Lincoln Electric Holdings Inc (LECO) 2002 Q4 法說會逐字稿

Good morning. Welcome to the Lincoln Electric holdings fourth quarter earnings release call. All participants will be in listen only until the question and answer session begins. I would like to introduce your speaker, Mr. Jay Elliot, treasurer and senior VP and CFO.

Jay Elliot Welcome. Welcome to the conference call to discuss Lincoln Electric's 2002 fourth quarter and year end results. Our earnings were released this morning prior to the market open and if for some reason you did not receive a copy, the release is available through our website and on a number of different financial sites. You can also contact our investor relations office and ask for a copy to be faxed to you. Let me start our discussion today by reminding you that certain statements made during this call and discussion may well be forward-looking. You all should be aware of the risk factors associated with our business. These risk factors are provided in our press release and more generally in our S.E.C. filings, including our 10K and 10-Q reports. I would like to introduce Tony Massaro (ph), Lincoln Electric Chairman and C.E.O. who will begin this morning's discussion. I will review the financials in more detail following Tony's opening remarks and, of course, we will provide time for questions. Let me now turn the call over to Tony Massaro. Tony?

Thank you, Jay. Good morning to all of you. I also want to mention that John Stropki (ph), our Executive Vice President and President of North America is with us today on the call. First I would like to quickly review the numbers, after which I will have some remarks on the industry and some of the actions that we at Lincoln Electric are taking to improve our operations and productivity. Looking at the results for the 2002 fourth quarter, Lincoln Electric earned -- or 43 cent per diluted share. That was on sales of 238.$5 million compared with 2001 fourth quarter net income of 20.6 million or 48 cents per diluted share and sales of $237 million. Now, you will recall that the 2001 fourth quarter included a net $1.2 million after-tax gain which was primarily related to the sale of excess property. If you exclude that gain, 2001 fourth quarter net income was $19.4 million or 45 cent per diluted share. The results in the quarter were very good despite the dark economic cloud the United States industrial markets have been under for the last two years. Sales from our U.S. operations were $143.9 million in the quarter compared with $150.1 million for the 2001 comparable quarter. Export sales increased 13% to $15.2 million in the quarter from $13.4 million in 2001.

Our non-U.S. sales grew 9% in the 2002 quarter to 94.6 million from 2001 sales of $86.9 million. Including the effect active acquisitions, our non-U.S. sales increased 6.1% over the 2001 fourth quarter and local currencies. Now looking at the full year, net income for 2002 was $29.3 million or 68 cent per diluted share compared with net income of $83.6 million or $1.96 per diluted share in 2001. Of course, the 2002 first quarter included special charges related to the writeoff of good will and costs associated with the rationalization program that we previously announced. Excluding those special charges, earnings for 2002 were 73.9 million or $1.73 per diluted share, and this compares to net income of 82.3 million or $1.93 per diluted share in 2001, excluding the previously mentioned 1.2 million after-tax gain. Net sales in 2002 increased 1.6% to $994.1 million. U.S. operations had net sales of $612.4 million in 2002, compared with $639.9 million in 2001. Export sales were up 8.1%, or $4.8 million to 63.2 million. Non-U.S. sales in 2002 were $381.7 million, up 12.6% from 2001. In total, as measured in local currencies, non-U.S. sales were up 11.8% over the prior year including the effective acquisitions. Excluding the effect active acquisitions, non-U.S. sales increased 6.9% in local occurrences in 2002. Cash flow from operations for the year was a very strong $103.6 million, which we believe reflects Lincoln's solid underlying operations and working capital management. During the past year, $501,330 shares of stock were repurchased as part of a previously authorized 10 million share rebuy back program. Total number of shares bought under that program now total 7.7 million.

At the end of the year of the board (ph) of directors increased cash dividend 6.7% to 16 cent per share for holders of record December 31, 2002 are, which was paid January 15, 2003. The holders of the company stock received 25.4 million in dividends in 2002. Now, let me say a few words about pension costs. In our earnings release this morning, we reported that our company, like most companies, has experience add significant decline in the fair market value of assets in its defined benefit pension plan trust. As a result, we estimate that our pension expense will increase by approximately 15 million in 2003. In addition, at the end of the year, December 31st, 2002, the company recorded a charge to shareholders' equity of approximately $80 million, which represents Lincoln's minimum pension liability. On another note as we reported previously, Lincoln began expensing employee stock options January 1, 2003.

