Lincoln Electric Holdings Inc (LECO) 2009 Q2 法說會逐字稿

Greetings and welcome to the Lincoln Electric second-quarter 2009 conference call. At this time all participants are in a listen-only mode and a brief question-and-answer session will follow the formal presentation. (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 now begin.

Thank you, Jackie. Good morning and thank you all for joining the Lincoln Electric 2009 second-quarter conference call. We filed the 10-Q for 2009 second quarter this morning and issued the financial results press release prior to the market open. Additional copies of the press release are available through our Investor Relations Department at 216-383-4893 or on Lincoln Electric'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 region. Before we start that discussion though, let me remind you that certain statements made during this call and 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. Let me now turn the call over to John Stropki.

Thank you, Vince, and good morning, everyone. Our financial results for the second quarter show important improvement from the first quarter despite the poor economic conditions of the global markets. We are seeing some stabilizing trends and a number of economies around the world, mainly Asia and parts of Latin America, are starting to reflect some improvement.

Our 2009 the second-quarter sales of $413 million were essentially flat on a sequential basis compared to the first quarter of 2009. Compared with the second quarter of 2008 sales declined 40%. Although sales volumes remained at levels near those experienced in the first quarter of 2009, net income in the second quarter was $15 million or $0.35 per diluted share, a significant improvement from first-quarter earnings of $3.8 million or $0.09 per diluted share.

All regions experienced improved operating results compared with the first quarter and benefited from our previously announced actions to align our cost structure which resulted in more than $10 million in savings compared to the previous quarter. During 2009's second quarter we took several additional actions to align our cost structure which included rationalization of factory operations in Europe. We anticipate that these actions, combined with measures announced in the preceding two quarters, will result in over $100 million of annual cost savings compared to 2008.

Our management and our global associate teams continue to assess and to implement additional cost savings measures aimed at improving profitability in each geographic region and all business units. Vince will give more specific details about the numbers for the quarter in just a minute. But first an update on the market conditions we face and an update on our strategic initiatives.

First, looking at North America. Industrial activity in North America continues to be at historical low levels. The June industrial activity as measured by industrial production was down 15.2% compared to 2008 marking 12 months of year-over-year declines. Capacity utilization, which normally averages in the mid-80s, was approximately 65%, a slight decline from the May 2009 levels.

In Canada the economic climate and outlook mirror economic activities in the US with industrial production forecast declined by nearly 9% from 2008 levels. As a result North America sales of $240 million in the second quarter were off 40% compared with the year-ago quarter and US export sales declined to $38 million in the quarter, a 41% decline. Despite the softness in the markets and significant revenue declines North American operating margins generate a profit of approximately 10%.

Looking forward order trends in our traditional US welding markets are historically weak in the summer. And with many manufacture shutdowns anticipated to be longer than usual, the uncertainty regarding any short-term rebound in business activity persists. However, even with the US automotive weakness, our product quality in welding solutions have enabled us to displace the competition at several key locations. The key criteria, as described by newly converted customers, include our ability to increase productivity, improve robotic up time, decrease production times and improve product quality.

The strongest end markets domestically continue to be energy-related in the pipeline and pipe mill sectors and in the wind tower and renewable energy. With oil prices firming and sometimes strengthening, there is renewed interest in the oilfield pipeline projects. In wind towers, despite recent funding delays and bureaucracy in the permitting processes, the ultimate and long-term demand prospects remain very strong.

We recently hosted our second successful wind energy conference here at our headquarters focusing on Lincoln's products and services for the wind tower industry all around the world. The success of these conferences and our product portfolio has resulted in 33 of 38 new wind tower manufacturing facilities around the world installing Lincoln Electric equipment and using linking consumables. Cost savings to the customers resulted in greater than 50% reduction in time and consumable consumption.

Infrastructure spending results from the US government stimulus package is having a trickle affect at best and the 9.5% unemployment statistics reflect the dire job situation with no meaningful improvement in sight. In Canada the economic investment package introduced at the beginning of the year was designed to provide stimulus through both infrastructure spending and tax cuts. We do expect the stimulus will begin to impact the demand late in the second half of 2009.

Turning to Europe. The overall economic trends continue to be depressed. Euro-zone industrial production declined 17% in the second quarter. As a result Lincoln Electric Europe sales were $94 million reflecting a 32% sales decline in local currency. However, compared to the first quarter of 2009 Lincoln Europe sales were essentially flat, further evidence of some stabilization.

Europe reduced its loss in the quarter to approximately half of the first-quarter loss as a result of the lessening impact of high cost inventory liquidations plus the benefit of important overhead cost reduction and factory rationalization initiatives.

Other cost initiatives to improve profitability in Europe include the relocation and consolidation of our Harris Product Group's Italian operation into Harris Group's Poland facility. This relocation will be completed by the third quarter of 2009 with significant financial benefits being realized in the second half of 2009 and into 2010. We are also evaluating other courses of action in Europe aimed at returning the region to the profitability of 2008 levels.

In Asia-Pacific, China, the region's largest economy, started to show improvement in March and continued during the second quarter. The economy grew 7.9% in the second quarter and is on track to hit the 8% growth targets for the year. Sales of Lincoln Electric Asia-Pacific declined approximately $50 million, down 31% in local currency compared to year-ago quarter.

However, China's substantial stimulus plan, which is focused on infrastructure projects including electric and wind generated power, did result in increased exports of high-end technology products to the region during the second quarter and we expect this to continue for the foreseeable future. China has already announced that it will build its nuclear power generation capacity with more than 30 new nuclear plants planned over the next 10 years. Presently there are 14 such plants under construction.

