Lincoln Electric Holdings Inc (LECO) 2006 Q1 法說會逐字稿

Good morning, my name is Maryann, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lincoln Electric Holding Incorporated 2006 First Quarter Conference Call. [OPERATOR INSTRUCTIONS] Our speakers for today will be Vince Petrella, CFO and John Stropki, Chairman and CEO. Mr. Petrella, you may begin your conference.

Thank you, Maryann. Good morning, and welcome to the Lincoln Electric Holdings 2006 First Quarter Earnings Call. We released our financial results for the Quarter prior to the market opening this morning. You should already have a copy. If not, copies are available on Lincoln's web site, or by contacting our Investor Relations Office at (216) 383-4893. Joining the call this morning is John Stropki, Lincoln's Chairman and CEO. In a minute, John will provide commentary on the Quarter, and activity in our global market regions and then I will get into more of the financial details later in the call. But before we get started, let me remind you that certain statements made during this call and discuss may be forward-looking and actual results may differ from our expectation. Risks and uncertainties that my affect our results are provided in our press release and in our FCC filings on Forms 10K and 10Q. Now I will turn the call over to John Stropki.

Thank you, Vince, and let me add my greetings to all of you joining the call this morning. We are off to a good start for 2006, and we have completed a very strong 1st Quarter. Sales increased 29% to a record $468 million, and net income rose 65% to $36.7 million, or $0.86 per diluted share. In the quarter, we saw important increased volumes in both our consumable and equipment product line, as well as a strong contribution from our J.W. Harris acquisition. In addition, most market regions and sales channels show good overall growth. Here in North America, total sales improved over 38% to $320 million, with US export sales also up 385 to $31 million. Sales at Lincoln subsidiaries outside North America were $148 million in the Quarter, and in local currencies, sales increased 17% at our international subsidiaries. We are very excited and pleased about the performance in the Quarter, and we owe a great deal of thanks to our employees along with our end user, customers and distributor partners for their continued support.

We are also pleased that our solid performance has been reflected in our share price in increases in our trading volume. Taking a closer look at the regions, in North America, during the Quarter, demand was strong across all markets. Economically, industrial activity represented in gain measures such as industrial production and capacity utilization continue to be robust, with most key industries that we serve continuing to show healthy year over year growth. For example, total manufacturing industrial production excluding the high-tech segment is up 3.7% year over year, while capacity utilization has climbed to 81%. As such, we continue to see investment patterns that would suggest that planned activity relating to modernization or upgrading of facilities as well as industrial investments remain positive.

As I mentioned, we experienced strong sales increases over the 2005 levels across most product lines and distribution channels, and we continue to maintain a healthy backlog of control dated orders.

Also, we did put through a modest price increase in February on both the machine and consumable side of our business. However, most of the sales increases in the Quarter related to increased volumes, as the price increase did not become effective until later in the Quarter. Further price increases may be necessary later this year based on current commodity price levels.

We do plan to continue with our key strategic capital programs aimed at improving capacity, efficiencies and driving cost reductions throughout all of our North American Operations. Looking forward, we believe that the industrial environment in the United States should provide for sustained levels of demand into the Third Quarter. However, year over year comparisons will temper as business activity in the 2005 Third and Fourth Quarters began to improve significantly.

Concerns over high oil prices, higher interest rates and the slowdown in housing may also impact the business environment ahead in North America.

Turning to Latin America, the Latin America region continued to perform strongly during the First Quarter. Overall sales growth in the region was 37% compared to the First Quarter 2005. Sales were driven by strong market dynamics in the energy sectors and continued market gains throughout the region as a result of our internal expansion programs and recent strategic investments in Columbia and Brazil. Total net sales at our Mexican subsidiary increased 41%, driven by strong sales to the energy, automotive and equipment construction sectors, and Lincoln del Brazil sales grew by 15%, driven by our recent strategic investments and additional flux manufacturing and strong electrode volumes.

Despite the several elections scheduled in the region for the balance of this year and the political uncertainties associated with that, in particular Brazil, Venezuela and Peru, we remain optimistic for the balance of the year, although year over year comparison will moderate as we said earlier.

In Europe, despite a fairly negative political backdrop and what the Economic magazine describes as “paralysis in Italy and surrender in France”, business settlement continues to track at multi-year highs and correlate well with strong Euro zone exports, which we are well positioned to thrive in the globe infrastructure built.

Results for Lincoln Electric Europe in the Quarter were very positive. Europe posted its highest EBIT percentage in the company's history. Sales were solid and steady, with Europe's March sales reaching a new high in local currencies. This was driven by strong domestic machine sales and exports. Production levels continue to improve in both volume and mix.

In Asia Pacific, the strongest growth in the region continues in China, with the recent First Quarter, China's GDP growth at 10.2% during the quarter and on March 23rd of this year, we dedicated our equipment manufacturing facility in Shanghai and officially transferred our Asia-Pacific Headquarters from Singapore to Lincoln's new manufacturing and R&B complex in Shanghai. We continue to expand our investments in China and Lincoln's Shanghai sales have grown over the 30% year-over-year, and we are continuing to expand our flex cord wire capacity, especially in light of the increased orders for the country’s infrastructure projects and projected growth in shipbuilding and general fabrication markets.