Those are the numbers and related financial issues. Our earnings and cash flows are very good. And we believe that our balance -- our balance sheet strength is an indicator of the stability of Lincoln Electric and its position within the welding industry. Our dividend yield is up. Our profitability of 7 to 8% after tax is the envy of our industry or just about any industry for that matter, and we're essentially debt free. I would now like to take a few minutes of your time to comment on other related issues. The economic environment, the unsettling geo political issues around the world and the uncertainty over war with Iraq, as we all know, are having an impact on business and the economy in general. As reflected in our U.S. domestic market numbers, U.S. markets have remained depressed. Lincoln, however, did benefit from growth in international markets with our non-U.S. businesses performing well and balancing out the weak sales performance in our domestic industrial markets. We expect this trend to continue and see no significant upturn in the U.S. industrial markets in the first half of this year. The uncertain economic forecast in a down market present challenges. The good news is Lincoln did accomplish some positive actions last year, and I believe that going forward, they will help us when the market rebounds. In line with our global strategy to grow through acquisitions and joint ventures, as you probably know, we completed two acquisitions last year. (inaudible), our welding machine manufacturing plant in Poland performed quite well in 2002, and provided a solid strategic position in eastern European markets and an excellent platform for serving that region and export markets (inaudible) provides low cost manufacturing base for equipment that can be leveraged in buying products for segments in our European and other regional markets. Our Venezuelan acquisition also performed very well, even in the shadow of the political uncertainty and business disruption that is affecting that country. Lincoln saw the doors to Venezuela, a market leader in that country, has enabled us to better serve the Indian countries as well. The Poland and Venezuelan acquisitions gained us market position in two different regions. Our business in China also performed very well last year, driven by the pipeline business we secured by the west-to-east pipeline project.

Our joint venture project in Asia is QuongthaiI which has plants in Taiwan and mainland China. They are very competitive in the Asian marketplaces and is growing about 15% per year. Lincoln Electric owns 35% of Quongthai and 85% of the Chinese subsidiary Genthai. This is important because it gives us growth in the Asian market. On previous calls I mentioned the progress we're making here in Cleveland and improving our operations and cost structure through the implementation of Sigma technology and lean manufacturing programs. Along with other initiatives. Programs in both are equipment and consumable areas have been focused on the U.S. operations but we anticipate transporting them to all of our manufacturing facilities around the world. Lincoln is one of the few companies that can do this. The shop for transformation is amazing and I invite you to visit us in Cleveland and see first hand how Lincoln is improving its operations to best in class status due to the slow down in the U.S. market. Other positive news during the year was our stock performance. Especially in a market that declined for the third year in a row. LECO held up well out performing the Dow, of the NASDAQ and the S & P and needless to say, all of our competition. We believe our stock is solid and a good value because we perform and do what you expect us to do.

With intense attention being given to corporate governance issues, I can also assure you that we have keen oversight in a tough audit committee on our board. We have passed reviews in every area. We're totally transparent and open in our financial statements and we play by the book. That's the Lincoln way. Looking ahead, as I mentioned earlier, our pension cost, of the uncertain economic and geopolitical environment and the uncertainty over war with Iraq, are impacting us along with all other manufacturers and I see no improvement in the first half for the I.R.S. businesses. Regardless, we will continue to pursue our global strategy. The United States, however, remains our solid base and a very important market, and we will protect that position. The growth potential for our business is in the international arena, and we will focus on that as well as continuing to ring out costs in all of our operations. We have quite a few opportunities. With a little cooperation from the economy, we continue to grow this company and continue to enhance shareholder value. Now Jay will review the numbers in detail. Jay?

Thank you, Tony. As Tony has said, our markets are difficult. This being so, it increases the significance of us being able to announce fourth quarter of 2002 is again a repeat of the kind of solid results that we have been discussing for the last five or six quarters. The Lincoln response has again been the successful preservation of margins through aggressive manufacturing cost improvements and stringent SG&A cost containment. Even with this control of expenditures, we have not ignored the future, as we continue to develop new products and process. These product less better serve the wielding needs of the metal fabrication industry. The process enhancements which are being presented to our existing and potential customers will allow them to make better use of our products and to lower their own manufacturing costs through improved welding methods. This strategy continues to allow Lincoln to maintain a very positive cash flow, report steady earnings to our shareholders and have given us the confidence to declare an increase in the quarterly dividend paid in the first quarter of 2003.

