Lincoln Electric Holdings Inc (LECO) 0 Q0 法說會逐字稿

Good morning and thank you for standing by, and welcome to the second quarter earnings conference call.

At this time all participants are in a listen-only mode.

After the presentation we will conduct a question and answer session.

To ask a question please press "star-one."

Today's conference is being recorded, if you have any objections, you must disconnect at this time.

I would now like to turn the meeting over to Mr. Vince Petrella.

Sir, you may begin when you're ready.

Thank you very much.

Good morning and welcome to the Lincoln Electric Holdings 2004 second quarter earnings call.

Joining me on the call today are John Stropki, President and CEO; and Tony Massaro, Lincoln's Chairman.

We released our second quarter earnings this morning, prior to the market open, so you all should have a copy.

If for any reason you don't have the results, you can obtain them from our website, from other financial websites, or contact our Investor Relations office to have a copy e-mailed or faxed to you.

Before we proceed, I would like to remind you that certain statements made during this call may be 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 forms 10-K and 10-Q.

I'll get into the details of the financial results for the quarter in a few minutes.

But first, Tony Massaro has a few comments on the quarter and the company's overall performance.

Following Tony, John Stropki will cover details of the regions and the markets.

Let me now turn the call over to Tony.

Thank you Vince, and good morning everyone.

The quarter just completed was a very strong quarter for the company with net income rising 66.7%, $23.7m or 57 cents per diluted share.

That was on sales of $331.8m, a 25% increase over the prior year, and the highest recorded quarterly sales results in Lincoln's history.

In the half, net income was $42m or $1.02 per diluted share on net sales of $638.3m.

These strong results were indicative of the continuing strength of the global industrial markets.

John will provide a more comprehensive view of business results and performance in the regions in a moment.

Higher demand across all industry segments drove sales increases in North America, Mexico, and Europe.

And on a global basis, energy projects in Russia, the Middle East, and China contributed to export sales increases for our operations here in the United States and internationally.

We have also continued to make progress with our push into these growth markets.

As we recently announced in June, we completed the transactions giving Lincoln the majority ownership in three significant businesses in China.

With our established position in China, Lincoln is now by far the largest and only global player with a strong position in the Chinese welding industry.

That's an accomplishment that we are extremely proud of, and I'm sure John is looking forward to leveraging and building upon that position.

As we have mentioned in our previous calls, our global growth strategy has been on track, and we believe it is paying dividends as we increase our positions in these growth markets.

Our goal has been to keep and make Lincoln a truly global company.

And I believe we have taken the necessary steps through a carefully constructed plan and strategy to make that happen.

As a result, we have emerged from the economic downturn these last few years, as a stronger, and better-positioned company.

And I believe the results validate that point.

As you are aware, last October I announced my intention to retire from Lincoln.

After a thorough search and evaluation process conducted by members of Lincoln's Board of Directors, these past several months, the strongest candidate, and the candidate who certainly had my vote of confidence, emerged in the person of John Stropki.

John, a 35-year veteran of the company, was named President and CEO in early June.

Many of you have had the opportunity to meet John and you know that he is a fine leader, and without a doubt the best and most-knowledgeable executive in the arc welding industry.

He knows this industry.

He has grown up within this industry and has the vision to take this company forward.

I have every confidence in John, and I believe the company is in extremely capable hands as it progresses forward.

With that introduction, let me pass the call to Lincoln Electric's President and CEO, John Stropki for a detailed summary of our markets and global operations.

John?

Thank you Tony, and good morning everyone.

As Tony mentioned, we continued to see strong performance during the second quarter in sales levels and profits across all of our operations worldwide.

This was particularly true in the North American market where industrial activity was robust across most major industries served, and which translated into a continuation of strong sales and orders.

The strength of the quarter and first half yielded excellent results here in the US, our largest market.

Net sales in the quarter for Lincoln's US operations increased year-over-year 28% to $198.5m.

Export sales increased year-over-year approximately 17% to $20.3m.

As a side note, underlying the importance of exports from our US operations, we recently earned one of the state of Ohio's highest business awards, the Governor's Excellent in Export Award.

This special honor recognizes Ohio-based companies for leadership in competing in the global economy.

Overall, our North American markets saw strong upward sales trends in all of our channels.

Industrial distribution was up over 11% from the first quarter, and more than 26% over last year's second quarter.

Retail, rental, and automation sales all gained over Q1, and double-digit growth over the same quarter of last year; again, good solid and significant growth.

In addition, in each of our product groups we had significant year-over-year sales growth.

Machine sales were up over 25% over last years, and consumables climbed over 31%.

Automation, another good indicator of capital spending given its cyclical nature, increased 29% from the first quarter, and 28% over last year.

