Lincoln Electric Holdings Inc (LECO) 2009 Q1 法說會逐字稿

Welcome to the Lincoln Electric First Quarter 2009 Earnings Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Vince Petrella, Senior Vice President and Chief Financial Officer for Lincoln Electric. Thank you, Mr. Petrella, you may begin.

Thank you, Latanya, and good morning. Thanks for joining the Lincoln Electric 2009 First Quarter Conference Call. We released financial results for the quarter prior to market open earlier this morning. Copies are available through our Investor Relations Department at 216-383-4893, or on Lincoln's website. Lincoln's Chairman and Chief Executive Officer, John Stropki, will lead the discussion this morning and will provide commentary on the quarter and the regional outlook.

Before we start that discussion, though, let me remind you that certain statements made during this call and during our discussions may be forward looking, and 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. Now I would like to turn the call over to John Stropki.

Thank you, Vince, and good morning, everyone. The economic recession which began the second half of 2008 has been [pervasive] and clearly accelerated during the first quarter of 2009. Consistent with our preliminary forecast, our first quarter sales were down 33% to $421 million. Sales decline of this magnitude were experienced in all geographic market segments and most major customer segments. Obviously, the significant drop in volumes around the world put pressure on operating profits as we reported our first quarter net income of $3.8 million, or $0.09 per diluted share excluding rationalization charges.

Vince will give the specific details about the numbers in the quarter in a minute, but first an update on what we are doing around the globe to maximize our operating profit in the current economic environment, while at the same time we prepare for the recovery in key markets.

During the first quarter of 2009, we took a pretax rationalization charge of $11.7 million geared to realigning our cost structure to current business levels. The full impact of these actions is not fully reflected in our first quarter results, but future quarters will benefit from the anticipated $20 million per quarter savings generated by the cost savings measures. During the quarter these cost savings actions included, first, a voluntary separation package for the Cleveland based eligible employees. Approximately 300 accepted the program with the majority working their last day in March.

Second, the suspension of a 401-K match in the US and other compensation savings including a 5% base pay reduction for top management. Third, a reduction in the headcount and hours of our production side of the business around the globe. And, fourth, the elimination of contract works, and finally a global hiring freeze. Our global management team continues to assess and implement additional cost-savings measures aimed at improving business profitability in each geographic region and all business units.

Today we are announcing further actions which will generate additional annual savings, between $20 million and $25 million, with half of those savings to impact 2009 results. These actions will include additional compensation adjustments, further headcount reductions, and factory rationalizations, which will require additional charges of $8 million to $10 million. We will continue to explore all options as we focus on building a more effective and highly competitive business model which will further strengthen our market leadership position.

Now, here's a review of the business conditions and the strong economic headwinds we face around the world. First, looking at North America. During this past quarter business conditions for our North American operations continued to be challenging and the recession accelerated. Industrial activity is measured by industrial production and capacity utilization continued to be substantially below activity of prior years. Total manufacturing, industrial production excluding the high tech segment was trending 14.6 below 2008 in March, while manufacturing capacity utilization was running at approximately 66.1%, the lowest number since 1948.

Order trends in our traditional US markets continued to be weak in the first quarter with the exception of wind tower, pipe mills and pipeline end markets. With much uncertainty about the overall business level moving forward, job losses within the manufacturing sector continued to mount. As an example, GM reported last week that it will suspend production at 13 assembly plants in the US and Mexico, some up to two months due to high inventory. And yesterday the automaker said it planned to reduce total number of assembly, powertrain and stamping plants in the US, from 47 in 2008 to 34 by the end of 2010, and 33 by 2012.

The impact of the US stimulus package on industrial companies is still unknown. However, we do estimate that approximately 10% of these infrastructure projects will require welding. In Canada, the drop in oil prices and the ongoing manufacturing slump caused the economy to formally slip into recession. With the delay of future energy projects, activity in Canada's western provinces softened.

The Canadian economic investment package introduced in January will provide stimulus for both infrastructure spending and tax cuts. However, the benefits will likely not be felt until late 2009 or early 2010. As a result, North American sales in the first quarter were off by more than 30%. US export sales decreased by 40% to $37 million, as the global recession stalled key infrastructure projects worldwide. However, North America continued to generate a profit even though it declined both in dollar terms as a percentage and as a percentage of sales. The cost savings initiatives mentioned earlier should further enhance profitability in the coming quarters.

In Europe, the overall economic trends in the first quarter continued to be depressed. European industrial production declined 16% in January and 18% in February, when compared on a year-over-year basis. Lincoln Electric Europe sales decreased 25% to $93 million in the quarter, excluding the impact of foreign exchange and acquisition.

The European welding consumable market continues to be pressured by aggressive pricing, and we don't see signs of that changing in the next few quarters. However, we do see signs of some smaller, weaker competitors closing.

