Lincoln Electric Holdings Inc (LECO) 2004 Q1 法說會逐字稿

Hello, and welcome to today's First Quarter Earnings Conference Call. Following today's presentation, we'll conduct a question and answer session. Until that time all lines will be in a listen-only mode. At the request of the Lincoln Electric, this conference is being is recorded. At this time, I'd like to turn the conference over to Mr. Vincent Petrella, Chief Financial Officer of Lincoln Electric. Sir, you may begin.

Thank you. Good morning, and welcome to the 2004 first quarter earnings call for Lincoln Electric Holdings. Joining us on the call today are Anthony Massaro, Lincoln's Chairman and Chief Executive Officer, and John Stropki, Executive Vice President and Chief Operating Officer. Our financial results for the first quarter were released prior to the market open this morning. If you have not received the copy, notify our Investor Relations office to have one faxed or e-mailed to you, or log on to our Web site to download the copy. I'll start today's call by reminding you, that certain statements made during this call maybe forward-looking, and that actual results may differ from our expectations. Risks and uncertainties that may affect our results are provided in our press release, and in our SEC filings on Form 10-K and 10-Q. First, on today's call Tony will provide an overview of the quarter, and of Asia. Then John will comment on our non-Asian operations. After John finishes, I'll cover the financial results in more detail. Let me now turn the call over to Tony.

Thank you Vincent, and good morning everyone. We've completed a very strong first quarter in all of our geographic regions, and we obviously are very pleased with our results. Our order rate continues the strong upper trend that started last September. For the first three months of this year, we saw a significant increase in our daily order rate in most areas of the company led by the United States. Let me review some of the financial highlights. For the quarter Lincoln reported a 50% increase in net income to $18.2m or $0.45 per diluted share, on net sales of $306.5m, which was 23% higher than the 2003 first quarter. These results compared with the 2003 first quarter net income of $12.2m over $0.29 per diluted share on net sales of $249.2m. This quarter sales were the highest first quarter sales in the history of our 109-year-old company. Our first quarter sales in 2004 were also 13.8% higher than the fourth quarter sales of 2003. We said during our year-end conference call that we view 2004 with cautious optimism, or remain cautious; our optimism is getting a boost as the global industrial sector continues to strengthen. Obviously there are still uncertainties, including the impact of the US election, rising steel cost and commodity prices, the war in Iraq, and the increased terrorist activities around the world. Let me repeat however that we are optimistic. Our US operations had net sales of $181.1m in the quarter, an increase of 23% compared with $147.3m in the same period last year. Export sales rose 23.3% to $16.9m due to a combination of strong foreign demand, the somewhat weaker dollar, and our continued global growth strategy. Non-US sales in the quarter were $125.4m compared with $101.9m in the same quarter last year. In local currencies, non-US net sales increased 10.7%. As announced earlier, the Board of Directors of Lincoln Electric Holdings Inc. declared a 6.25% increase in the dividend raising it to $0.17 from $0.16. The dividend is payable today, April 15 to shareholders' record on March 31, 2004. This represents a total increase in the dividend of 42% over the last five years.

Let me now take a minute to comment on the success of our Asian operations. Our global expansion combined with the rebounding domestic market made the first quarter the strongest in the years. Our global-growth strategy has put us in a very solid competitive position around the world and there is no question that we are the global-market leader. An important part of our success during the past several years has been in Asia. Asian sales are up 17% in US dollars versus last year's first quarter. We saw a sales growth in Singapore, Japan, Korea, India, China, Taiwan, and Thailand. Orders in China were strong fueled by demand for automatic equipment and the market acceptance of our new arc weld product line produced by our Bester and Australian operations. China remains in the market with the strongest growth in the world. Massive infrastructure projects continue to be planned there. An example of the project is to