These results reflect our successful channel management, as well as our continued focus on being "the Arc Welding technology leader" in the industry.

We are doing this through our aggressive R&D program which continues to drive successful new product introduction.

For example, sales of our new technology products, such as our precision TIG machines used across a number of our customer segments, and our Power Wave AC/DC machines for [sub arc] welding applications, are moving exceptionally well.

All of these products are under our [next weld] umbrella.

Our portfolio of products solutions focus on factory automation, productivity, and process control.

These new products are not only contributing to sales growth, but also winning engineering design awards as well.

We recently received the 2004 Nortec Innovation award and the 2004 Innovation in Business award related to our work of power electronics on our Power Wave AC/DC 1000.

Sales trends continued strong throughout the second quarter.

And we are continuing to take steps to meet increasing customer demand as we continue to add new hires to our Cleveland workforce.

At the beginning of April, we began a Mig wire only allocation system with our customers to better control and prioritize the level of product available to our various customer segments.

And at the same time, we have taken steps to increase capacity for this important product which is already having a positive impact on availability.

In mid-April, we added a fourth shift to our consumable plant in Mineral, Ohio, and we are now running the facility on a 24-7 basis to accommodate demand.

We are, however, continuing this product allocation process with incremental increases into the third quarter.

As a result of significant cost increases for our raw materials, particularly steal and chemicals, we implemented product price increases throughout the second quarter and again, beginning this third quarter.

The global steal rod markets remain in turmoil, with both supply and price being issues.

Moving forward, we are continuing with our strategic capital programs aimed at improving capacity and lowering costs throughout all of our operations.

For example, we recently broke ground on a new manufacturing facility in Torijon Mexico which will produce high labor concept products with the principle focus on supporting North American product demand.

We expect this facility to be completed during the latter part of the fourth quarter of this year, with ramp up production beginning in the first quarter of 2005.

During our last call, we talked about the integration of the Century Marquet product line.

I can report that this integration is now complete, and it was successful.

We are now actively developing a new brand and product strategy for this high-potential product line, including battery chargers, which will be positioned within the retail and automotive after-markets.

Turning to our international operations, our non-US sales in the quarter were up 22% to $133m.

In local currencies, sales increased 18% to approximated $130m.

In Latin America, economic conditions continue to improve.

Main drivers were the ongoing strength in commodity prices, a notable recovery in investments throughout South America, and a steady improvement in the Mexican manufacturing sector, which is being pulled forward by the positive developments in the US economy.

Profitability also improved across the region due to expanded volumes and good results recovering material cost increases through higher average selling prices.

The outlook for the region going forward is optimistic.

And good momentum in key countries and sectors is tempered by the potential of political and social conflict in the region.

In the region covering Russia, Africa, and Middle East, we continue to experience strong demand for our products, and we are seeing increases in orders looking forward.

With the transfer of Sovereignty to the Iraqi authorities, we have experienced an increase in business activity in Iraq.

In a relatively short period of time, since the transfer, we have already received a significant number of orders and inquiries for welding products from major Iraqi companies and contractors.

We anticipated this increase in activity to continue for the foreseeable future.

The general business activities continue strong in the Middle East, especially in the pipeline construction segment, even with the terrorist threats and political unrest in the region.

For instance, In Saudi Arabia, we recently received on order valued at over $1m for our auto weld pipe systems from three different contractors scheduled for delivery within the next two months.

In addition to these machine systems, we will be selling our specialty pipeliner consumables for these systems as they are put into service.

I have commented in the past of the importance in the prospects for growth in Russia.

And we recently received an important order for welding equipment from [Trasnet] in Russia totaling over a half of a million dollars.

[Trasnet] is the operating company for all pipelines within Russia.

This order is the second part of a program by them to upgrade their pipeline repair fleet, consisting of engine drives, high-end welding machines, and wire feeders.

In Africa, business activity also continues at a good pace due to oil and gas projects currently under way and/or starting in the near future.

In South Africa, we recently added an important new distributor which further increases our distribution coverage and activity in that country.

In Europe, forecasts now say that the Euro-zone economies including Germany, will grow faster than the previously anticipated 1.7%, reported by the European Commission.

Commission credits improved business confidence, consumer consumption, and exports for the projected new growth.

Eastern Europe sales continue strong with YTD sales being 144% from prior year in local currency.

Eastern Europe's overall general market growth trend, which started last year, is expected to continue.

Overall, sales in Europe are projected to continue their positive trending upward.

And strong demand in base markets for solid wire and equipment should continue, allowing for a positive outlook for the next three months, keeping in mind that starting in July, several countries go on their annual summer shut-down.

Tony mentioned the opportunities we have in China.