With the combination of sales volume declines, pricing pressure and liquidation of high price inventory, Europe reported a loss for the quarter. We continue to implement cost savings actions in Europe aimed at reducing our overhead costs and realigning manufacturing to lower costs in Eastern European countries.

In Asia Pacific, the slowdown in the region is pronounced. However, China's economy did start showing improvement in March. The economy grew 6% in the first quarter, and the Chinese government is still targeting growth of 8% for the year. China's stimulus plan, which is focused on substantial (inaudible) production projects including electric and wind generated power, is expected to stimulate the economy leading to increases in steel demand and a brighter outlook for many of our end markets such as automotive, heavy machinery and the pipeline industry. Despite positive economic industrial growth data, steel production declines of 25% in the second half of 2008 continued to affect welding consumable sales through the first quarter of 2009.

Sales for Lincoln Electric Asia Pacific excluding currency impacts decreased 29% in the quarter. This sharp decline, combined with our ongoing investments for growth in the region resulted in an operating loss during the quarter. However, consistent with steel production recovery starting in the first quarter, our March and April sales volume shows sequential signs of improvement, and our focus on streamlining operations and consolidating manufacture should set the foundation for improved performance in the quarters ahead.

In Latin America, much of the same challenging economic news with the region experiencing a sharp deterioration in the first quarter. The two largest economies, Mexico and Brazil, are expected to be in recession this year. The GDP contraction of -5% for Mexico and 1.5% for Brazil estimates the (inaudible) deteriorating month after month.

In Mexico, the automobile parts manufacturing industry continues its sharp downturn compared with last year's first quarter activity. There are no signs of immediate recovery. For the quarter, Latin America sales were down 18%, excluding currency impacts and acquisition, and Mexico reported a sales drop of 18%. Despite these declines, the region remained profitable during the quarter and continues to implement cost-saving initiatives based on projected lower market demands.

That's an overview of the regions. From an overall perspective, although the global market conditions remain weak, we continue to focus on our current financial performance and on executing our strategy of building our position as a global leader in the arc welding industry.

We are confident that we will emerge from the global recession with a more efficient and highly competitive business model, one which will further strengthen our market leadership position, accelerate our global growth, and improve our overall profitability.

As part of our global growth strategy, during the quarter our Lincoln Electric Asian subsidiary signed a definitive agreement to acquire 100% ownership of Jinzhou Jin Tai Welding and Metal Company, a welding wire business in Jinzhou, China. This acquisition will greatly expand our customer base and bring significant cost competitive solid wire manufacturing capacity under Lincoln's control. The transaction is scheduled to close near the end of the third quarter.

Staying ahead in the technology area is also part of our strategy, and it's even more critical to achieving success in the current market environment. During the quarter we introduced several new products aimed at improving productivity, especially in the energy and pipeline end markets. We're also establishing a Lincoln Green Initiative, highlighting our new line of engine drives that are more energy efficient and are three years ahead of the EPA mandated deadline for emission standards.

With new products, improvements in processes, and improved welding solutions, as the market conditions turn positive, we are poised to lead the industry when the growth cycle resumes. Now, Vince will cover the financial results in detail.

Thank you, John. The first quarter of 2009 reflects the challenging global economic environment that we are currently facing. As John mentioned, the quarter's consolidated sales were down 33.6%, with North American sales decreasing 33.5%, and sales reported outside of North America decreasing 33.7%. Foreign currency effects decreased reported sales by 6.2%. Volume decreases reduced sales dollars in the quarter by 33.6%. Pricing contributed an increase of 4.6% in sales dollars year-over-year. And, finally, acquisitions increased sales about 1.5%.

On a product line basis, machine sales decreased 42%, and consumable sales decreased 28%. Excluding acquisitions, consumable sales decreased approximately 30%. The percentage of gross profits in the quarter was 21.9% of sales, compared with 28.6% of sales in the prior year.

A decrease in gross margins as a percentage of sales was reported across all geographies. Reduced factory efficiencies associated with the 33% volume decline, and the liquidation of higher cost inventories contributed to the compressed gross margin.

SG&A expense was $77.5 million in the quarter, or 18.8% of sales. The higher SG&A as a percentage of sales was primarily driven by the deleveraging associated with the overall sales decline plus increased pension expense of over $7 million in the quarter. This was offset by a reduction in bonus expense of $23.5 million in the quarter compared to the prior year same quarter. Foreign currency exchange rate decreased SG&A expense by $7.9 million in the quarter.

We recorded rationalization charges of $11.7 million in the first quarter related to previously announced headcount reductions as outlined by John in his comments. These rationalization charges along with other previously discussed cost-savings initiatives resulted in cost reductions of $11 million in the first quarter, and are expected to reduce costs by an estimated $25 million per quarter for the remainder of 2009.

