I think previously you said sales were flat, net down slightly. Is there a reason why you didn't reiterate your guidance?

No, not at all Gary. It's a - we haven't changed our guidance at all in that regard. I didn't think it was necessary to repeat it, but you make a good point. It's the same flat sales and the profits, depending on the bonus of course as we stated.

OK. And that excludes the 7 million after - you're not considering the 7 million after tax charge?

No, that's correct. That was not included in that forecast.

OK. And secondly, just with the - with putting all - you know, getting all that cash and doing the debt offering. I mean, can you elaborate a little bit further, you know, you guys do generate a lot of cash, you know, why that amount, you know, !50 million or so, and how quickly would you think you'll use that cash in terms of, you said through acquisitions and share buy-backs.

Gary, when we actually arranged the facility the target amount was in a range and it was so well received that we ended up taking $150 million -- we really thought it would be more like $120 million - we've done it now with the knowledge that we, in fact, may have to carry this unused for a part of several quarters, but that there are enough opportunities that we're working on right now that we felt it was justified to take the debt at this point with a low interest rates, and suffer the risk of perhaps a little bit of a negative

for several quarters.

We do have a number of acquisition candidates, Gary, that we are looking at right now. I think we mentioned that last time as well. And I'm confident that we will have more than enough opportunities throughout this year to use that.

Well, if I look at, you know, if I exclude the charter, you know, bid that you made and you've never used anywhere near that amount for acquisitions in the last five or six years, does this signal maybe a more aggressive stance towards making acquisitions?

I think we've stated over the past couple years that, you know, the market for the welding business is not as robust as we would like to see it. The way that this company is going to grow is through international expansion, in particular through joint ventures and acquisitions, and I think the consensus of our management is that that's the way we're going to go forward.

OK. Great. Thanks, thanks a lot guys.

OK.

Our next question comes from

of Merrill Lynch. You may ask your question.

Thank you. Good morning.

Good morning.

Morning.

I'm wondering if you could give me an idea of when you expect to start to see some of the benefits from the program that you put in place in the first quarter?

Well, it's immediate. The first quarter we took the charges and as far as the retirees are concerned, of course, we would not have their salaries going forward from that point on. So the return begins, or began I should say, April 1.

OK. And can you tell me if you've been seeing any changes in demand for your equipment product from first quarter to fourth quarter?

We've got John Stropki here. He can address the domestic market which he oversees.

Clearly, the first quarter of this year the equipment side in particular was better than the fourth quarter of last year.

The comparison of quarter-to-quarter, first quarter to first quarter of last year, is about neutral on the equipment side, but as Tony said, last year's first quarter was the strongest quarter that we had had in all of last year.

So we're, I would say mildly optimistic on the equipment side of the business moving forward.

OK. And can you just remind me what might have happened in first quarter of last year in terms of markets that were stronger than what we saw in the first quarter of this year?

Well, the general market was much stronger the first quarter of last year than throughout 2001. If you recall, the industrial markets diminished throughout 2001. That's why the first quarter was the strongest.

And we have recently seen I would say a bottoming and even, if I'm wildly optimistic, a slight increase in the first quarter this year over the fourth quarter of last year.

But certainly the markets aren't at the level that they were in the first quarter of last year.

, we saw really a reduction in demand starting in the second half of '00, and the best quarter last year, as Tony said, was the first, then each quarter declined and we think we were at a bottom when we were in the fourth quarter, and it appears to be pretty much that way for the total company sales. It's slightly down, but not much.

But still, we do see the U.S. having a tough comparison.

Yeah, and we're talking about apples to apples comparisons here. We have essentially the same businesses this year as we did last year. Some of our competitors are reflecting that they have increased sales this quarter over the same quarter last year. But you won't have to be careful. There were acquisitions made during that period of time.

But if you look at any of the individual markets, is there anything that stands out

being different?

You mean geographically or ...?

Yeah,

we're down in the U.S. again this quarter, but we are strongly in Australia and in Asia in general, this quarter versus a prior year's first quarter. And every other market really is up.

So there's a diversion between what's happening in the U.S. for steel

. I think you see this evidenced by what the situation is with the U.S. steel companies.

And even now, the customers of the U.S. steel companies, they're just

at even being able to obtain steel and the prices that they are having to look at being much higher now with the import restrictions and duties that are being placed on it.