In addition, other parts of Asia market also hold good promise for Lincoln.

Over the last two months, both Tony and I have visited customers, prospective customers, and our distributors throughout Southeast Asia and Pacific-Rim market and India.

We see demand growing in this region, and we intend to participate in meeting that demand by expanding our manufacturing platform.

For example, we will be doubling the capacity of our stick electrode plant in Indonesia to help supply that particular product channel throughout Southeast Asia.

In June Tony visited Vietnam, where we and our joint-venture partner [Kuan-tai] are establishing a welding consumable factory in Ho-chi-min City.

This plant will make stick electrodes and MIG wires and will be in production late third quarter of this year.

In addition to Southeast Asia, we are experiencing increasing demands for our submerged arc fluxes and wires and India due to the rapid growth of the pipeline infrastructure.

Four new pipe mills are schedules to commence production by the end of 2004, and approximately 25,000 kilometers of oil and gas pipeline are scheduled for construction between 2005 and 2009.

We intend to strongly participate in this growth opportunity.

Down under, Lincoln Australia continues to show solid growth.

Lincoln is now the largest welding product producer in Australia-New Zealand.

We recently received approval from the Lincoln Board of Directors to proceed with a $10m investment in our Australian plant to upgrade and improve our operation there, to better serve both the domestic Australians, and export markets.

Among the many strengths of our Sydney plant is the production of engine drives, and we are continuing to improve and upgrade our product offerings in this area.

Lincoln Australia recently launched a new product- the Titan 701, a world-class engine drive designed for the demanding conditions in Asia, the Middle East, and Africa.

In summary, the regions, all of the regions, put in solid performance during this quarter, and during the first half.

There are a number of factors, however, through the rest of the year that may result in slower growth that what we experienced in the first two quarters of this year, such as the European vacations in July and August, which I mentioned.

But we do, however, anticipate that our positive trend will continue.

As I mentioned, we are continuing to improve our production costs, focus on raw material costs, and where possible invest back into the business on every continent that we operate.

Finally, we are very encouraged by the improved business environment we have seen and expect to see.

Let me turn the call back over to Vince for the detailed financials, after which we will open for questions.

Vince?

Thank you John.

As noted in our release and in the previous comments by John, we continue to have significantly higher quarter verses prior year quarters sales in our global operations.

As noted previously, sales were up 25%, with US sales increasing 29%, and sales reported outside of the United States up approximately 22%.

Excluding foreign currency effects, non-US sales increased 18%.

Pricing had an important impact on sales for the quarter, contributing 7% of the increase in sales dollars year-over-year.

Therefore, second quarter year-over-year sales volume comparisons were slightly lower than the first quarter of 2004 comparisons.

Nevertheless, we continue to see strong order levels into the third quarter.

Accordingly, we believe year-over-year sales comparisons will be up double digits for the remainder of 2004, but the first half year-over-year increases will be difficult to repeat.

Looking at the volume of our purchases by customer location rather than our selling units location, US customers were up by approximately 30%.

Europe increased by 20%.

Russia, Africa and the Middle East customers were up over 10%.

Latin America was up over 20%, and Asia increased 33%.

In local currencies, sales in Europe were up approximately 15%.

By a product-line basis, both machines and consumables saw strong rates of growth, both up over 20%.

Sales by product line approximated 56% for consumables, and 44% for equipment as compared with the first quarter 2004 split of approximately 57% consumables, and 43% machines- essentially the same.

Prior year same quarter product line were 54% consumables, and 46% machines.

The percent of gross profit in the quarter was significantly higher verses the prior year at 30.2% of sales compared with 26.4%- a 3.8% increase.

First quarter 2004 gross margins were 27.4%.

The increase in gross margins was a result of higher volume levels, and better overhead absorption as well as improved pricing.

Overall, we expect margins to remain at these levels through the remainder of 2004.

First half gross profit was 28.9% of sales, compared with 26.8% in the prior year.

Again, year-over-year improvements were attributable to volume gains.

SG&A expense in the quarter of $68.9m was 20.7% of sales compared to $52m, or 19.6% of sales in the second quarter of 2003.

Higher bonus provisions, stock compensation costs, 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 second quarter were approximately $10m higher than the prior year same quarter.

These increases are attributable to higher operating profits, and better performance against budget targets by all of our worldwide operating units.

Stock compensation costs increased over $2m in the quarter, primarily because of the 30% increase in the company's share value in the quarter.

Approximately $1m of the increase in SG&A was caused by foreign currency translations.

SG&A expense for the first half was $129.4m, compared with $102.5m in 2003.

Again, the primary reasons for the increase were higher bonus provisions, stock compensation costs, and foreign currency translation.