water from the South to the North of the country, which will require total investment of about $60b. We expect significant orders for our pipe welding products for this large-scale project. In addition, many of our multi-national customers continue to expand on China. Ford Motor plans to build a second car plant in Eastern China to serve the booming area around Shanghai. The automaker aims to investment more than $1b in the project. As most of you know, we have a very good relationship with Ford and other North American automobile manufacturers, and we should benefit from this expansion in China. Another priority for China is its growing investment in oil refinery and transportation. The China National Offshore Oil Corporation will build the country's third liquefied natural gas project in the Zhu Jiang province of energy store of East China. Additionally Royal Dutch/Shell has confirmed that they will be joining China National Offshore Oil to build a $2b refinery in long-term process. The reason that I mentioned these large projects is to give you an idea of our opportunities in China, which are driving our investments there. We have and we will continue to benefit from our continuing commitment to develop new products to serve the world market. But as we previously mentioned, we have increased our holdings in our three joint ventures in China to a majority position. We and our partners have signed contracts to expand Lincoln's joint venture ownership and we expect to close these transactions in the second quarter of this year. Actually we are just waiting for government approval, we have already closed them as far as the partners are concerned. This transactions made huge effort and will provide Lincoln with a very significant footprint in China through flux-cored wire production in Baoshan, a major stick electrode production facility in Inner Mongolia, and the machine manufacturing facility in Baoshan. This expansion will also give us a stronger and more strategic link to our joint venture partner's extensive distribution network. The major Chinese infrastructure projects that I just mentioned will be key customers for our operations in Japan. And both John and I will be going there next month to meet with our major customers and our distributors. In other parts of the Asia-Pacific region we are seeing very good growth. Sales in India, the second largest market in the region are growing lead by investments in energy-related projects. I will also be meeting with major customers and distributors in this very important market next month. Our first quarter sales to Korea, Thailand, Taiwan, and Singapore were the strongest we've had in more than three years. Highland reported GDP growth of 6.7% in 2003, with 2004 expected to grow between 7% and 8%. The general industrial production in business environment in Thailand looks promising for 2004, and the automotive sector continues to grow and represents a big opportunity for us. Export sales to Japan in the quarter were the highest of any quarter in the past three years. And finally, our Australian subsidiary had a strong first quarter, both in the domestic market and through exports to the region. That's a quick overview. Before turning this call over to John for his comments, I would like to remind you that the company's annual shareholders' meeting is scheduled for 10:30 a.m. on Thursday, April 29th here in Cleveland. We remain committed to increasing shareholder value. Our global growth strategy, share buyback program, and increased dividend reflect that commitment, and our improving performance testifies to our success. With that, let me turn the call over to John Stropki. John?