So there is a lot of disruption in the fabrication of steel in the U.S. market still.

OK. Thank you.

Walt Liptak of McDonald Investments, you may ask your question.

Good morning.

Good morning.

Going back to the previous question. Are there any sectors that you're seeing? I know you mentioned oil pipelines in china. Are you seeing a pick-up in up an auto or construction machinery

markets?

Well, pipelines in general around the world are booming right now and we're taking advantage of that growth in the marketplace. There has been an increase in the automotive business in the United States.

Heavy equipment, however, is off. I think you probably saw Caterpillar's release yesterday where they've noticed a down-turn in their business as well. They, you know, they are a pre-cursor to some of our businesses if you will.

But there's ups and downs all over the world. I would it's more indicative to look at the businesses geographically than it is to look at the businesses by product line. Geographically all of the regions outside of North America - in fact, all of the regions outside of the United States are doing better this quarter than they were first quarter of last year.

The U.S. is still recovering or in the throws of a recovery, and when it turns around, which we again think will be the third quarter of this year, then I think we'll have a synchronized recovery around the world that will benefit us tremendously based upon our cost position.

OK, that's fair.

Just a couple of housekeeping things. We can back into some of these, like inventory you said was down nine million. What's the actual amount of inventories in the quarter? Accounts receivable and accounts payable too?

Alright. Your question was anticipated.

The accounts receivable were 168 million, inventory 167 million, and accounts, straight accounts payable were 65 million.

OK. And what's your goodwill after the charge?

It's about four million.

OK. Where was the write-down taken?

And you don't have a whole lot of goodwill to start with.

Yeah, it was Europe. The European entities with the level of profitability that those margins, markets have had couldn't carry the price that was paid, you know, ten years ago, so ...

These were acquisitions made in the late '80s, early '90s.

OK. And then I haven't had an update recently about

bankruptcy. Where is that thing now? Has the Judge made any decisions on it?

That, I haven't heard really anything regarding that that I can relate to you. I suggest maybe you talk to them.

Yeah, it's been long time that this has gone on with no announced agreement. They must be having trouble.

OK. OK, thanks guys.

Again, if you would like to ask a question, please press star, one.

One moment please.

of Bernstein Investment Management, you may ask your question.

Good morning, gentlemen.

Morning.

I noticed your operating margin is quite a bit lower than it has been in say the last four or five quarters on essentially a comparable level of sales. And you mentioned that your gross margins outside the U.S. are going up and there was absorption problems in the U.S. as you took inventories down.

Are there any other factors effecting either your gross margins or your operating margins in terms of mix, price, other cost issues internally that will either continue or reverse over the next couple of quarters?

Well, there is a higher cost for pensions, and we actually announced that we were going to be looking at that in our release at the close of fourth quarter last conference call. And that is effecting margins.

We have an anticipation of higher insurance rates this year. We haven't actually negotiated new contracts and what we're hearing is that we may be better served on those price increases than a lot of other companies are experiencing. But at the same time, there is going to be an increase in that, so that's going to be a higher fixed cost to carry going forward.

The principal issue though is plant utilization and how much we're able to run through the plants. And we are watching that very closely and we're just looking at some statistics which indicate that we've been able to take our non-direct labor component of the plants down in relationship to the direct labor that's gone down. The direct labor absolutely ties with the level of production because we pay piece by piece with our piece work system.

And it was very pleasing to see that the overhead component of factory staff also was reduced, and that's a more difficult thing to manage than the piece workers.

I'd just like add to that. While the margins this quarter are slightly below the first quarter of last year, they in fact are the same as the fourth quarter of last year. We haven't seen a further degradation in margins.

And most of the retirements are in the overhead side of our business.

And that was not present in the first quarter, so that's going to be a further benefit as we get into the second and continued quarters.

So what is your outlook for gross margin for the next couple of quarters when you factor in any further -

planning more inventory reductions if we assume, you know, sort of flat sequential sales?

I would say that our margins are going to have to wait for a sales recovery to recover, but I would think they're going to continue about where they are right now without that sales recovery.

OK. Thank you.

Yes.

Again, if you would like to ask a question, please press star, one.

One moment please.

Mr. Elliott, at this time there are no further questions.

All right. Thank you very much for attending the call and we will talk to you three months.

Thank you.