First quarter operating profit was 9.5% of sales compared with 6.8% in the prior year, an increase of 2.7% verses the second quarter 2003.

This increase was primarily the result of greater operating leverage provided by much higher sales levels.

First half operating profit was 8.6% of sales compared with 6.5% in the prior year, and increase of 2.1%.

The prior year included pre-taxed rationalization charges of $1.7m.

The income tax provision for the quarter reflected an effective tax rate of 28%, bringing the YTD rate to 25.7%.

The prior year's quarterly effective tax rate was 21.6%.

The higher effective tax rate primarily results from the company's higher forecasted earnings for fiscal 2004.

Depending on full year earnings, we expect our effect tax rate to remain at the YTD of 25.7% through the end of the year.

Reviewing the balance sheet, working capital needs grew during the quarter in comparison to the prior year.

However, working capital turn-over efficiency continues to improve with same sales and accounts receivables and average operating working capital to sales falling.

The company's operating cash flow of $43.5m has remained relatively stable year-over-year despite increases in accounts receivables and inventories to service the much higher sales levels.

Pension contributions in the quarter were $10m, and $20m YTD- the same as 2003.

The company paid $6.9m of dividends and invested approximately $12.7m in capital expenditures in the quarter, excluding acquisitions, bringing our total capital expenditures for the half year to $20.3m, an increase of $6.5m over 2003.

Our 2004 capital spending plan continues to focus on capacity expansion to meet the higher demand levels in our global operations as well as improvements in operating efficiency.

In addition, we purchased approximately $2m of common shares through our repurchase program during the second quarter.

The company closed the quarter with a $185m of cash and marketable securities, and approximately $164m of debt.

As previously announced, the company spent $6.1m during the quarter on our investments in China.

We expect an additional $15m to be reflected in third quarter cash flows related to these acquisitions.

Looking to the future, we will continue to experience higher volume levels in our global operations.

Volumes will likely to continue to reflect double-digit increases through the third quarter of 2004.

As John mentioned, it is important to note that historically, first half sales and earnings results have exceeded second half results because of lower overall demand principally related to planned shut-downs and holiday periods occurring in the third and fourth quarters of our fiscal year.

This factor, coupled with some moderation of order levels, from the demand spike occurring in March, April and May of this year, should result in more modest year-over-year sales improvements.

On the profitability side, we will continue to experience year-over-year operating margin improvements as our leverage achieved at the higher expected volume levels continues through the remainder of the year.

However, the sequential expansion and operating margins experienced this quarter will moderate around the levels achieved in the second quarter through year end.

Certainly, the results for the quarter are encouraging.

We're optimistic that the company will continue to take advantage of the recovering global economy during the remainder of this upturn.

At this point I would like to open the call for any questions.

Anita?

Thank you.

At this time we will begin the question and answer session.

If you have a question, please press star-one on your touch-tone phone.

For any participants using speaker equipment, you will need handset prior to pressing star-one.

If you wish to cancel your question, please press star-two.

All participants please stand by while the questions register.

Our first question comes from Jason [Voista], [Gate C.] Management.

Your line is open sir.

Hello?

This is [Jack Volaska] from P.H. Capital.

I was wondering on the gross margin side, can you tell me the raw material impact on the quarter in dollars?

We prefer not to get into those kinds of details for competitive reasons, but we would say that our pricing strategy has been one to cover increases in overall raw material costs.

OK.

Can you talk about your price increases that you instituted at the beginning of last year, I think you said in the first quarter of last year and the first quarter of this year you had two price increases, and another one in the third quarter, is that correct?

We raised prices throughout the first and the impact from those price increases were approximately a 7% increase in sales dollars year-over-year.

John mentioned that we also raised prices in the beginning of the third quarter, early July, and I'll let him give some broad commentary on the level of those increases if he so chooses.

Well, Jason as Vince said, our strategy is really to recover the cost increase on raw materials.

That's true both in the equipment and in the consumables side of our business.

That being said, we have seen the most significant increase in raw material prices for our carbon steal rod in July that we have seen yet in the ferris wheel that we're on as far as steal pricing is concerned.

And again, we have implemented the price increases to recover that.

OK.

So the price in steal rod is the one that is experiencing the most increases out of all of your product lines?

That is our most significant purchase, and the increases have been highest from a percentage basis.

That being said, we have also seen price increases on the equipment side driven primarily by the commodities of copper, aluminum, steal, and electronic components.

Again, our strategy is to recover those in the second half of the year.

OK.

Then also on the balance sheet, could you give the dollar value of your accounts receivable inventory and accounts payable?

Yes.

At the end of the half year, we had $217m of accounts receivable, $204m of inventory, and $125m of trade accounts payable.