First quarter operating income was 0.3% of sales, compared with first quarter 2008 operating income margins of 12.7%. Excluding rationalization charges in the first quarter, operating income was 3.1% of sales. Now, moving to the geographical segment base.

North America recorded EBIT margins of 7.1% in the first quarter. Europe EBIT margins were negative 6.4%, and the other country segment reported a negative 1.2% EBIT margin. The income tax provision for the first quarter reflected an effective tax rate of negative 78.8% compared with 32.3% in 2008. A negative effective tax rate was due to foreign operating units reporting pre-tax losses with no associated tax benefit.

We invested $13.6 million in capital expenditures in the first three months of the year compared with $12.8 million in the prior year's period. Other uses of cash in the quarter included the repayment of $30 million of debt, and $11.4 million were paid as dividends to our shareholders.

Weighted average diluted shares outstanding decreased to 42,568,000 shares for the first quarter, compared with 43,090,000 shares for the first quarter of 2008, a 1.2% decrease. Shares outstanding at March 31, 2009 were 42,518,921.

Our return on invested capital based on a trailing 12-month earnings decreased to 14.5% at March 31, 2009, compared with 18.6% in the prior year period. The Company closed the quarter with $300 million of cash on the balance sheet and a net cash position of $191 million.

Now, looking to the future. April sales to date are running at roughly the same levels experienced in March. Although we do not yet see signs of recovery, the rate of decline in sales has moderated. Commodity prices including steel have continued to fall, which will likely result in lower market prices for consumables in the future. However, we believe the second quarter of 2009 will experience a less significant impact from liquidating higher cost inventory.

Provided sales levels do not deteriorate further, we are optimistic our cost-cutting efforts will reflect better alignment of our cost structure to current sales volumes resulting in improvement in our profitability profile in the second quarter of 2009. Our strong balance sheet and good cash flow generation will position us well for the challenges of the year to come.

Now, at this point, Latanya, I'd like to open up the call for any questions.

(Operator Instructions) Our first question comes from Michael Cox with Piper Jaffray. Please proceed with your question.

Good morning, gentlemen. My first question is on the restructuring. It seems that the dollar benefit from the restructuring efforts per dollar rationalization charges, if you will, is coming down. Could you describe what the second wave is really targeting, and is this sort of as far as you can go in terms of cost-cutting at this point?

Well, the second wave is a combination of headcount adjustments, compensation reductions and plant rationalization. And plant rationalizations, Michael, tend to be, particularly in overseas, foreign jurisdictions, more expensive than cost reduction initiatives on the North American continent, so moving to more of a mix of plant rationalizations from headcount reductions.

Yes, Michael, just as a follow-up of that, the first quarter actions were primarily related to the US company and the voluntary separation plan that we had. It was extremely cost efficient. The other activities that we have, we'll have very good long-term value in terms of the overall cost structure. But outside of the US, the costs are substantially different in order to execute that. But we still think it represents a very good long-term value of realigning our cost structure around the world.

And then, Michael, the final point I would add is the initial cost reduction initiatives, much of those initiatives had no associated costs that were traditional Lincoln levers, management techniques to pull, to bring our piecework employees down to a lesser than 40-hour a week work week, and those types of adjustments have really no associated incremental cost to executing them.

Okay, that's helpful. You mentioned that the rate of decline is moderated somewhat here and is matching more in line with the March trend. I was wondering if you could give a little more color around where March was, I guess, as to a rate of comparison?

Well, I would say that the March numbers were reflective of the first quarter. We didn't really see much change sequentially through the first quarter, and what Vince was commenting on was that we started to see stabilization, if you want to call it. And clearly if there is any decline around the world, it is moderating from what we saw as a very steep curve in the late fourth quarter carried over into the first quarter.

Okay, that's helpful. And then my last question, you took a pretty sizable write-down on your China subsidiary last quarter, and then this quarter acquired the remaining stake of an operation there. Could you just talk about the decision to do this? I'm assuming that this was previously accounted for as an equity income and now it will be fully consolidated?

Yes, Mike, I'll just give you a general view and then Vince can walk you through more of the financial side of it. First off, there are two totally unrelated transactions. We were a minority partner in the Jinzhou business that I spoke about, and we were acquiring that. So, the equity write-down in that was not part of that transaction. And that equity write-down was part of the other entities that we own that we're currently in the process of resizing, and Vince can talk in more detail about that.

Yes, the only thing I would add to that is that the write-downs were taken on majority-owned or wholly-owned businesses under the Lincoln umbrella. And the acquisition is being executed, has been signed, a joint venture deal that we've had for a number of years and now taking out the rest of the ownership interest to own 100% of the business.

I guess my question, though, is if you were taking a write-down on the other operations, what is different about this one that you would want to employ more capital into?