Thank you Tony, and good morning to everyone. As Tony said, we saw a significant improvement in our sales levels worldwide this past quarter. Our US sales trends continued strongly upward with the year-over-year increase of 23%, the strongest percentage increase we've seen in many, many years. Business levels across all sales channels within the North American market were impressive during the first quarter, and the momentum is continuing into the second quarter. New orders remain strong in all products and in all channels. Sales through our industrial distributor channel reflect an overall improvement in manufacturing activity. As many economic reports have pointed out, new orders and industrial production across many of our key industry reserve such as heavy truck manufacturing, construction and farm equipment, and just general fabrication have been very healthy. Solid consumer demand driven by new product introduction and the integration of our Century market product line is continuing to boost our sales through our retail channels. As you may be aware, the recession we experienced in the manufacturing sector of the US economy these past few years impacted our consumable business more significantly than it affected our equipment business. Over the past seven months, however, the strong demand we are experiencing extends across all of our product lines - welding consumables, welding machines, cutting products, and robotic packages. We believe our results reflect not only the economic expansion generally taking place in the United States, but also real market share gains. These market share gains are a result of our new product introductions, our ability to better respond to improved demand levels, and market confidence in our strong stable company. We're confident that if you review the results reported by key competitors in our market, you will find that we have outpaced their performance. From an operating profit perspective, we continue to leverage our margins and our sales growth. The ongoing investments in our manufacturing facilities and business processes have positioned us to continue to improve our profitability as a percentage of sales as the year progresses and as our volumes continue to grow. We do, however, have many challenges in the variable cost of our business, and widely reported worldwide demand for steel has created a seller's market with unprecedented price increases and spot shortages in supply. While we've been steady on the supply side, we have experienced significant increases in the price of steel. We have mostly offset these cost increases with price increases through all channels we serve, and let me add that the market is accepting these price increases and that future increases will be necessary based on the current forecast for steel cost. Also, transportation and other related energy costs have been pressured by rising oil prices. We believe though, although these challenges are significant, we are well positioned to protect and improve our operating profits during these exciting times. Our operating cash flow has been steady, and we continue to invest strategically in our business to improve output, productivity, and our cost position. In the past few months, we've been shifting our capital investments to expand capacity, particularly on MIG and flux-cored wires, and we expect to see important impacts in these areas in the near future. We're very proud to report that we've achieved a significant operational milestone by having all of our Ohio plants certified to ISO 14001 environmental standard. We believe that this is an industry first, and that all of our major US operations are now ISO 14001 certified. Another achievement is the pace and depth of our new product introduction. Last week, we rolled out a significant number of new products at the Annual American Welding Society Show held in Chicago. Show attendance has been down for the past several years. But this year, our booth was flooded with customers, both domestic and international. And while we've large crowds viewing and participating in ten different live product and process demonstrations, several major competitors offered only static product displays. Important customers commented that we're not part of the show, but that we're the show. And they're most grateful for our efforts, and very excited about our new product offerings. As most of you know, our sales outside the United States have grown dramatically in recent years to the point where non-US sales are approximately half of our total sales. And it's great to see an economic recovery in the United States, but we also expect the rest of the world to provide a lot of growth in the years to come. But, let's talk what's happening, talk about what's happening in some of the other important markets. In Europe, our results in the quarter were the best in months with strong sales, improved capacity utilization, and lower cost. Several European economies are clearly showing signs of recovery. Total net sales were above prior year quarter by almost 20% in US dollars, and over 6% higher in local currencies reflecting our efforts to gain market share and expand geographically. Strong sales from Eastern Europe with 35% growth in local currency year-over-year had a very positive impact on results. Bester, our Polish subsidiary and C.I.F.E., our Italian wire manufacturer were major contributors to the higher sales levels. As we've mentioned before, Bester continues to perform quite well with several new products being introduced for Europe, Asia, and the US market. Bester has been growing consistently and ended the first quarter with total sales, which include exports 51% ahead of last year in local currencies. We expect the growth trend to remain strong. We're in the process of the significant upgrade of our C.I.F.E. MIG wire plant to improve efficiencies, lower cost, and increase capacity. The first phase of this project will be completed later this year, with the second and final phase by mid next year. While analysts continued to forecast somewhat positive GDP growth for the Eurozone in 2004, the euro does remain strong against the US dollar, and the mood is best categorized as cautious optimism. We believe, however, that we'll continue to see growth to market share gains driven by new products and a lower cost base. In Latin America, our overall sales were also very strong. Higher margin consumable sales improved Lincoln Mexico's product mix. Clearly, the economy in that country is improving. And we believe, the economic pickup that began in the US several months ago is finally starting to impact Mexico and improve demands for our products. We're constructing a second plant next to our present facility in Torreon, which we expect to be in full production in early 2005. In Brazil, 2004 started with a slightly positive numbers for the economy and welding related sectors. With the newly realigned presidential cabinet in place, and municipal elections coming in October, we expect significant infrastructure spending to result as well as a focus on job creation which will be funded by both public and private investment. Inflation remains under control at 5% in Brazil, and interest rates are trending downwards. All of these factors should possibly impact the welding markets throughout this year and next. We are also putting a second electrode line at our Brazilian factory. Installation will be completed this month with startup production in May, doubling our electrode capacity within the next two to three months. Regarding our Venezuelan facility, performance has been very positive. Government spending, in anticipation of a possible Presidential election this year, is driving economic growth. In addition, intensive maintenance projects in oil facilities, as the country struggles to reach its $3.2m barrel per day quota is positively impacting the welding industry. We are the clear market share leader in Venezuela, and we will benefit significantly from these projects. Political situation poses the largest potential risk in Venezuela. However, despite the political and social problems that are damaging most businesses, our financial results improved significantly in the quarter. Turning to our Russia, Africa, and Middle East region, business activity in the Middle East has picked up considerably even with the ongoing political unrest in the region. Product sales increased over 36% compared with prior year. Also, this business has tied oil production and pipeline activity. I plan to visit Russia next month for that country's major welding trade show, and I expect similar positive results to what we experienced in Chicago last week. In Africa, we recently dedicated our new expanded demonstration and training facility in Johannesburg, South Africa. Throughout the continent, we're expanding and adding distribution with very good results, and we're gaining considerable share in this region. That's the summary of all the markets. We're very encouraged by the improved business environment we see. Next, Vince Petrella will review the financial details. Vince?