If you compare that to the prior year's net working capital, our net working capital went up about 8-9% on a sales increase of 25%, so about a third of the increase in sales was reflected in net working capital.

Was your sales volume in the US consistent with the industry, or in excess of the industry?

We believe that we are in excess of the industry.

There's not a lot of good data that it available.

But we know from talking to our distributor partners that we're outperforming some of the other competitors in the marketplace as far as their purchases our concerned.

Thanks a lot .

Thank you.

Our next question comes from Walt Liptak, Keybanc Capital.

Yes, thank you.

Good morning.

Congratulations John.

Thanks Walt.

The question I've got is for Vince.

For the third and fourth quarter that Delta and Bowman's bonus payments is $10m year-over-year, will that continue in the third and fourth quarter at the same rate?

It's likely to be close to that, although I think the second quarter might be a tad higher than what the spread might be in the third and fourth quarters.

OK.

And what about for the stock compensation?

Walt, that's difficult to predict.

We do have some of our incentive compensation programs tied to SAR-type instruments.

So, there is some variability in our compensation costs depending upon what our share price does.

So, the bulk of that increase in stock compensation costs was caused by the nice appreciation in our share price during the first half and particularly the second quarter of the year.

So, the answer is I can't predict it to the extent that our share price moves, but certainly the move we had of over 30% in the second quarter might be difficult to replicate in the second half, although I hope not.

Ok.

In a similar line, you haven't mentioned the pension expense.

What was the Delta year-over-year?

From the quarter, it was down $2.2m.

For the half-year, about $4.5m.

OK.

I don't think you mentioned a CAPEX number for the year.

Well, our half year is $20.3m and I fully expect us to hit $40m this year as our CAPEX is starting to accelerate in the second quarter of the year.

OK, great.

Those orders that you mentioned in Russia and Saudi Arabia in the Middle East, I think you said, but I didn't hear the dollar amount of that Saudi Arabian order?

The Russian order, how big were those?

Combined, approximately $2m.

But those are just two orders of significance that we highlighted because of the strategic importance of them.

I would reiterate that we are doing very, very well in that region, and we have focused a lot of our R&D effort over the last several years on the development of new pipeline welding equipment and consumable and those are being extremely well-received in all oil and gas sectors around the world because of their advantage in reducing labor content and greatly improving the quality of the weld, particularly as people move to new steals to reduce the initial cost of pipelines.

OK.

Got it, and then Vince, in your outlook you talked about the demand spike in March, April, May.

I'd just like to understand, was business progressively better during that time period, and what did June look like?

Does that mean that June didn't see the spike, and things slowed down?

I would say that June was still very strong overall if you look at our volume compared to year-over-year where the first quarter had comparisons in excess of 20%, we were in the high teens in the second quarter.

So, I would say that it's a handful of percentage points softer than the first quarter year-over-year comparison.

Just as a follow up to that Walt, our year-on-year comparisons are running very well, but also remember that the third and fourth quarters of last year got progressively better, particularly the latter part of the third quarter and most of the fourth quarter.

So, I think what Vince is trying to say that year-on-year comparisons could dampen a little bit, but the levels are still positive.

Got it right, still a very good level of business, but tougher comps.

OK.

Thank you.

Thank you, and our next question comes from Godfrey Birckhead, SBK Brooks.

The line is open sir.

Good morning folks.

Is there any benefit to earnings from FX- foreign exchange?

No.

Actually, the foreign exchange gains and losses year-over-year were less than $1m differential.

Plus or minus?

Plus.

We had a loss last year, and a very minimal insignificant loss this year.

OK.

If business is so good why didn't your equity earnings and affiliates go up?

Well, there's a couple of factors there.

One is that some of the businesses that we bought in China are now being recorded in all of the different line items in the P&L.

So, we did have a couple hundred thousand dollars that would have been reported in equity earnings that is now up in operating profit year-over-year.

OK.

So you've consolidated that it what you're saying?

We consolidated a couple of businesses that were equity earnings before.

But we do expect those earnings to have better comps for the remainder of the year.

OK.

So for the year as a whole, that should be up- that line item?

Yes, we think so.

OK.

Now I missed a beat.

I know you addressed it, and I apologize for this, why did the other income go from $200.000 to $1.2m?

There are a couple of reasons.

One is we have some greater investment income from long-term investments that are not classified as interest income.

And also some gains on dispositions of properties and assets...

OK.

So you had some sales of properties...

Those will be non-recurring.

So that would be the same as last year in the second half of the year, or ..?

Yes.

It ought to drop back down..

Drop back down to a more normal type of think?

Right.

OK.

Is the fourth shift, day at your plant in Ohio, is that the most efficient you can get- or is that the least efficient?

How would you characterize that?

