Lincoln Electric Holdings Inc (LECO) 2003 Q1 法說會逐字稿

All participants, please stand by, the conference is about to begin. Hello and welcome to the First Quarter Earnings Conference Call. Following today's presentation, there will be a formal question and answer session, until then, all lines will remain in a listen-only mode. At the request of Lincoln Electric, today's conference is being recorded, if you have any objections, you may disconnect at this time. I'd like to turn the meeting over to our Chief Financial Officer and our leader, Mr. Jay Elliot. Sir, please go ahead.

Thank you Monica. Good morning. Welcome to the Lincoln Electric Holdings Inc., 2003 First Quarter Conference Call. Let me remind you, that certain statements made during this call, during our discussion with me, may well be forward-looking. You also should be aware of the risk factors associated with our business. These risk factors are provided in our press release or generally in our SEC filings - 10-K (inaudible) Report.

Our Chairman and Chief Executive Officer, Tony Massaro, will lead the session this morning. Following Tony's remarks, I will cover the financials in more detail. I should mention that John Stropki, Lincoln's Electric's Vice President and President of North America, will also be with us, --- available to answer any questions you may have. Now let me turn the call over to Tony.

Thank you Jay. Good morning and thank you for joining us today. Before I get to my comments, I'd like to take a moment to remember those soldiers who have given their lives in service of our country and to those wounded in duty. The war has hit close to home here in northeast Ohio; we've lost two of our (inaudible). In addition, several Lincoln employees, as well as spouses and family members of our employees, have been called to active duty during this war. We certainly wish them God-speed and safe return. Now let me move on to the results for our quarter. The down economy in a specter of war, continued to hit hard at the manufacturing sector during the quarter and dampened results for many industrial companies. Our results were affected by those same factors, including the continuing lag in our US industrial markets. But, those results were offset by the performance of our international operations, as the numbers bear out.

For 2003, first quarter net income was $13.5m or 32 cents per diluted share, excluding rationalization charges of approximately $1.3m. First quarter 2003 results include approximately $4m of additional pretax pension charges, principally related to the US pension plans. 32 cents per diluted share is in line with expectations that we previously announced on March 11. Rationalization charges are related to asset impairments and severance charges. If you'll include the charges, the company earned $12.2m; 29 cents per diluted share. The 2002 first quarter net loss was $27.1m, or 63 cents per diluted share, including the effect of a change in accounting principle and rationalization charges. First quarter 2002 income before the cumulative effect on accounting change, was $10.5m or 25 cents per diluted share. Excluding the cumulative effect on accounting change and rationalization charges, income was $17.5m or 41 cents per share Looking again at this year's first quarter, total sales were $249.2m, compared with $248.4m in the same quarter in 2002. As I mentioned, and as was anticipated in our earlier announcement, our U.S. business remained depressed for the quarter, reflecting the continuing weakness in the domestic industrial markets. First quarter sales for our U.S. operations were a $147.3m, compared with a $155.6m in the comparable 2002 quarter. Export sales, were $13.7m, compared with $15m for the same quarter of last year.

Lower results in the United States were offset by improvements in the performance of our overseas operations. Non-U.S. sales in the quarter were $101.9m, compared with $92.8m in the 2002 first quarter. Cash flow from operations in the quarter was $8.9m, and the lower cash flow was due principally to additional funding to a company pension plan, which we announced earlier this year. To counter-balance and indeed, mitigate the results, we have undertaken a number of proactive measures. These measures include retirements, elimination of overhead jobs. We've also consolidated organizations within our company. We believe that we will start to see the benefits from these actions beginning in this second quarter.

Let me take a few minutes to discuss what we are seeing in the various regions around the world. Last week, the American Welding Society held its annual exposition in Detroit; this is the arc welding industry's major trade show here in the United States. As you would expect, the war and the economy had a dampening effect on attendance. Lincoln, however, did rollout numerous new products and the reception of both our machines and consumables was very positive. We showed various operating displays of our technology and had considerable interest in our process abilities.

As Jay mentioned, John Stropki is here, and John can comment further during the Q&A session on the business here in North America, especially as we continue to expand our position in the traditional distribution end-user and retail rental mechanics.

In Asia, the region holding the greatest potential for growth in our markets, we experienced a positive performance in China, Japan, Malaysia, Indonesia, and India. Also, exports from our North American operations into Asia, especially for the China market, were ahead of sales in a quarter over quarter comparison. The SARS episodes in Asia have tended to slow business at the present time due curtailment of travel.