Thanks, John. As noted in our release and in the previous comments by both Tony and John, we continue to have much higher quarter versus prior year quarter sales in our US operation. We're also seeing favorable year-over-year comparisons in our International operations. Based on the increased level of first quarter business in our North American Business Unit, we believe the US economic recovery in the basic industrial and manufacturing sectors is poised to continue through the remainder of 2004. However, we also believe that some portion of the increase in sales during the first quarter is related to the satisfaction of pent up demand in the marketplace, as well as a building of inventories by our users ahead of the announced price increase. Accordingly, we believe the year-over-year sales comparisons will be up for the remainder of 2004, but that the first quarter increases will be difficult to repeat. Looking at the volume of purchases by customer location rather than our selling units location, again US customers were up by approximately 23%, as John noted Russia, Africa, and the Middle East customers were up over 30%; Latin America was up 29%, and Asia increased 17%. In local currencies sales in Europe were up approximately 6%. On our product line basis, both machines and consumables saw strong rates of growth. Sales by product line approximated 57% for consumables and 43% for equipment as compared with the fourth quarter 2003 split of approximately 55% consumables and 45% machines. The percentage of growth profit in the quarter was higher versus the prior year at 27.4% of sales compared with 27.1%, a three-tenth of 1% increase. On a regional basis, US gross margins increased 1.1% while non-US gross margins declined seven-tenth of 1%.The increase in US gross margins were a result of higher volume levels and better overhead absorption. Competitive pricing pressures, rising input costs, and product mix, particularly in Europe, were the primary causes of the reduction in non-US margins. Overall, we expect margins to continue to improve in the second quarter, as year-over-year volume increases continue and as the recently announced price increases take hold. Price increases in the first quarter began having an effect during the latter part of the quarter. Although we are continuing to focus on programs to reduce cost and increase our efficiencies, our focus has now shifted to ensuring we have the necessary capacity to meet the sharp increase in demand, particularly in the US. SG&A expense in the quarter of $60.5m was 19.7% of sales, compared to $50.5m or 20.3% of sales in the first quarter of 2003. Higher bonus provisions and the impact of foreign exchange translation due to the weakened US dollar were the primary factors driving the US dollar increase. Bonus provisions in the first quarter were approximately $5m higher than the prior year same quarter. These increases are attributable to higher operating profits and better performance against targets by all of our worldwide units. Approximately $3m of the increase in SG&A was caused by foreign currency translation. The improvement in SG&A as a percentage of sales of 1.2 points reflects stable underlying SG&A cost and higher sales levels. First quarter operating profit was 7.6% of sales, an increase of eight times the 1% versus the first quarter of 2003 excluding prior year rationalization charges. Again, the increase was primarily attributable to the greater operating leverage provided by much higher sales levels.

Cash flow and working capital management improved in the quarter in comparison to the prior year. Working capital turnover efficiency continues to improve, with day sales and accounts receivable, day sales and inventory, and overall average operating working capital to sales, all following. The company's operating cash flow has improved year-over-year despite increases in accounts receivable and inventories to service the much higher sales levels. Pension contributions in the quarter were $10m, the same as 2003. The company paid 6.5m of dividend and invested approximately $8.8m in capital expenditures in the quarter. We purchased less than $1m of common shares through our repurchase program during the first quarter. The company closed the quarter with $174m of cash and marketable securities. This $174m in cash will continue to be available to support our acquisition program, repurchase shares, pay dividends, and reinvest in our operation. As was previously mentioned, we expect to stand approximately $24m on our recently announced investments in China.

Looking to the future, I believe we will continue to experience much higher volume levels, particularly in our US operations. Volumes will likely continue to reflect double digit increases through the third quarter of 2004. We will also continue to experience operating margin expansion as our leverage improves at the higher expected volume levels and under improved pricing condition. We have very actively managed our pricing strategy in the face of much higher commodity prices, transportation cost and unit labor cost. Despite these higher operating costs, the result for the quarter was a meaningful increase in operating margins. Our ability to continue to manage these cost increases will be critical to maintaining and growing margins for the rest of 2004. The results for the quarter are certainly very encouraging. We are optimistic the company will continue to take advantage of the recovering US and world economy during the remainder of this upturn. At this point, I would like to open the call for any questions. Mohammad, please open the call.

Thank you. At this time, if you would like to ask a question please press star, one. To withdraw your question simply press star, two. Once again, that is star, one to ask a question. Our first question comes from Gary Mcmanus of J.P. Morgan. You may ask your question.