Well, this one doesn't require a write-down based on our analysis of the carrying value and the future cash flow generation that we expect from the business. We have not closed this transaction yet. We expect it to be closed during the third quarter of 2009, and we will at that time continue to evaluate the carrying value of our new wholly-owned investment.

Okay, thank you.

Our next question comes from Walt Liptak from Barrington Research. Please proceed with your question.

Hi, thanks. It's Walt Liptak. Good morning. First, Vince, I wanted to ask about the second quarter outlook. How should we think about the second quarter volume still down in the 30% range and some of the cost reduction finally given some benefit?

Walt, in my prepared comments I addressed my view on the second quarter from the perspective that to the extent that sales declines moderate and don't take another step down, we expect based on our cost-cutting initiatives that we'll reach a full maturity rate of $25 million in the second quarter compared with $11 million in the first quarter. This should be an improvement in our profitability.

Okay. And with that said, is it as simple as we can take the incremental cost reduction, add it to this quarter's profit?

I don't think it's that simple, Walt. As you know, there are a lot of factors that determine the overall profitability of any Company, some of which we can see and some of which we can't see or predict. We believe that these cost-savings are real. We believe that we will achieve them, but we don't know what other factors may impact the quarter, be they positive or negative. And I don't think you should look at it in just a static type of a view.

Okay, that's fine. You give better guidance than some companies and it was a little bit of a surprise, so I just thought (inaudible). The pricing that you got during the quarter, up 4.6%. Is that sustainable next quarter, throughout the year? In such a bad environment, how can you be continuing too get pricing?

Well, you really have to look at it, Walt, from where we were. If you look at the pricing history in 2008, the major rollups in steel costs and our subsequent price increases took place late second quarter, early third quarter. So, we're not up against those kind of comparables. And we've actually seen some softening in pricing that have brought down that pricing comparison down from previous type of quarters. And to Vince's view, with the current view of what steel costs will be moving forward and competitive pricing in the marketplace, we expect to see much of that pricing gain evaporate as we transition through the rest of this year.

Okay. Is the Euro pricing, that's where you're seeing the tougher pricing environment?

Well, I think it's a tough environment everywhere. I mean, when you have steel consumption down close to 50%, you should assume that welding consumption is down somewhere close to that. And obviously that puts a lot of pressure in the marketplace. I think a lot of companies were in different inventory positions and some have been reacting much quicker, particularly the smaller ones that didn't have a lot of embedded inventories, and that will eventually equalize, and I think in Europe, in particular, we're starting to see that equalization start to take hold.

Okay. Your inventory came down pretty nicely. Are you through the higher cost inventories now, or is there still more to go?

Well, I said in my prepared comments, Walt, that I thought that the most significant detrimental impact from higher cost inventories has come through the first quarter. As you might recollect, some of the biggest declines in steel and commodity prices occurred in the fourth quarter of last year. There is still some additional reductions that have come in the first quarter of this year, but not to the magnitude that we experienced in the prior year's fourth quarter. So, it's our view that the impact from high cost inventory liquidations will be mitigated and will be much smaller in the second quarter than what we experienced in the first quarter.

Okay, great. All right, thanks guys. I'll get back in queue.

Our next question comes from Mark Douglass with Longbow Research. Please proceed with your question.

Good morning, gentlemen. Vince, can you go through the sales mix for the different regions, volume, price?

Certainly. North America, volumes were down 36.4%, price was up 4.3%. Foreign exchange had a detrimental impact of 1.5%. So, total North America year-over-year change was down 33.5%.

Moving to Europe, volumes were down 25.6%, price was flattish. Acquisitions contributed 3.6%, and foreign exchange had a detrimental impact year-over-year of 15.3%. So, total Europe was down 36.7%.

And, finally, the Other Countries segment was down in volumes 34.7%, price was up 11.3%. Foreign exchange was detrimental by 10%, and acquisitions contributed 4.1% in the Other Countries segment, for a total decline year-over-year of 29.4%. Those are all based on third-party sales.

Right. Right. Okay, thank you. For the rationalization, would you say a lot of it, then, is then being focused primarily in Europe and then in other countries? In particular, I'm kind of looking at what is it that necessarily took Europe down this quarter so hard? Higher fixed cost structure? Was it more inability to reduce the workforce or cut hours sizably and you just don't have the flexibility that you do in North America? Just a little insight particularly into Europe and the rationalization and cost-cutting measures.

Mark, let me just start off again with just some general comments. We announced this past week that we are shutting one of our facilities in Italy, and we'd be moving that production to Poland. In the charges that we take -- will take in the second quarter, obviously there are fairly significant costs associated with that because of the legal structure within Italy and it's very much the same in most countries in Europe when it comes to severance penalties that are associated with that.