Lincoln also participated in the Japan International Welding Show held in Tokyo on April 12th. It was my honor to be the keynote speaker at the opening event. The exhibition went very well with more than 100,000 attendees over the 4-day period. We used the show to launch the opening of our new sales and demonstration Office in Tokyo, and to showcase many of our new, patented high tech products.

In Australia, total net sales in the quarter were up 28% in local currency. Export sales have been driven by improved results with our high quality flux in the India, as well as sales of Lincoln engine driven welders into Southeast Asia, the Middle East, and North Africa.

In India, Lincoln's Power Wave technology continues to be in strong demand for both soft and hard automation applications, including shipyards, [pipe mills], wind power structures, automotive, and other demanding applications that require high productivity and high quality.

India is Asia's 2nd fastest growth market, and our plans to expand there are progressing on schedule with the ongoing site selection review coming to an end.

Moving over to the regions covering Africa, the Middle East, and Russia. We continue to see strong growth in the energy related sectors. In Africa commodity minerals, such as copper and bauxite, continue to have high world demand, boosting the South African mining sector. The Oil and Gas Alliance of South Africa recently announced a consortium of companies that will fabricate offshore platforms in [indiscernible] Bay near Cape Town. Oil and gas opportunities remain strong off the coast of West Africa.

In the Middle East, oil and gas pipelines, drilling rigs, and offshore platforms continue with high activity, given the price of oil of over $70 a barrel. In addition to oil and gas segments, barge projects revolve around production of aluminum, fertilizer, and structural steel, all contributing to increased demand for our welding products.

The energy sector story in Russia is the same where oil and gas projects center the need for welding machines and consumables. For example, a new 4,000 km pipeline project has already generated more than $2 million in start up order thus far this year. In Russia the focus on oil and gas production continues to grow, and the demand for Lincoln products is very strong.

That is a high-level view of the quarter, and the regions. In summary, a very exciting quarter with some tail winds going into the 2nd quarter. Two other items of note.

In March it was announced that Lincoln will be added to the S&P Midcap 400, a milestone for Lincoln Electric. When LECO will be added depends on when the acquisition of Antion International, the company we are replacing is finalized. The current schedule is projected for May 1st.

And finally, this week, Lincoln Electric was selected to receive the prestigious President's E-Star Award for exports. In recognition of our achievements in supporting export growth in the US business community. We are very honored, is that once before in 1994, we achieved this significant achievement. Thanks again to all our employees for all their hard work for helping us to achieve this recognition.

Next, Vince Petrella will provide the financial details for the quarter.

Thanks John. First quarter of 2006 represents our 9th consecutive quarter of strong earnings growth. As John mentioned earlier, the quarter's consolidated sales were up 29% with North American sales increasing 38% and sales reported outside of North America up 13%.

Foreign currency effects reduced reported sales by 1%. In addition, 10% of the company's overall sales increase was attributable to our acquisition of J.W. Harris. Volume increases contributed a robust 17% of sales dollars in the quarter. Pricing had a relatively minor impact on sales for the quarter, contributing 3% of the increase in sales dollars year-over-year.

Looking at purchases by customer location, rather than our selling units locations, again, North American customers were up by 38%. Russia, Africa, and the Middle East customer sales increased over 45%. Latin American sales increased 40%, and although, European sales were flat in dollars, they were up 11% in local currency.

Our product line basis, machine sales experienced a strong growth rate, increasing over 22%. Consumable sales were up 34%, or 18% without the acquisition of J.W. Harris. Sales by product line were 60% consumables and 40% equipment, roughly approximating the prior years same quarter.

The percentage of gross profit in the quarter was 27.8% of sales, compared to 27.1% in the prior year. North American gross margins improved 40 basis points, and non-North American gross margins improved 70 basis points. Improvement in gross margin was primarily attributable to higher volume levels, and the related operating leverage.

We did have increases in product liability defense costs, and recent acquisitions that negatively impacted our 2006 gross margins.

SG&A for this quarter of $76.7 million was 16.4% of sales, down 200 basis points from the prior year. The lower SG&A as a percentage of sales was primarily driven by strong volume leverage. In addition, recent acquisitions reduced SG&A as a percentage of sales by 70 basis points. Higher bonus costs in the incremental SG&A associated with the acquisition of J.W. Harris were the primary factor driving the dollar increase.

First quarter operating income, at 11.2% of sales, was up 290 basis points versus the 1st quarter of 2005. Operating income increased 74% in the quarter. The quarter also included $1 million of pre-tax charges related to our continuing European rationalization efforts. Excluding these charges, first quarter operating profit margins would have been 11.4%. The prior year’s quarter included European rationalization charges of $1.3 million. Without these charges, prior year operating profit margins would have been 8.6%.

The income tax provisions for the quarter reflected an effective tax rate of 29.2%, compared to 26.4% in 2005. The higher effective tax rate is primarily the result of higher income before income taxes in higher tax rate jurisdictions.