It produces the most available capacity of any other option that we have.

It is somewhat historic for us in periods of peak business.

That being said, it is always challenging to staff that kind of an operation and we work hard to ensure that we maximize the output under those difficult circumstances.

Part of that is some of the significant investments that we have put in over the last three years that greatly automate that facility to reduce the physical labor contents that require to maximize output, and we're seeing some very positive gains in that area.

OK.

To get back to the earlier question, where the gentlemen was asking about[inaudible], you used the word demand spike- I think is the way you characterized it going through May and then you said there was a little bit of a downturn in June, and wasn't quite as bright there.

Then, before in your formal remarks you talked about being on allocation in some products, it sounds as though the demand/supply got very, very tight at one point, and now that is beginning to loosen up.

Am I thinking about that correctly- or not?

What I would say to categorize Vincent's point is that we saw a very rapid acceleration of demand at the latter part of the first quarter.

That level of business, quite frankly, has maintained itself and I would say in certain of our markets has actually improved.

We still are at a very high level of demand.

The allocation issue that I addressed is in one product which we are increasing capacity...

In the MIG wire one...

Right.

We still think there is some embedded demand opportunities for us to capture there, and part of the CAPEX moving forward for the remainder of this year, and quite frankly early next year, is designed specifically to address that.

OK.

What I am trying to get at here is..I'm one of your customers, and my business has been lousy for a long time, all of a sudden demand picks up in my business and I'm not carrying a lot of your products in inventory.

What is the inventory condition with your customers now, and what is the inventory condition with your company now?

Let's do it that way.

When you have these kinds of increases in volumes and levels of sales, you have to build some inventories, and that's been reflected in our inventory figures where we've increased our inventories, probably over $30m on a base of $170m last year.

So I would expect, although I don't have access to and visibility to all of our customers and distributors inventories, that there would be some increase in their inventory levels as well to support the higher demand requirements.

So, certainly, when business volumes pick up like they have, we've seen the necessity to increase our inventories, we would expect that our distributors and users have done something similar.

I guess what I'm trying to get at is a cautionary note that you gave us about the second half.

Does some of that have to do with the fact that there was a inventory catch-up, and now that's taken place?

I know you have given us the seasonal thing, but you had the seasonal thing last year.

So you're talking about apples to apples...the same condition existed last year.

The Europeans went on- the French go on vacation every single August and we know that.

We just don't expect that there is any real serious inventory issue on either our side or on our customer's side.

Things are thin right now and I expect that they will stay thin for the foreseeable future.

So you're telling us that in the second half, if we're building a model, that the sales in the second half should be up somewhere between 15-20%?

Does that sound reasonable?

Look at the fourth quarter Godfrey; we had a 10% increase year-over-year in the fourth quarter.

So what I'm telling you is that you shouldn't model the same kind of increase that we had in the second quarter.

Right, because [inaudible]

Right around the end of the third quarter it started to pick up.

SG&A expense as a percentage of sales of 20.8%, the way I figured it in the second quarter is that going to be it for the year as a whole?

What guidance can you give us on that?

I think that we can expect comparisons in that same type of range through the remainder of the year.

OK.

Thanks for putting up with me.

You're welcome.

Thank you.

Our next question comes from Evan [inaudible].

The line is open sir.

Hi there guys, nice quarter.

My question is- I got confused at a lot of reference to margin as there was in the last questioner, but mine is pretty simplistic.

You did 12% plus EBITDA margin for the quarter, your old peak going back to 2000 was around 16.5%.

I believe on the last call you said that you felt that that type of number moving forward over the next few years was certainly within range.

When I'm looking at your US margins, you break them out in the queue, I know you don't do it in the quarter here but in the past they were in the high teens.

I know that they're no where near that today.

I'm just wondering if you still stand by that, that you can get towards those mid-teens EBITDA margins moving forward.

I know the mix has changed and that the international with start-ups and stuff is lower and that the US is probably the highest margin of all.

But maybe you could just speak to the broader outlook over the two-three-four year time-frame.

I think Evan, that we can continue to increase our margins, obviously operating profit and EBITDA margins from where we stand today.

However, you do remember the conversation we had in the last couple of quarterly calls to highlight from geographical and product-mix issues that will make it difficult to hit those types of peaks.

John pointed out some of our global manufacturing strategy which includes producing products in other regions including Latin America and in [Torion] where we are building a new factory.

You see some of those margins shifting a little bit between regions depending upon where we source and where we manufacture our products.

But overall, we think from an operating profit standpoint we are going to continue to inch that margin up and, like we've said in the previous calls, hit double digits some time this year.

OK.