That being said, when we built our plant in Poland, we always thought that it would represent a big opportunity on the cost side of a fairly competitive side of our industry, and we were committed to taking full advantage of that operation when the time was right to do so. That being where we had a trained workforce, that being when we had volumes that we could transfer, and the timing is right to do that and I think represents a very strong opportunity for us.

And we have other actions not only in Europe but in other parts of the world that we're deep into the commitment to make the changes that we think are necessary over the long term. Vince can talk more on the specifics of how the charges were for the details behind that, but I think it's a fairly common occurrence for people that are facing high costs, historic manufacturing operations and transitioning those to better options that they have on the table.

And, Mark, what I would add in summary to those comments is generally the flexibility that you have in the US in managing workforce relations, including Lincoln's unique guaranteed employment program, gives us a much more flexible and rapid ability to right size in particular our productive labor force to existing business levels. Those types of tools are not available and particularly in Western Europe and other parts of the world, and so they're much more limited capabilities for temporary reductions in compensation levels like can be done on the North American continent. So, that is the fundamental difference between managing the US business and businesses in other parts of the world, is the flexibility we have with workforce relations.

The one other follow-up comment I would make, Mark, is that we're fortunate that through our investment activities over the course of the last several years we have invested in the infrastructure capabilities that we needed to make these transitions when the timing is right. So, we can move fairly swiftly and I think at a very low cost in terms of the production equipment associated with making the moves.

Right. Then with that, are you looking -- that will be substantially completed in the second quarter, the severing of Italy?

No, that will take a longer period of time than the second quarter. It will certainly be completed by the end of this year, but not in the second quarter.

Okay. So, we would see profitability in Europe still challenged for at least second quarter, if not till the end of the year?

Yes. Clearly, Europe's profitability will be challenged during the course of this year.

Okay. This might be a difficult question considering what happened this last March quarter. What kind of tax rate are we looking at?

I'm not prepared to give any kind of guidance on tax rates.

Okay, fair enough. And then with the pension expense, you said it was $7 million in the March quarter?

Actually, $7.8 million, and for the year it will be up about $37 million, we expect.

$37 million?

Yes.

Okay. Do you have -- can you give an indication about the amount of capacity maybe that's been taken out in your operations, or is it kind of just check tracking with the volume declines at this point?

I can give you some indication in terms of workforce reductions. We estimate that the actions that we've taken so far in (inaudible) that will be completed this year will bring our worldwide workforce down by approximately 20%. From a factory standpoint, there will be a lesser impact from bringing down the productive capacity of our worldwide manufacturing organization in the expectation that the downturn is temporary, the capacity will be needed from a long-term perspective. But there will be decisions like John discussed on Italy that we view from a long-term perspective of being necessary to align our cost structure and our capacity needs within particular geographies and product lines for the future.

Mark, just again to follow-up on that. It's really not our intention to take substantial capacity out of our portfolio. This Company is going to grow. Welding is going to continue to grow for all the reasons that it had grown in the previous three years. And we're going to position the Company to have that capacity available to meet those market needs, but it's going to be a different mix and one of which is going to be much more competitive than we've had in the past.

Right. If you can talk about, just quickly, the acquisitions, the Jin Tai acquisition. We're still looking at July type timeframe?

Yes. Beginning of the third quarter.

Beginning of third quarter, okay. Have you given any indication as what kind of sales run rate we'd be looking at now? At the time I think you said it was around $200 million in sales in 2008. Or if it's similar to the trends we've seen, I guess we could just come up with a number.

We have disclosed that the run rate for 2008 was $200 million, and in the numbers that I gave on regional sales levels year-over-year, I would expect China to have similar types of reductions as was disclosed for the Other Country segment. Perhaps a bit better than that on a year-over-year basis.

Yes, again, follow-up on that, Mark, is that I'm much more bullish on the actions that the Chinese Government is taking to build up their economy. I mean, 6% GDP growth in the quarter did not meet the 8% number, but it's also much larger growth than any other region has seen, and I'm quite optimistic they will achieve the 8% growth rate. And we're seeing, as I mentioned in my remarks, our utilization of our Chinese factories improving substantially from that that we're seeing in other parts of the world.

Now, that's countered by the fact that there is price reduction in that marketplace because steel prices move very rapidly there, and obviously the welding consumable component of the steel pricing is critical to that.

So, we'll see volume increases, but we'll also see price reductions, and it will be the balance of that that will determine what the sales revenue side looks like. But the utilization numbers are improving and should continue to improve based on everything that we're seeing in terms of the investments.

Okay. And then, finally, the India plant is up and running now?

We'll have our grand opening on May 9. The production equipment is fully installed, at least to the levels that we expect for this year. And we are producing finished product and expect to be in the marketplace very quickly. And we are very optimistic of our ability to achieve our objectives in that economy, one, because it is still growing and, two, because our penetration is very low in the products that we will be producing in that plant, but that our name is very well known in that country.