Depending upon the full year earnings in 2006, as well as estimated tax deductions, we would expect our effective rate to approximate between 28 and 30%.

Now to the balance sheet. Working capital turnover efficiency improved with average operating working capital per sales of 30.3%, compared with 31.3% of sales at the prior year’s end. Cash flow from operations increased to $30 million in the quarter, compared with $18 million in the prior year.

We invested approximately $17 million in capital expenditures in the quarter, compared with $10 million in the prior year’s first quarter. The 2006 capital spending plan continues to focus on capacity expansion, as well as improvements in our overall cost base.

We expect to invest over $50 million on capital projects in 2006, further expanding our capacity and improving our manufacturing efficiencies. Other uses of cash flows in the quarter include the payment of $8 million of dividends to shareholders.

We also contributed $7.5 million to our U.S. pension plans, compared to $10 million in the prior year’s first quarter. Weighted average diluted shares outstanding increased to 42,718,000 shares for the first quarter, compared with 42,088,000 shares in the prior year’s first quarter, a 1.5% increase in outstanding shares. Shares at the end of the first quarter totaled 42,432,000.

Our return on invested capital rose to 19% at March 31, 2006, compared with 17.7% at December 31, 2005. The increase in returns is reflective over our higher operating income. The company closed the quarter with $43 million in net debt, including 116 million of cash.

Looking to the future, we expect to continue to experience strong volume growth in the second quarter of 2006. Second quarter 2006 comparisons will be effected by the acquisition of JW Harris, which closed on April 30, 2005, as well as the more difficult comparisons beginning in the second quarter.

Our overall business levels to date remain solid and we are optimistic that strong earnings growth will continue into 2006. The end of my prepared comments. At this point, I would like to open the call for any questions. Maryann?

[OPERATOR INSTRUCTIONS]. Your first question comes from Gary McMinnis with JPMorgan Securities.

Good morning, John and Vince. You said you put a price increase in the first quarter. Did you think that had any influence on volume? Do you think there was some pull forward by your customers and distributors to beat the price increase?

No, I don’t really think so, Gary. As I said, I was fairly modest, particularly on the consumable side as we saw stabilized steel prices and it’s a kind of traditional - - we went back more to the traditional model of the equipment price increase that we had intended to be just a general cost increase based on last year’s operating results. So, little or none, I would say.

And some of these commodity costs has come up recently. Do you think the pricing you have in place right now is sufficient to overcome what could be higher material cost here in the near term?

Well, we’re going to watch that very closely. We have just recently put through a price increase on some of our larger engine drive machines that are heavy copper consumers or use a lot of copper in the production side, because that was the biggest run up. And we’ll take a good look at the second quarter and see how things settle out to see if we need to do something in the July kind of timeframe.

Okay. And last question I have is just on your cash redeployment priorities. It looks like you’re going to have a good year. You’re going to be generating a lot of cash and you’re basically in a - - close to a zero net debt position. Can you talk about the acquisition environment out there right now and any kind of potential for share repurchase?

Well, Gary, we continue to view our top priorities for the use of our cash and balance sheet to be acquisitions and internal investments and CapEx. As you could see in our first quarter, we are at a relatively high run rate on CapEx of about 18% to the extent that - - or $18 million, excuse me, to the extent that we haven’t identified and closed M&A opportunities, we are investing in improving our capacity situation in many geographies around the world. We continue to look opportunities for acquisitions and hopefully we’ll be seeing more of that activity in the future.

So I should rule out share repurchase as a possibility near term?

Well, we still have an open share repurchase program that’s been authorized by our Board of Directors that has close to 5 million shares available for repurchase program. Historically, we’ve been aggressive when our share price has been at significant discounts to what we think the appropriate value of our shares are. So, we haven’t disclosed what we think that threshold is but we do have an open program. I can’t make any predictions on how much we will buy and when we will buy. It’s solely dependant upon what the share price is doing.

Gary, this is a follow-up to Vince’s comment on CapEx. I think that when we evaluated acquisition opportunities, which we’re doing all the time. We also benchmark that about what we’re capable of doing in those markets where we might acquire companies by expanding our own operations. And I think our CapEx expenditures have been very effective in adding to our capacities and growing market shares in critical markets without paying large premiums to acquire that market share through an acquisition philosophy. So, we benchmarked both of those, evaluate them and think we have the opportunity to take advantage of the best of each of those opportunities in the markets that we’re looking at.

Okay, great. Great quarter.

[OPERATOR INSTRUCTIONS]. At this time, there are no further questions. Mr. Petrella, are there any closing remarks?

Yes, thank you, Mary Ann. Thank you for listening to the call today. If there’s no further questions the only announcement I have is that we do have our annual meeting for shareholders this Friday, April 28 here in Cleveland at the Marriot East and the meeting will start at 10:00 am. Thanks again and we look forward to talking to you in late July during our second quarter conference call.

Thank you. This concludes today’s Lincoln Electric Holding, Inc. 2006 First Quarter Conference Call. You may now disconnect.