Good morning, everybody. In terms of the revenue growth, you said you don't expect the 23% growth to continue because there was some inventory building in front of price increase. How much did that really help the first quarter? What kind of revenue growth rate would you anticipate in the second quarter and beyond?

Well, I think it's been said. We expect for the next several quarters to have at least double-digit sales growth. What we are saying is, don't expect 23% every quarter from now on. I think double-digit, though, will be pretty safe to assume.

Okay. But to what degree did the first quarter benefit from inventory building at the distributor level?

Gary, I think that's very difficult to say just at looking at some of the data that we have by individual channel and customer. We just think that some of this increase was the satisfaction of demand that has been building for some time as well as some users building their inventories after a long three to four year decline in reduction in inventories. So, I don't think we can put a number on it but we do think that some portion of this was the building of the inventories.

And Gary, I would say that that would only apply in the consumable side. Clearly the equipment success that we have is not inventory build related and what we saw on the consumable side, I would say, was somewhat mitigated by our ability just to meet the influx in demand we had based on capacity and steel supply issues.

Okay. The second question, if I recall in the last conference call you expected pension expense to be down $6m and I think I heard you Vincent saying that pension expense was unchanged in the first quarter year-over-year?

Gary, those were our contributions. Actually, our pension expense was down in the first quarter about $1.2m.

Okay. All right. And then just last question is regarding to operating margins. I mean, I think at the last peak in 1990 it was about 13.5% operating margins, you announced getting around 7.5% or so. I mean, how quickly do you think -- with this kind of volume growth, how quickly can we get close to that 13.5% margin, we are talking years away or quarters away?

Well, Gary, we have seen a month to months to months and a quarter to quarter to quarter improvement in the operating margin side. But clearly there are some external factors that slowed some of the progress that we would love to make in that area but we think that we will very shortly be able to achieve ten to plus operating profit type margin and continue to build on that based on our future view of the economy.

Okay. So, there is no reason your margins can go back to where they were at the last peak under similar conditions?

Yes.

Well, I think the only caveat to that is that, and I think everybody knows this, is that the international business is traditionally been at slightly lower margin and in these emerging market areas, until that we really see the kind of consolidation of which we are driving in places like China, that there will be some expectation that will slow the progress in achieving that long-term result.

Okay. Thank you very much.

Welcome.

Our next question comes from Walt Liptak with

Capital management. You may ask your question.

Okay, thank you. Good morning, guys.

Good morning.

Let me ask on the pre-buy situation or the inventory build situation, to get a little bit more color. What was the growth rate during the quarter for machines and what was the growth rate for consumables?

Machines were up little over 20%, and consumables in the mid 20% range.

Okay, so very similar?

Okay, And as we go into the second quarter, the consumables were in the high 20's and machines around 20. So, we think there is a pretty significant difference in the two.

Okay. And as we look at the second quarter, maybe-- I guess we've been thinking about consumables growing, maybe 10% to 20% range something like that?

Well, I think one of the issues in comparing the consumable growth is the price increases that have taken place because of the steel surcharges. So, those kinds of numbers will be very much predicated on what we see on the field cost side. But we are seeing significant volume increases on consumables and that's the most important side. As an example of that, we have added a fourth shift to our Mentor consumable operations and we will be running that at 100% utilization, in fact, are now. We started that shift just this Monday and that will increase our capacity depending on product mix out of that facility in the 15% to 20% range almost immediately.

I think we are maybe overstating the inventory build issue here, I think. Whatever inventory build there was is probably behind us now and we are seeing some real growth at this point or some buying before price increases. The fact of the matter, as John said, there isn't any inventory building in machines and they are up 20% consistently year-on-year.

And as I mentioned to you in Chicago, we have changed our shipping and billing policy now to reflect price and effect time of shipment, which really eliminates that four or five opportunities.

Okay. All right, fair enough. The numbers that you threw out there for the second quarter suggest that you had been looking at revenues that's at least equal to what you did in the first quarter. Is that safe to say?

I think it's approximately - and obviously it depends on what happens in the next couple of months and this is essentially a book and bill business, Walt, as you know --

Right. The operating leverage, what do you think your operating leverage will be going forward? You are about 11% during the quarter; I mean what would be a reasonable run rate?