Okay. Thank you.

Our next question comes from Steve Barger with KeyBanc Capital Markets. Please proceed with your question.

Good morning. If you normalize the higher cost inventory to current levels, what would gross margin have been, or can you just tell us what the impact was in dollars?

That's not a number that's -- there are other variables that would affect what our margins would be, so I'm not prepared to give you an estimate on that.

Well, I guess, trying it another way. Since the high price inventory is gone as we look forward into the other quarters, is it reasonable to expect a pretty material improvement in gross margin?

I wouldn't necessarily say material, but there should be less of a headwind in our face on that issue on going forward than what we had in the first quarter of 2009.

Okay. This is tough to quantify, I'm sure, but how much more can you takeout of inventory and AR in terms of cash generation? Or, I guess more simply, do you expect to see a couple more quarters of that kind of cash flow performance?

Steve, I would expect that to moderate a bit along the lines of what's going on with our top line. So, we've had our most significant declines in sales in the first quarter as compared with the fourth quarter and certainly last year. And so to the extent that the top line moderates and declines at a lesser pace perhaps, we should see a lesser harvesting and liquidation of our accounts receivable than inventories going forward.

Okay. Well, regardless, you still have a lot of cash and the balance sheet is in great shape. After you get past the pension payments, are you looking at any further debt pay-down or are you seeing private company multiples coming down, or kind of how are you thinking about the cash right now?

Well, there won't be any significant debt pay-downs until our private placement, last tranche comes due in March of 2012. That's $80 million, and that's the bulk of our outstanding debt. We won't pay that down until 2012. The remainder of our debt, $25 million or so, is overseas, working capital requirements, lines of credit to run our foreign operations. And that will likely stay intact into the near future.

In terms of acquisitions, we're always active in looking at properties that we can bring into the Lincoln fold at the appropriate prices. Negotiations on properties are very difficult in this environment as sellers are hesitant to believe the current earnings generation. And so buyers like Lincoln have a difficult time paying for earning streams that were in the past year or so that we don't believe repeatable for the near future. So, there are some, in our view, and I'm sure you're hearing this from other companies that you talk to, some disconnects between evaluations of buyers and sellers.

Yes. So, that being said, other than pension, is it likely that you'll just put any cash that you generate on the balance sheet for the time being?

Yes, I think so, unless we, again, can find the appropriate acquisitions at the right prices. So, I wouldn't make any predictions on significant uses of cash at this point in time.

Okay. And switching gears to some of the infrastructure stuff that you talked about, can you talk about major infrastructure projects of note around the world, whether it's stimulus driven or not, and have you seen any existing projects accelerate because of planned future spending relative to, I think you said 10% of projects that might benefit from welding?

Well, the 10% that I commented on first, Steve, would relate to the infrastructure of the stimulus bill in the United States. The terminology that was used there of shovel ready, I mean, that's paving of roads and minor road construction. It's not major infrastructure kind of work that they had originally focused on.

That being said, even the Obama administration is talking about things that will require substantial amount of welding. The commitment to wind power and clean energy and nuclear, those types of activities are huge energy -- or, excuse me, welding consumable and equipment kind of projects. That is the kind of investment that we're seeing being made in China and Asia in general today. A lot of wind power projects, a lot of pipeline projects that are continuing to move forward or maybe even accelerate. So, it's a mixed bag depending on what part of the world that you're talking about.

But I would say in general, in most other parts of the world, what we've seen in a much bigger commitment to infrastructure in the stimulus plans that have been announced and approved than what we've seen to date in the United States projects.

All right. Thanks very much. I'll get back in line.

Our next question comes from James Fink with Sidoti & Company. Please proceed with your question.

Good morning. I was just wondering if you could help me with a variance between what otherwise your more optimistic viewpoint is on top line compared with Nucor Steel last week and US Steel last night, and even Illinois Tool Works the week before in regard to their welding division. They are all implying accelerated declines into the second quarter, so I'm just trying to understand what you guys might be seeing or experiencing as different from them?

Well, James, I think what we said is that we've seen a slowdown in the decline, not an acceleration in the decline, and that's our current view and it's the best view that we could give you. That's kind of the overall global aggregate, but we have seen in certain markets, China in particular, where we've seen a bit of an acceleration in the volume side of it.

Now, it's an early read and there is no guarantee that that's sustainable, but I don't think that US Steel or Nucor, quite frankly, have very strong positions in the steel production capacity in China or in Asia, in particular. So, if the Asian market is showing some improvement and they're not participating in that, then we're only focusing on Nucor is primarily a US-based steel producer. US Steel has some international component, but strong US North America. That may be the difference in terms of their view versus ours.

Okay, fair enough. And just sticking with Nucor, they seem to be disgruntled with the infrastructure of spending that's planned in this stimulus bill that ultimately might be all sizzle and no steak. Is there anything you might be able to comment on that?