In the market that we call RAM, consisting of Russia, Africa, Middle East, environment was mixed, as you would expect. Although there is an air of uncertainty due to the war, business activity was in fact good, with sales ahead of last year. Additionally, we have already seen increased interest due to planned reconstruction activities in Iraq. We would plan on being in that business. Improvement was best seen in the Russian market, where our Urhan (ph.) and Schwill (ph.) unit was just awarded a $6m contract to supply and install pipe welding system for Pipe Mill in Russia. The potential add on business come, including our proprietary submerged arc pipe welding consumables.

Turning to Europe -- We experienced good performance so far in Europe, although sales are being impacted by the worsening of economies and the strength of Euro. The European industrial market segment is down from a year ago and the region is also experiencing over supply, putting increased pressure on pricing. We, however, have a very good presence and product supplies that are locally manufactured and are able to compete very effectively. The Latin American market's sales slowed somewhat, but we were able to maintain our margins. Mexico continued its very good performance helped by the weakening pesos, of course, and improved salesmen. We are also taking advantage of our position in Mexico, as U.S. companies continue to move there. We recently announced major expansion of our Torreón Facility to accommodate the Mexican business. In Venezuela results were better than expected given the impact of the long strike and the political instability in the country. We continued to be the major market player in that area. That's a quick look at how the regions are performing. As we mentioned in our last call, pension cost, the uncertain economic and geopolitical environment, and the Iraq war had an impact on us and other manufacturers. Having said that, though, we continue to squeeze out costs and pursue growth and develop in developing markets.

Some other items I should mention. On April 15, the company paid a quarterly cash dividend of 16 cents per share to shareholders, a record March 31, 2003. Also, the annual meeting of shareholders of Lincoln Electric Holdings Inc. is scheduled for 10:30 am Thursday, May 1st at the Wellington Center in Highland Heights, Ohio, a suburb of (inaudible) Our proxy and 10-K along with other SEC filings are available through our website.

One last, but very important item, we're pleased that a new director has joined the board of Lincoln Electric Holdings Incorporate is Robert J. Knoll, former partner of Deloitte & Touche. Rob is an excellent addition to the board, bringing decades of experience and adding to the board's financial and audit expertise (inaudible). Now let me turn the call back to Jay Elliott, who will continue with the financial review in detail, Jay?

As Tony has explained our results for the first quarter of 03 have turned out to be pretty much as advertised. The sales were up fractionally with the business decline within the domestic U.S. (inaudible) market, fully offset, up sales gain we achieved outside the United State. At the gross profit level, the U.S. business decline more than offset the improvements we had out side.(Principle reasons were the inclusion of approximately $4m higher pension cost in the quarter with nearly 80% of that being charged with the cost of sale. Coupled with scheduling the plants at lower levels because of reduced product demand with a resulting smaller sales base over which to allocate fixed cost.

The U.S. business unit took steps to reduce their fixed cost, bringing it into better alignment to the current level of business by reducing overhead employment. In fact, these employment reductions will be permanent, as they have been made possible by improved organizational efficiencies. The cost of selling, general and administrative expenses in the quarter was $50.5m only marginally higher than the $49.4m of '02. This was made possible even though there has been a large increase in the translation rate of the Euro verses the U.S. dollar between the two periods, and the increase in pension cost in the U.S. -- part of that SG&A.

This was made possible because of offsetting reductions and other expenditures in the U.S. company. Profit percent at the operating income level, excluding rationalization and realignment expenses, amounted to 6.8% in the quarter as compared to 9.9% in the prior year. The U.S. percent operating profit was at 6% versus 10.7% percent in the prior year. As noted earlier, process for this kind is a higher pension cost U.S. business, coupled with lower overhead absorption because of lower plantoperating level. Business outside of the U.S. achieved the same percentage operating profit in the quarter as achieved in the prior years period, which was 8%. Lincoln’s strategy of increasing the geographical footprint outside of the United States continues to pay dividend as we see that operating income growing by 9.5% over the prior year's life quarter versus the decline in the United States.

Turning to cash flow and investment. $9.7m less was invested in working capital Q1 '03 versus Q1 of '02, and $6.6m less was spent on purchases, property, plant and equipment, plus acquisition. The $8.9m cash flow from operations included, a $10m contribution to the company's U.S. pension plan, which obviously reduced the cash flow and effects negatively this years comparison to the prior year's cash flow from operations, $27.7m.