I think John addressed that Gary's question. I think we can get back to operating levels in the low-teens, operating profit levels in the low-teens, if the volume levels that we are talking about in the not too distant future. In fact, I would be disappointed if we don't do it in the next couple of months.

I am sorry. So, if we-- we should see a 10% plus operating profit by the end of the year?

Yes.

Okay. All right thank you.

Our next question comes from Holden Lewis with BB&T. You may ask your question.

Good morning. Thank you. Can you just give us a sense of - we were talking about the rate of growth and all that. But, what was the contribution in Q1, I guess in the US in particular, between pricing increases and volume increases? And to what extent do you expect pricing -- or how much greater of an impact if that pricing is to play a role in Q2 going forward?

I can comment, Holden, on the first quarter and perhaps John can comment on the second and going forward. But, our price increases in the first quarter, at best, had maybe 1% effect on sales. Those price increases that started to be announced in the middle of February. Mind you, price increases at the time of order; in middle of February orders were not being shipped until the latter part of the quarter. So, we only saw the impact in the US of price increases towards the tail end of the quarter and probably middle of March for the last two to four weeks of the quarter. So, the full impact should start in April now and I will let John comment on what that might be.

Well, again two things. We've taken, I would say, a conservative long-term view on our price increases as they relate to our steel cost increases. That being said, the policy shift change of price and effect time of shipment, we'll have a major impact on our ability to cover cost and to have a lagging improvement on our margin, and we should see a much better position of that in the second quarter.

Okay, and have you seen any indication, I mean, I guess we have half of April in the books here but have you seen any indication that the volume piece of the business has decelerated from the rates that you were seeing in Q1 at this point?

Not significant. It's very consistent.

Orders are still high.

But at least early on anyway, it looks like the volume levels are consistent and then you should be seeing a better impact from pricing, at least from a near-term standpoint?

Well, not only that. As I mentioned, our ability to supply a greater share of the market is being enhanced because of the investments that we have made over the years to have some capacity availability, and the delay of that was really driven by hiring needs of which we have completed. Now, we will be in our North American facilities at 100% utilization and could realize again depending on mix of 15% to 20% volume increase ability.

Okay, and you referred the capacity additions that you are making in your US also. I assume that those are just manual, involving you are going to 24/7 production?

No, we are adding new equipment in all of our facilities in North America for welding consumable product production.

Okay. So, new equipment and new people?

New equipment and new people, and that's Canada, Mexico and improvements in the operations of the Cleveland operations and then fully staffing those lines.

Quite a vote of confidence in the outlook for demand going forward. Now, presuming you were in that, you wouldn't -- I am assuming if you were particularly concerned about inventory build at the distributors and things like that, you wouldn't exactly be spending your capacity?

Well, we have been operating at a fairly high level of utilization for the last 12 months and we have had the plans on the

to be able to do that, including facility space available. Now, we are just installing the equipment to take advantage of that and we are fortunate that our balance sheet has afforded us the opportunity to do that.

Okay, fair enough.

It's one of the ways we can significantly take market share

.

Okay. On the balance sheet, just had a couple of questions. The share repurchase, you weren't active there, is that just a function of this quarter really diverting those resources to the working capital and do you expect to get more active on the share repurchase going forward?

Well, I think Holden, one of the reasons why we were not very active was that when our share price ran up over 20% in three months period, we tend to, want to watch whether that's going to be stable for some period of time and we don't like to chase the price up in very strong movements. So, we'll evaluate, we will continue to evaluate that and we'll hopefully wait for the share price to stabilize before we move seriously into repurchasing shares again.

First, there's no issue with regards to the amount of cash to purchase shares or depend on capital.

And, what is the authorization, is the authorization still like 1.1m shares?

No, we have another 5m. Over 5m shares available to repurchase under the previous authorization.

The board reauthorized another 5m earlier this year.

Right. And then, so in your philosophy where your cash balances are, you know, there is lot talks now about rates moving up and things like that. Does the prospect of that make you more likely to, perhaps, use the cash to pay down some of the variable debt that you might have or is most of it already pretty well fixed?

Well, we don't have a whole lot of variable debt that we can pay down. The bulk of our debt would have relatively significant prepayment penalty as fixed rate debt. So, we are not in a position to bring our debt balances down significantly through prepayment.

Okay. So, it's not enough variable on theirs to have any impact on you?

No.