And in regards to the manufacturing sector, since you guys are global, and since the Wall Street Journal and some of these other papers are infatuated with referring to China in the slow-down or potential slow-down there, and how it impacts the rest of the world; could you just give us your views on the perceived China impact and what impact it really does have on what's going on from a manufacturing standpoint in other parts of the globe and how much we read in the paper about the government trying to slow down business and what sort of impact that has worldwide?

What is your viewpoint on that?

Before John responds to that I'd just wanted to also mention that one of the significant factors affecting operating profit and EBITDA margins in the last few years is this pension cost run-up.

Even though we are having some declines this year, we've had a 2-3 hundred basis plank deterioration in margins because of pension costs that are $20-25m higher now than they were back in those peak earnings years.

So I don't want you to forget that on an adjusted basis, if you take our 9.5% OP margin, that that ought to be closer to 12-13%.

OK.

That's a good point.

Evan the China question is a huge question and you can spend hours debating it.

I would just make one general comment.

The slowdown that the government was orchestrating in China I think has been achieved.

With that being said, they're moving from maybe 9-9.5% growth down to an 8% growth type range so still, very significant growth.

But also remember that the base volume level is now so much higher than it has been in historical periods that 8% of this new volume is still a very high level of activity.

And what we're seeing there is just a continuation of good opportunities that historically we have participated only in infrastructure-type activities in China, and with our new joint ventures and now majority-owned ventures we are really having an opportunity to participate in the general manufacturing sector in China, which is approaching a size of significance to the North American overall manufacturing sector and clearly is projected to be bigger.

So the opportunity is large from a domestic participation standpoint and yet obviously represents some challenges to manufacturers in existing markets of which they have to find ways to react to.

We just think that we've done a terrific job under Tony's leadership of getting us to the position in China, and as I said in Asia-Pacific in general to really capitalize on any movement of manufacturing into that sector as well as a tremendous base that it already there.

And lastly, any comments for the growth of dividend and potential rise of the dividend?

You're sitting with a lot of cash.

We reevaluate that every year Evan.

I don't think that we're scheduled to look at that until the end of this fiscal year.

But if you look at our track record, and our history, we are committed to increasing our dividend on a long-term basis, as our earnings increase and as we trade within a certain yield, and payout ratio.

I think I can't make any predictions but we do have a track record and a history of moving the dividend up annually.

OK.

Congratulations again.

Thank you.

Our next question comes from Gary Mcmanus, J.P. Morgan.

Go ahead sir.

Hi guys.

Congratulations John on your promotion.

Thank you.

Not to beat a dead horse but on your outlook for second revenue growth, if I recall correctly during the first quarter conference call you said that you didn't expect the 23% revenue growth in the first quarter to be repeated.

So it obviously looks like the second quarter came in better than expected.

I am wondering what's your conviction that the revenues aren't linked to year-over-year growth; and really you're also talking sequentially that revenues are going to slow from the second quarter.

What is your conviction, or confidence that that is going to be the case?

Well, again I think that the base, the year-on-year comparisons are clearly going to be more challenging as Vince mentioned earlier.

In the fourth quarter of last year we had 10+% year-over-year growth.

Put 20 on top of 10 is a big number, and I think it's somewhat unrealistic.

We're optimistic that are performance level is going to be good.

We're just citing the comparison issue to be sure that everybody understands that.

Is there any markets you see slowing down in?

I guess maybe auto you'd be a bit worried about, but I would think that the energy area and industrial area still look very strong.

Yeah, again you guys follow the industrial markets as well as we do.

I think you can dig out as much data as you want- I mean construction/equipment is still very, very strong.

Most commercial transportation sectors are going very well-that would be truck, train, boat, ship kind of areas.

We've seen some slow down in automotive, but it's small kind of stuff.

As you said, energy around the world today is just going nuts as people try to react to $42 barrel of oil and record gas prices and natural gas prices.

I think we mentioned on the last call, the great thing about the energy sector from our side is where all the oil and gas is isn't where it's used and it's got to be moved and it's either moved by ship, which takes a lot of welding, or by a pipeline that takes a lot of welding.

And we're very, very strong in those sectors.

So we don't particularly like high energy costs from a production standpoint here, it's not bad for what it does for welding.

The second question, in the cash flow statement, there is $10.1m for issuance to come and shares per treasury net which I assume that is not buy-back.

That is actually adding shares, right?

I think Vince that you said there was a few million dollars of share buy-back in the second quarter, so there were shares issued for options.

Give me a detail of that $10.1m.

That is caused by shares issued for the exercise of [inaudible]fixed priced stock options and so we did for the half year repurchase $3m worth of shares, but we issued $13m worth.

And would you think that the $13m is going to continue in the second half or does it dependent upon the stock price?

That I can't predict.

That is actually impossible to predict.