Well, I don't know that it's very popular to comment on things that the Obama administration doesn't approve of. So, I will just tell you that I think there's a lot of disappointment on the steel industry. I don't think it's just Nucor. I think there's a lot of disappointment in the construction equipment industry over the lack of focus on infrastructure in the United States versus that that we're seeing in other parts of the world.

That being said, the needs here are equal or greater but there seems to be a reticence on addressing those needs in favor of other activities that seem to be more popular. Whether that changes over time, your guess is as good as mine. But we're going to react to those opportunities that we see around the world, and we're extremely well positioned to take advantage of them on a regional basis. And I think we're well ahead of the curve in doing so.

Okay, terrific. And, Vince, what's your CapEx spend for the full year?

What we're saying it will be somewhere between $45 million and $55 million at this point in time.

Okay. I guess that's all I have. Thank you.

Thank you.

Our next question comes from Greg Halter with the Great Lakes Review. Please proceed with your question.

Yes. Good morning. Can you comment on where your cash is located around the world?

Yes. Of the $300 million we have roughly $240 million of it in North America, another $30 million in Europe, and the rest of the world has the balance, around $30 million.

Okay. And of that $240 million in North America, I presume some will be in Canada. So, if you wanted to bring that back there would be some repatriation tax on that?

Actually, all of that is in the US.

Oh, well, that's easy. And relative to your debt now, the $100 million or so, what's the average interest rate that you are paying, or paid in the quarter?

Well, the rate on the private placement, that is 4.6%. And then the total debt rate is in the high 7% range caused by higher interest rates on borrowings overseas. However, going forward we expect the private placement debt cost on the bulk of it, the $80 million, to be about 3.8% through maturation, the maturity of the debt in 2012. There are some Latin American countries that we borrow locally that have a much higher interest rate than what we're accustomed to in North America.

Okay. But in the private placement you're talking 3.8% going forward?

Yes.

Which would then be colored by those other rates in other parts of the world?

Yes. That will draw it up significantly. I can't predict what that might be, but I can tell you that the bulk of the debt is at about 3.8% for the remainder of the term.

Okay. And I noticed on the cash flow statement the share repurchase $343,000. Is that a carryover from '08, or is that something that you did in '09?

Those are share repurchases associated with stock compensation benefit programs required to satisfy tax withholding. So, it wasn't part of our share repurchase program.

Okay. What are your thoughts on share repurchase given the market and where your stock is currently?

Well, we've always said, Greg, we'll look at it not from a systematic standpoint, but from a use of our balance sheet standpoint. What we see in the future in terms of acquisition opportunities, dividend requirements, and what the underlying business is doing. We're being a little bit more cautious here in buying shares until we see some signs of the economy turning around and our business improving. And so we're in a phase where we're being a little bit more cautious about how we use our balance sheet.

Okay. And relative to the swine flu, I know it's very early and there's a lot of media hype probably over this, but I'm wondering if you could comment on anything you're seeing relative to your Mexican operations, and then anything globally as well?

Well, we obviously touch base regularly with our Mexican management, not only from a business perspective but from an employee perspective. The news that we have at this point is very good. We're not impacted in any negative way. What we're seeing is school closures in Mexico City, where we have the smallest of our three plants, but we're not seeing a major impact on the business community at this point in time. That doesn't say that it can't turn and it's obviously something that we'll keep our eyes on. It's surely not something that the global economy needs at this point in time is another element of surprise or concern, but we're quite hopeful that the world bodies will contain this in a way that it won't have any further negative impact.

Okay. And I think you had mentioned that you expect when we come out of this to have a more competitive marketplace, but at the same time you mentioned there are some of the maybe smaller, marginal players that may be going by the wayside. I just wondered if you could square up those two lines of thought there?

Well, I think I said two things. Let me cover those again. One, we will clearly emerge with a much more competitive cost structure in those markets where we're making the changes that we're making. And that's the reason for making those changes.

Two, we do expect that the markets will be fiercely competitive, because people will have been in very difficult situations and they're going to fight hard to get their selves out of those kind of situations. But, third, not everybody will survive. Those companies, and I don't think that's just true in the welding industry, the companies that were undercapitalized and didn't have the depth or the strength to maneuver through this very significant recession probably won't be there as competitors in the future. Whether they just cease to exist or whether they're acquired by companies like Lincoln, we'll have the opportunity to change the competitive landscape in certain markets, and we'll surely take advantage of those opportunities as they're presented.

Okay. And one last one. You've done a very good job on the receivables, and I don't know if you use this or not, but in terms of invoicing, do you use an e-mail or e-fax to get invoices out to customers like we've been reading about some of the other companies?