Okay, thank you very much.

Our next question comes from Evan

with

. You may ask your question.

Hi guys, nice quarter. Most of my questions have been answered but maybe you could talk a little bit about the Chinese joint ventures. I think in the 10-K, as you mentioned today, you are going to invest $24m. They had revenues of $50m to $60m that was going to be accretive right after that. Maybe, because obviously that is the most rapidly expanding market today. Can you just give us a little bit more color on when they are expected to close, what future plans there might be? And then on a separate note, in the past, you guys have made acquisitions, sometimes very large ones, and actually uncertain

entered into them and then decided not to go forward. I'm just curious on your outlook with regards to acquisitions in today's environment.

Well, let me address the Chinese joint ventures first. At some point several years ago, we formed a joint venture with our partner there, which is the Kuang Tai Group, out of Taiwan. And we owned a minority position in the Taiwanese company of about 35% and then we had a separate and distinct joint venture in Mainland China, under the name of Jin Tai, that we had approximately 48% of. The JinTai joint venture which is actually what we are talking about here is what we have increased our majority ownership to in various, different percentages. There is actually three joint ventures there. One is a flux-cored wire facility in Baoshan, outside of Shanghai, where we have now gone to a majority position in that. The second is an equipment manufacturing facility also in Baoshan, where we have taken a majority position. That's a new facility and that was not part of the existing joint venture. And then finally, there's a facility in Inner Mongolia called Kuang

which we again are taking a majority position and this is a very, very large electrode manufacturing facility.

In combination, those three businesses today represent approximately $50m to $55m per year in sales, and that doesn't not include the Taiwanese, Kuang Tai business nor does it include the MIG wire business that's part of our existing joint venture in Mainland China, which we did not at this point to take a majority interest in. We do plan on discussing that in the future however.

The growth of these businesses typically have been sustained to 20% per year in China, and we anticipate that will continue. So, in a very short time period, these combined businesses are going to be a significant part of our Asian business going from $50m to possibly $100m in several years, without our minority non-consolidated portion. I have answered your second question, the larger acquisitions. Yes, we have gone after a couple of large acquisitions and in each of those the decisions were made at the end of the day. They were not in the best interest of our shareholders and we were not going to pursue them. That continues to be our strategy, our strategy with acquisitions is that they have to be value adding, there has to be some reason why we would acquire a company, besides it's just being a good company. They have to be accretive; we don't want to buy fix-up operations. They have to be good for our shareholders and they have to be in some way aligned with the businesses that we believe our management, and our resources, and our technology skills can add something to. So, the ventures that you're talking about that were boarded for very, very good reasons mainly due to the fact that we didn't think in the end of the day there were the best interest of our shareholders.

Ok, fair enough. And then last question, you said in the US, you have pretty much of capacity where the company has been operating and pretty much new capacity. What about in the international markets?

I think its not really what John said. John said we're operating a capacity on a human resource basis, and we have added another shift in our MIG wire facilities, flux core wire facilities and we do have equipment capacity and now we've added additional people to get our capacity upgraded and we're still adding capacity in other areas of the US. To answer your question internationally here, we're adding a new electrode line in Brazil. We're building a whole new plant in Ontario, and Mexico.

We were upgrading the C.I.F.E. MIG wire plant, we are upgrading MIG wire in Canada; and the old Torreon plant, we continue to add production capacity; and in the Asian region also. We have a growing demand for capacity and we fortunately have balance sheet that can support that and therefore take market share.

Okay. And then, the Capex in the 10K, you said about 35 to 40 that still stand--?

Well, I guess, it's what that's going to be about 40 to --

That might be at the high end of that now, maybe even break 40.

Okay. Thanks very much.

Thank you.

Our next question comes from Anthony Coniaris with Harris Associates, you can ask your question.

Hi there. Can you give us an update in your litigation?

Well, you know, I think you just have to look at the SEC filing that we have, we're very transparent with that. There is essentially nothing new, we have very strong track record applicable insurance and we don't take it's material.

Okay. And then, could you break down prices versus volume for us?

Again, the first quarter it's only about 1% price impact, almost all of the first quarter increase was volume.

Okay, thanks. And then, margins by business segment? US, Europe, international, and then when you get in international, can you sort of frame for us how it's working with Asia growing faster than Canada and you've got those higher reseller margins and how do you see that shaping now?