Our performance is steady and solid. Which we believe is very far from the norm for companies operating in the basic industrial economy. Now to some of the details. The quarter's gross profit rose 0.1 points versus the prior year's quarter. Foreign gross profit percentage rose 0.3 points. But the total was brought down by the U.S. operations decline as a consequence of the sales decline and resulting reduction in overhead absorption. For the full year, the 0.4-point increase in foreign was not able to offset the U.S. decline. Sales, general and administrative expenses were 19.4% to sales in the quarter versus 18.7% in the prior year. This year's SG&A expense percent to sales is more appropriately looked at. To understand the expense running rate because of a timing difference, which I will comment on in a moment. 2002's full year percent was 19.9 percent versus 2001, 19.4%. A rise of 0.5 points. This rise came from an increase in our provision for credit losses in effect of 0.3-points and this was primarily in offshore customers. An increase in foreign exchange loss and effect of 0.1 points. And finally, an increase in R&D and effect of 0.1 points as well. R&D expense rose 6.7% in the year. Without these three causes, one of which was by decision, our SG&A expense to sales for the year would have been the same as 2001. This year's cost for bonus expense, a key part of our relationship with our employees, was essentially the same as the prior year. The accrual for the expense, however, was proportionately higher in the fourth quarter in 2002 as compared to 2001, making the quarter's comparison appear to be negative versus what was the actual year's expense. This is why it is better to compare the full year's rate of expense and items which have affected the change rather than to look at the quarter alone. Operating profit for the year rose by 0.4-points in Europe to 5.9% and rose by 0.2 points in other foreign to 9.8%. But in total fell by 1.8 points, to 10.3% from the prior year because of the larger U.S. operations performance. If the effect active tax rate for the year was 23.9%, this has been made possible by making use of foreign tax credits with foreign source income and tax loss carry-forward absorption.

We expect a tax rate in 2002 to be near 25%. The actual tax rate will depend upon the income realized in individual companies and countries, as tax rates can be very different country by country. Shifting to the balance sheet, as well as it's effect on the papal, you can see that we are nearly debt free on a net basis. $176 million in cash versus $188 million in debt. Our interest expense and income have both increased versus the prior year. The after-tax net carrying cost of this cash and debt upon our EPS is near to 1% per quarter, thus maintaining both cash and debt is having a minimal effect upon our profit. Of the cash affords us flexibility to continue to afford our efforts to make a major acquisition in the welding industry and to continue to return value to our shared holders through dividends and share buy backs with little earnings penalty. Reductions in working capital in the year, i.e., accounts receivable plus inventory less trade payables contributed over $7 million to tower $104 million operating cash flow. We spent $4.8 million less on capital additions, acquisitions and equity investments in 2002 versus 2001, which also served to increase cash availability. We spent the -- dividends in 2002 versus 2001 and increased by almost $8 million our spending on share buy-back during this year. In summary, we have a solid quarter, completing a solid year, and a very strong balance sheet. We are prepared to harvest the recovery when it comes, and we all know that it eventually will. In the meantime, we continue to work on making the company even better. At this point, Brett, would you please open the call for questions from our listeners.

Certainly. At this time, if anyone should have any questions or comments you may press star 1 on your touch-tone phone. Once again, if have you a question, please press star 1 now. To withdraw your question, you may press star 2. First question is from Jerry McManusnous (ph) of J.P. Morgan.

Hey, Tony, yea and John. Couple of things. Regarding the pension, 50 million, do I use the 25% tax rate to get -- that's a pre-tax number, I assume?.

The actually effect would be a higher tax deduction because it is in the U.S. tax environment.

But you said you expected the tax rate to be essentially unchanged. So I if I do the math it's something in the neighborhood of 20, 25 cent negative impact to earnings in 2003, right?

Right.

And can you overcome that in better earnest growth or --.

Well, we are expecting to have essentially, with the time of vision we have, which is the next six months, we're expecting to be pretty close to what we achieved in the same quarters last year.

Okay. That's helpful. Did you make any additional cash contributions to the pension during 2002 and do you expect to make any in 2003?

We did. And we will. Yes.

Can you tell me how much it is or do I have to wait until the annual?

Well, around $20 million last year, a little over that. And likely it will be the same this year, which is very close to the actual cash payout to pensioners that we have.