An additional use for cash in '03 was a spending of $8.5m on repurchase of the company's shares, which was $6m higher than the prior year's first quarter. The company's percent debt in total capital was 30.3%, and when the cash balances are reduced from the debt it is only 3.1%. We continue to be very conservative to leverage, and to be in a position to undertake significantly sized acquisitions, which will be continued to be worked on.

In summary we have continued to experience the degradation in the U.S. business and we continue to see growth and improvement in our foreign business. We're continuing to manage the efficiency of our operations, in the face of (inaudible) in the U.S. and very competitive market place through out the world. We're focusing on investing wisely within the business and looking to add to the business in areas of the world that offer enhanced growth opportunity. All this is progressing as we continue to share the success of our operations with our shareholders, who are quarterly dividend payouts, in the stock buy-back program, which returns cash flow for shareholders.

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

Thank you, at this time if you would like to ask a question please press star one. To withdraw or cancel your question, press star two. Once again that's star one to ask a question. One moment while the question is registered. Once again that's star one to ask a question. Our first question comes from Walt Liptak with MacDonald's Investment.

Good morning Tony and Jay.

Good morning Walt.

To just talk a little bit about the gross margin decline a little bit more. You know, maybe one way to look at it is that your revenue year-over-year was basically flat but your cost to goods sold increased by about $8m bucks. You said that about 80% of that pension expense went through cost to goods sold, that's about $3m of that $8m in incremental cost to goods sold in the quarter. And is that the equivalent amount of the under absorption issue that you are talking about? Or is their something else going on with higher raw material or you know other benefit, pricing, etc.?

There are a lot of things in there including mixed being different operations around the world. Frankly Walt what I did was take a look at the income in the two periods, before rationalization and realignment expenses. Of the $13.5m in ’03 versus $17.5m in ’02 and that is a decline of 23%, which is substantial, and figuring that out on a pretax basis is $6,250,000. And taking out of that several items, which are in parting costs and part of ST&T (ph.). I mean parts (inaudible).so from that $6,250,000, taking $4m of pension out, taking $600,000 of foreign exchange, where we had about half about of that was Venezuela. Which still made money even though it had substantial charge, and $400,000 out, which is change in net interest, expense for these two periods, that leaves $1, 450,000 (inaudible) between SG&A and costs. And that is represented by cost absorption and other margin factors, but it only represents 0.5% of sales. So I think that considering the competitive nature of the business and the market share shift and there are some cost increased, that it's very minimal that effect on the company during this period. John did you want to add to that John Stropki.

Well I would just want to add to the comments that Jay brought up beyond the pension and the other areas of foreign exchange. The two areas of costs that we've seen the biggest increase of is in steel driven primarily by the artificial tariffs that have been posed by the government into the U.S. market place. I'm sure you've seen the increased prices that steel companies have reported in the 20 to 25% range, has had some impact on us. We've taken some steps to mitigate that we think we will get some improvement on it moving forward.

And secondly energy costs, we are a significant consumer of both electricity and natural gas. And as we have gone through the - from oil of the Middle East and the difficult weather conditions, particularly in the Midwest, we've seen some pretty significant cost increases of that, yet we think that (inaudible) as we go through the second half of the year.

Okay, can you give me some idea of what percentage of your cost of goods sold as steel and energy?

Well I don't want to break out steel's singularly. I would say that our costs of goods sold purchase items have been sold is in the - it's 50% range.

Okay.

And those are two very significant components of that.

Okay, and then on the pension cash - the pension funding during the quarter. How much of your operating cash flows went to fund the pension?

That was $10m.

Are there plans to continue funding the pension this year and how much?

at least that much again in the balance of the year. we are waiting to see what happens on that (leave) market during the rest of the year

On the $1.7m charge can you give us a little bit better idea of the number of workers that were let go? What locations - I guess US versus international and any plant consolidation?

It was a mix Paul, various places around the world (inaudible)

Well?

Took the reserve from the plant conditioning.

It was more in the US than outside of the US - but we really deemed the somewhat mysterious - (inaudible) we don’t like to talk (inaudible).

And the benefits from the restructuring can you quantify the payback period on the amount of cost savings?

Well on a quarterly basis we think it's million, million and a half to go forward and that will be immediate.

Okay, alright thank you.

Thank you.

Thank you once again, that's star on to ask a question.

Well it sounds like we have answered everything. We thank you, the attendance has been very good on this call. We look forward to talking to you in the future.

Thank you all very much.

Thank you for attending today's conference and you may disconnect at this time.