Well, we have in the past talked about margins by geography or in a detail that you are asking for at this point, like we can't say that our margins are somewhat higher in the US and in our non-US operation.

But, you've historically broken that out in your filings right?

Yes. Gross margins I gave you earlier in terms of US versus non-US?

And then, the Asia thing. That's in the other international margins, you said, the other international margins we may not expect those to be going up because of Asia's growth. And you talked about how big Asia is within the other international and sort of where it's margins might be relative to your real high margin in the Canadian business?

What was John was trying -- John was responding to a question in terms of what our operating profit margins could expand to. And what he was pointing out is that, with gross margins and the operating margins in the US somewhat higher than the non-US. But, as we more rapidly grow non-US operations, and as non-US operations become a greater percentage of our global operations, our margins will be pressurized.

And that goes for equipment and product manufactured in Asia. I can assure that the products that John and rest of the people import into China and the rest of the Asia are at very high profit margins.

Okay. And then, lastly -- okay.

One follow-up point on that is, it's not that our -- we don't expect our margins to increase in those regions, we do and we are, but they don't increase and haven't reached the level of the traditional matured market margins.

Okay, thanks. Okay that does it for me thanks guys.

Thank you.

Once again, that's star one to ask a question, our next question comes from Holden Lewis with BB&T, you may ask your question.

Yes, hi. I just, I was under the impression that the tax rate would likely be higher, then you wound up reporting in the Q1, is there anything in sort of the tax line sort of brought it down below expectations that's unusual or you sort of revising your expected full year tax rate?

Now, it's actually a bit higher than the last year's, Holden, by I think a full over 100 basis points, that's 22.8, I believe, last years it was about 21.6.

All right. I thought they were looking for some thing higher than that, still there is something is unwound in stuff that compressed last year's tax rates. I expected a bigger jump and, I am just serious, does this just represent what you expect for the full year?

Yes, it is. We expect the rate to be right around 22.8%. To the extent though that we become much more profitable than what our forecasts are in developing that 22.8% rate, it could go higher. And to the extent that we have less profitability that could go lower. So, more profits than what we forecasted at this point in time might drive the rate up slightly, but for purposes of forecasting around 22.8% is as good as a number as we are going to get today.

Okay. And then, depending on how long this recovery lasts, I mean you would expect that in subsequent years to perhaps increase further, right?

Yes, we do.

All right. And then, can you just comment, the consumables versus the equipment margin? Can you give a sense of what's the relative operating margin in consumable versus equipment was in the first quarter? I assume that, the consumables growing in volume terms and then really being the biggest beneficiary of pricing, I mean, that mix is going to continue to skew more towards consumables in upcoming quarters and that should be beneficial to margins, is that accurate?

Yes, it's should. And, we have to be a little bit careful though, because we are indeed going to have higher reported sales because of the price increases that will have their full effect in the second quarter. But, these price increases obviously aren't are going to go straight to the margin level because we do have significant commodity, and particularly steel cost increases that have to be covered by these. So, to a large extent, the sales are going to be higher because of pricing in the second quarter, but also our cost of sales are going to track relatively closely.

All right. You can even argue that it's possible that gross margin could contract depending on how you approach that. But, it sounds like you are pretty optimistic, you are not just using pricing to offset the cost figure, because it sounds like you feel that you are getting some real pricing in the market too?

And we think, we are going to get more margin expansion, we don't anticipate margins contracting. But, the other variable that you have to remember is, we have added some additional capacity and we are going to get much better overhead absorption in the second quarter as well as we've added a whole another shift in Cleveland and that's going to take that leverage up a tick more.

Okay. But, do you think you are getting some real price, you are just costing up yet too far ahead of that?

Our goal is not to take advantage of the situation in the short-term.

Right.

But, to be sure that we cover our cost and we don't have any negative impact as far as our margin is concerned because of the costs element. And we convince that our big upside will come from the utilization side versus taking advantage of the situation.

We don't want to anger our customers, our distributors by increasing prices and then turn around and find out that they went somewhere else. So, it's a very delicate balance that John and his people are doing. Hello?

Mohammed, are you there?

Yes, sir. I am here. At this time, I assure no further questions.

Okay. Well, thank you all for joining the call today and I earnestly can say that I look forward to talking to you at the end of the second quarter. Thank you.

Thank you for attending today's conference and have a great day.