The last question, presumably you borrowed last year to help fund the Hyundai acquisition that is not going to occur. What are you going to do with all of the cash? Would you be more aggressive in buying back stock or are you just comfortable leaving it on the balance sheet longer term?

I think we have said this a number of times, Jerry. Our primary purpose in use of cash is acquisitions and we still have a number of those that we're looking at. The second priority, if you will, is the buy back shares of our stock and we have been doing that so far this year. We have bought some more shares back. And we will continue to do that. And we -- we also invest in the company for growth. So we're not going to waste the money. Lit either go to acquisition, share back buy -- buy back or internal growth.

Thank you very much.

Next question is from Matthew Levinson (ph) from Matthew Levinson and Company.

A number of companies which deals in consumables has talked about pick up in business from the auto industry. I'm wondering if you see anything like that? And is there any particular class of industrial customer in your U.S. business that is showing signs of strength?

I'm going to ask John Stropki, our president in North America to answer that.

We have seen some improvement in the automotive industry last year. A lot of that improvement was actually in Canada, where we have seen a fairly significant shift particularly of the peer one parts suppliers into that marketplace and we had a very good year in Canada and we're the recipient of some good sales in a that marketplace. We have also done quite well in the automotive market as they have continued their goals to improving their productivity in our automation business has seen some nice expansion. Because of that, particularly in the automotive arena, in unit billed. As far as other industrial marketplaces that are doing well, I wouldn't say that there's anything to be too optimistic about in terms of the industrial economy at this point. We're seeing some activity in the oil and gas sector as it relates to oil pipeline and gas pipeline construction. But the general overall industry market seems to still be fairly flat.

Thank you very much.

Our next question comes from Ross Taylor (ph) of Cash & Associates.

I have a couple of questions. First we saw a slow down on the international or SUX side of the business in the quarter. Would you compare to comment on that? Is that just a one time event. We saw great growth in the first part of the year and it seemed to fall off in the fall quarter. Do we expect recovery back to the previous levels or is that something that will start to hound dog us?

And your other question?

My other question gets into the stock trading at a little over $19, the share right in here, would you anticipate -- and you had stated how well the stock had performed in the last few years, would you anticipate being more aggressive with your buy back given your excellent balance sheet? Looks like you have a fairly sizable amount of shares left to purchase on your buy back, your enforce buy back, and just striking -- when does that balance shift and you say the stock is more attractive than acquisition and at 19 or $20 a share are we at that price?

19 and $20 a share is certainly an attractive buy. The first question is that the fourth quarter falloff was mainly due to two episodes. First was, of course, the Venezuelan situation and slowdown that occurred there. And it wasn't so much the acquisition that we made in Venezuela, it was the import of our North American and Mexican-made products into Venezuela which shows up as non-U.S. sales, of course. And that affected Venezuelan market of the other was in Asia, and Asia was going along very, very strong all year. And in December, Asia essentially just stopped. And most of that was due to china. To answer your question further, we think this -- well, we already have seen it pick back up again.

So we see -- we have seen a recovery in Asia in the first part of this year. Now, obviously Venezuela, the strike lasted, I think, longer than people thought it would. The economy seems to be struggling back. Would we expect to see a recovery or are you starting to see signs of a recovery in Venezuela or how long do you expect that to be impacted?

We have seen a recovery. The plant is operating and it was not -- I will tell you it was not operating in January. And I do see it recovering from there. We obviously lost some business in January. But overall for the year, I would say the international business will be up from last year.

Okay. Would we expect to see -- I mean, china is a market that seems to be growing dynamically in most areas so it's a little surprising we saw a fall off there in December. Any thoughts on why that would be? Was it just like a one time event, you said you have seen some recovery. That looks like you're seeing solid double digit growth in applications in china right now.

There's a lot of reasons for it. You know, the Chinese decided to take more time off in December than normal. And that was probably part of the reason. The second reason is that, you know, we have a lot of product that is shipped from Australia into china. And from our different facilities around the world, and some of some of it got caught up in the ports waiting to be loaded. However, I will tell you that we just this past month have had a number of increased order orders for equipment from Cleveland and our other subsidiaries for china. Business is not by any means slowed down. It's just a timing issue.

Okay. Thank you very much.

Once again, if you should have any questions or comments, please press star one now. We have a question from Walt Liptech (ph) of McDonald Investments.