That is dependent upon what employees and management decide to do in terms of exercising their options and that's dependent upon a lot of personal situations and investment strategies.

You've been sitting with $180m roughly for the last several years.

Why haven't you guys been more aggressive in buying back stock?

As I recall, you borrowed to fund the Hyundai boating purchase that never materialized, so why haven't you been more aggressive in buying back stock?

I think that there are a number of reasons for that.

One is that we have had as our number one strategy the building our business both internally and externally through acquisitions and although it's not something that can be talked about, we are continually looking at different opportunities for properties and our priority again is to use the cash to buy businesses to grow our geographical and product footprint.

So, we don't want to be in the situation to use our powder on share buy-backs and then turn around and have to spend for example, $150m on Hyundai in Korea so we still think that there are opportunities for certain properties in the marketplace and we're being very patient and judicious in that acquisition strategy.

How big of acquisition could you make?

Not what your capability is, but how big of an acquisition do you think is possible looking at the different properties that are out there?

We'd comment on any particular property Gary, I would just say this.

There are a number of companies that we believe have spent the last three years riding out the storm, hoping for a better day where they could get a reasonable value for there business.

We would expect that we would see some of those people begin to bubble up in terms of opportunity and as Vince said, our powder is dry, we're ready.

And I think we've also demonstrated both to our shareholders and to the companies that we've acquired, that we have a very successful integration model that protects the value of the business moving forward for those people who helped put that value into the marketplace.

We're quite optimistic that that trend will continue and we'll be sitting here and evaluating them as they come along.

So I shouldn't assume much repurchase activity in the second half of the year.

The $3m you did in the first half is...

The only factor that I didn't talk about Gary was the rapid run-up in our share prices.

We've historically been very careful in opportunistically taking shares out of the market in prices that we think are very attractive or at large discount to what we think our multiple and discounted cash flows are worth.

So, we've been careful the last couple of quarters because we have seen a pretty strong showing in our shares, and so we're going to take the opportunity at certain price points to take out shares.

OK.

Thank you.

The other thing Gary, as I sit here and think about your option question, you know, aside from Tony's retiring, we have had two or three other executive officers of the company that have retired this year.

The effect of that is that the option agreements require them a limited amount of time to exercise their options so if I were to say there is a trend line, it is that in the next couple of years you probably will see some larger exercises because of planned retirements and options that are coming nearer their expiration date.

OK.

Thank you.

Thank you.

Our next question comes from Justin [Bordall], Gates Capital.

Your line is open sir.

Hi.

Just one quick question, back with the price increases.

Is it your understanding that your competitors have fallen suit with those price increases?

From the knowledge that I have, I would say yes, that is the general rule of thumb.

I can't comment on every competitor but on the major ones that we track, they have and quite frankly it is an absolute necessity.

Anybody who is not doing that is going to report pretty negative results because this raw material increases are real, we're not making these up.

Very good.

Thanks.

Thank you and we have a follow-up question coming from Godfrey Birckhead, SBK.

Sir, your line is open.

OK you guys must be worn out after this so I'll make it fast.

Depreciation is still $40m for the year?

Depreciation?

That's the top end of it.

I would say it is in the high 30's.

I doubt that we'll hit 40.

$38m I recall, or something like that.

That's probably a more reasonable estimate.

Do you share with us how large China is now in terms of sales?

We would prefer not to at this point.

OK.

What was the capacity utilization in the second quarter, and if there is such a thing for you?

You'd have to break that- that's again a pretty big question from a global perspective, from a product line perspective.

I would just try to generalize it and say that in general our consumable factories are operating at very high levels of capacity utilization, some at historical levels driven by the command for the 24-7 schedule.

The equipment plants are also operating at very high levels of utilization and many of our operations are operating a full and very broad second shift operation in equipment which is again, at historical level type numbers.

It is much easier with that being said, the increase in capacity in equipment because we don't generally run full three-shift operations which is very traditional in consumables.

So that is a people hiring issue, we've hired about 200 people this year net in our Cleveland operation, and we are continuing to hire as the demand stays where it is.

Is that profitable for you?

Could it be more profitable if you had more capacity?

In other words are we running the overhead so large there that you are beyond the point so you're taking one more course then you'd like to, to resolve that or not?

No, I think if you just look at the results, the year-on-year for the quarter, you can see the impact of a higher level of utilization on our overhead absorption and if that trend continues, we should see those same kinds of results continue.

OK.

Thank you.

I think that's all the questions we have today.

We certainly do appreciate joining us on the call today and showing your interest in the company.

And we look forward to talking to you in October for our third quarter results.

Thank you.

Thank you Mr. Petrella, and everyone who participated in today's conference call, and have a good day.