Yes, I would say we're extremely efficient on that, particularly in our North American operations, where we have very powerful ERP system, SAP, and a lot of tools. And I think if you look at our collections and DSOs, that we're well ahead of industrial peers in that area.

Okay, very good. Thanks.

Our next question comes from Holden Lewis of BB&T. Please proceed with your question.

Great, thank you. Good morning. Can you give a little bit more color, I guess, on this trajectory that you're expecting out of pricing since you know sort of when things anniversary, and things like that? Could you give us a sense of it slips in Q1 from Q4, but it's still positive, and you have the [past pricing going] through. Sequentially, are you seeing pricing go negative in any of the territory, or is it just going to zero, and at what point do you think you kind of hit zero or go negative on the pricing during the course of the year?

Well, I would start, Holden, by saying that it is likely that in -- starting in the second quarter, that pricing impact will flatten out if not go negative. So, again, when you're looking at our pricing numbers are based on a year-over-year comparison, and we had some of our biggest price increases that occurred during the second and third quarter of last year. So, just doing the math on last year's increases versus what's going on this year, and not even taking into account large pricing declines, we should see the pricing impact on the top line diminish starting in the second quarter and deteriorating through the rest of the year.

And, Holden, I would just add that I think in different regions we're in different parts of that cycle. As I mentioned to you, the decrease in pricing in Europe was already felt in the quarter, but we expect that will stabilize and we won't see further deterioration or significant kind of deterioration. So, depending on the market consolidation and the amount of fragmentation in the market, and also the regional steel pricing, you'll see different models in different parts of the world on that.

Europe was flat in Q4 and flat in Q1, in terms of pricing, so how is that eroded? I mean, it looks like that just bases on zero pricing and you've been in it and you've already anniversaried your past increases. How has that gone negative?

Well, I think it's more specific in terms of the mix areas. We're not seeing any deterioration. In fact, we expect to still get maybe some improvement on equipment pricing based on our higher technology platform. But if you look at a specific MIG wire in the European market, you would have seen some pretty significant deterioration in the average selling prices in that marketplace. Coupled with that the steel prices are coming down, but when you're sitting with higher cost steel, you get behind the curve of that, eventually we'll get ahead of the curve of that.

In North America, you had been seeing pretty stable pricing across the board, I think. Have you seen any wobble in that, or has that remained stable? How should we look at North America?

Well, I think that Vince commented on it, and I would suspect that we will see some either flattening or deterioration on the price model in the US. Markets are soft, steel prices have come down, and certain competitors are reacting to that in a more aggressive fashion. We will respond accordingly where we think it's in our best interest to do so.

Okay. But that's something you haven't necessarily seen yet, you're just kind of predicting or --

There has been some on the -- I'll have to remind you, Holden, that the business is split between consumables as an impairment commodity input and equipment that doesn't necessarily have such a large component of metals in the pricing. So, certainly on the consumable side there has been some slight easing; on the equipment side, lesser so.

Okay. And then do you have a sense when you look at sort of corporate-wide, where you said some of these things are in different parts of their cycles. I mean, ultimately what kind of negative number would we expect at the worst on pricing? I mean, is this like a negative 2 type of thing, or what are sort of the expectations in terms of where pricing could go company-wide?

That's something I wouldn't ever attempt to try to predict. Obviously, the variables that affect that are continuing declines in commodity input prices. Volumes can certainly have an impact on the competitive marketplace, that there is greater volume declines that certainly brings more competitive pressures to the marketplace as the industry or competitors try to sell their production and maintain their market share. So, that's very difficult to try to get a beat on. But I can tell you that it has the two most important variables are what the commodity input prices do and what the overall industry volumes do for the remainder of the year.

Okay. And just looking at your two lines, machinery it sounds like is still flat to off in terms of pricing, whereas, consumables is where the problem is. That's kind of how it breaks down?

I wouldn't describe it as a problem, but I would describe it as consumables being a little bit more sensitive to a significant input cost associated with metals.

Okay. And then I guess lastly, inventory, obviously you feel like you've gotten your inventory kind of in hand. How do you feel about your channel partners? Do you feel like there is still inventory out there, or are they running reasonably lean at this point?

I think we get that call about every quarter, Holden, and again it's my view, and I haven't seen anything that would substantially change my mind, is that the distributors have always stayed fairly lean on inventory, and if there has been any destocking it surely is completed and there is no more room for that. Probably more -- any inventory destocking that you would have seen would have been probably more at the end user, where they watch their production volumes halve in some cases, and obviously they're going to carry less inventory with that. But, again, I think the majority of that, if there is any, is substantially behind us.

All right. Thank you.

Thank you.

At this time I would like to turn the call back over to Mr. Petrella for closing comments.

Thank you, Latanya, and thank you all for joining us on this first quarter conference call. We look forward to talking to you at the end of July to report our second quarter results. Have a nice day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.