Good morning. Just going back to Jerry's question about the cost. Besides the pension expense can you quantify any other costs going up in 2003? You mentioned the stock options, what the incremental expense will be from that, any health care expenses or any other expenses that you're concerned about for next year?

Well, the cost of expenses of stock options is going to have a very minimal effect and it will not have any effect until the fourth quarter and then only a fraction of the value of the stock options granted in our meeting wean we do grant them is spread over three years. And just three months or two months of that three-year period. It's a non-event for the expensing of stock options in 2003. Medical costs, we have a program which actually the medical cost is funded by our workforce from their bonus in the U.S. company, and while it impacts all of us, me included, with rising costs for insurance programs for medical costs, it should not affect the company itself and we do not have post retirement medical costs at all. So our biggest issue is to try to keep ahead of the curb on productivity improvements in our plants, and be able to bring those forward, hopefully even in anticipation in advance of what may be happening in the marketplace with sales levels. So our sense is, we should have the same kind of margins we have seen last year, assuming that the business continues at the same kind of levels it seems to be right now in the U.S. So we don't expect big negatives. We're work towards creating positives.

And, of course, if the market improves at all with the improvement that we have made in our cost base, our margins would go up.

Okay. But it's going take it -- it sounds like it's going to take more of a recovery to see some incrementally a bit from sit Sigma and things you're doing in Cleveland?

To have a radical change, that's true.

That's why we have been able to compete or do what we've done is the improvements that we are made. Most companies couldn't have gone through the dramatic change in the U.S. market that the welding industry has gone through, and post the performance that we have done. All one has to do is look at some of the work on the (Inaudible).

In terms of like market share or any of the dynamics in the welding marketplace has anything changed in the last year? I know there are some competitors that are bankrupt. I mean, has anything changed on pricing? Are you keeping up with enough products and gaining market share?

Absolutely. I'm not going to comment own the competitors. I think you know and the people in the industry know the full situation there. But we believe we have actually increased market share over the past year globally and in most of the major markets. If you look at the published reports by our competition, it would show that we have increased market share in just about every major market. The only thing that has changed, I would say, Walt, is that the market is flat. The Asian and eastern European markets are growing. Parts of Latin America are growing particularly Mexico and Central America.

With respect to the U.S., the fourth quarter revenue number was not an easy comparison and still looked pretty bad. Can you talk about like the month-to-month progression, did things get worse as the month went on or as the quarter went on?

December is always the slowest month because of the holidays, what not. But there wasn't -- there's not a degradation going on in the marketplace. It's just flat and it has been flat for the past two years.

Right. Okay. Then just a couple of, you know, numbers. What is your CapEx forecast for 2003 and DNA forecast?

It will be essentially the same as the depreciation levels, 36, 37 million.

And can you give us the exact amount of inventory, accounts receivable and payables? For the fourth quarter?

Closing balance sheet?

Yes.

Let me take a look here. The accounts receivable closed at $153.6 million. Our inventory at -- with U.S. is $164.6 million, and the trade payables were $63.9 million.

Okay. Thank you.

You have one more question from Holden Luis (ph) of (inaudible).

Can you give a -- in terms of the overseas demand and improvement, can you give a sense of whether or not, you know, this has anything to do with just the general dollar weakening or whether those markets continue to behave a little bit better in terms of underlying demand? What is sort of the core reason why you continue to see the international markets doing better?

Well, that varies by region, of course. I mean, the international markets in northeast Asia are growing in local currency, dollar terms, and just about any other term that you want to use because of the infrastructure requirements of the economies there, especially china -- well, china in particular and Korea also. In Europe, there is some improvement because of the strength of the euro, but I will tell you that our business in Europe, in local occurrences is up significantly year on year. We have taken market share. We have a better cost position now than we did a year ago and than we did a year before that. So it's real growth we're seeing in our business. I will tell you, the market, I don't think, is growing in Europe, except for herein Europe.

Okay. And how much in sales, just company-wide, did you recognize net from acquisitions? What was the actual number for the quarter and for 2002?

Total of about $25 million for the year.

Okay. And what about for the quarter?

For the quarter, it was $5 million.

Great. Thank you.

At this time there are no further questions. Mr. Elliot, back to you.

Thank you very much for being with us this morning. And we look forward to talking to you in another three months. Good morning.

See you.

Thank you for attending today's call.