Lincoln as a unique portfolio of products for the nuclear power generation market and we recently won a very significant order for the Shanghai Nuclear Project, a milestone for Lincoln in China and it dramatically improves our prospect for significant additional business in this important market sector.

Along with nuclear China is also pushing towards becoming a green energy superpower. It's estimated that the country will have approximately 30,000 MW of wind energy by the end of 2011; this translates into 20,000 towers with a potential for consumable sales alone valued at approximately $80 million.

As evidence of our global strength in the wind tower sector we recently won both the welding consumable and major equipment supply contract for a new Chinese manufacturer of wind Towers. Also large construction equipment manufacturers like Caterpillar and Komatsu are indicating very positive signs towards recovery in China and also the auto industry is showing excellent growth. In fact, China surpassed the United States in auto sales in the month of June with more than 872,000 units, up over 40% year over year.

In India sharp interest rate cuts helped start a recovery in the industrial production and mining. India is also experiencing solid growth in the automotive sector, posting an 8% rise in auto sales during June. Sales to pipe mills in India picked up in the quarter and is expected to drive demand for both Lincoln imported and locally produced products.

Lincoln Electric India held its grand opening of the new manufacturing plant in Chennai on May (technical difficulty) the 11th which included industrial production of MIG and sub arc wires with the first customer orders being filled in June.

Turning to Latin America. In Latin America market challenges continued during the second quarter, more markedly in Mexico where activity slowed as measures to fight flu virus forced many public and private activities to shut for days and weeks. The recession in Mexico is expected to deepen during 2009 with GDP contraction predicted to be about 7% while the forecast for contraction in Brazil remains steady at 1%.

In Mexico the automobile parts manufacturing industry continued to deteriorate and several large energy-related projects remain on hold, while in Brazil recent tax breaks offered by the government to the automotive sector and further interest rate reductions appear to be providing some boost.

Our Latin America sales results reflect the challenging economic conditions in the region with sales down approximately $60 million, a decrease of 23% in local currency compared to the 2008 second quarter. The profitability in the region has improved since the first quarter as cost savings initiatives improve our cost structure in the region. The expectation is that the second half could see continued improvement. Countries in the region should be favorably impacted by the recent uptick in commodity prices and the fiscal stimulus projects throughout Latin America.

That's an overview of the regions. On a global perspective steel production, which is a key indicator of welding consumable consumption, increased steadily throughout the quarter resulting in an increase of 8% compared to Q1 2009 production levels. Steel production in China and India grew 6% compared with prior year volumes while the US and Europe remain approximately 40% below prior-year levels.

While global market conditions remain weak from an overall perspective, we continue to focus on our current financial performance and on executing our strategy of building our position as a global leader in arc welding industry. Our focus on technology leadership is an important component of our strategy. Our new product pipeline is extremely robust and during the last nine months we have introduced 108 new or improved products, more than at any time in our history. I would encourage you to go visit our website, LincolnElectric.com, to review this impressive list of new products.

A few important products from our China operations include new flex cord wire products along with several new welding machines introduced at the Beijing welding show. Here in the North American markets we have introduced more than 20 new machines and more than 20 new consumables and automated solutions and numerous new accessories. This accelerated large-scale new product launch is a strategic response to the current market conditions in combination with the numerous cost savings initiatives we discussed earlier.

We are confident that with our strong balance sheet, our market leading product portfolio and a leaner, more efficient cost structure we will emerge from the global recession as the unquestioned market leader providing welding solutions around the world. Now Vince will cover the financial results in detail.

Thank you, John. John pointed out second-quarter of 2009 financial results reflect a meaningful improvement in operating earnings from our first quarter of 2009. The quarter's consolidated sales were down 41% with North American sales decreasing 40% and sales reported outside of North America down 42%. Volume declines decreased reported sales by 37% and foreign currency effects decreased reported sales by about 5%. Pricing was flat in the quarter year over year and acquisitions contributed about 1%.

On a product line basis machine sales decreased 46% and consumable sales decreased 38%. Sales by product line were approximately 66% consumables and 34% equipment compared with 63% consumables and 37% equipment in the prior year's same quarter. The first half of 2009 consolidated sales were down 37% with North American sales decreasing 37% as well and sales reported outside of North America down 38%. Volume declines decreased reported sales by 35% and foreign currency effects decreased reported sales by about 5% in the first half. Pricing increased sales 2% and acquisitions contributed about 1%.

The percent of gross profit in the quarter was 25.7% of sales compared with 29.3% in the prior year. The decrease in gross margins as a percentage of sales was primarily attributable to unfavorable operating leverage caused by decreased sales volumes on a year-over-year basis. For the first half gross profit was 23.8% of sales compared to 29.0% of sales in the prior year. This year-over-year decline in gross profit was due to unfavorable operating leverage combined with the impact of liquidating higher cost inventories.

SG&A expense for the second quarter was about $80 million or 19.4% of sales representing a $33 million expense reduction from the prior year period. The decrease in SG&A expense was primarily driven by lower bonus expense and decreased selling expense associated with lower sales volume. Foreign currency exchange rates decreased SG&A expenses by $5.3 million in the quarter.

SG&A expense for the first half was $157.6 million or 19.1% of sales, representing a $54 million reduction in year-over-year SG&A expenses. Decreased bonus expense of $40 million and the impact of foreign currency translation were the main contributors to the reduction in SG&A cost.

Second-quarter operating income at 4.7% of sales was down 840 basis points versus the second quarter of 2008. Excluding rationalization charges and the pension settlement gain operating income was $24.7 million or 6% of sales.

On a geographical segment basis and excluding special items North America recorded EBIT margins of 9.9% in the second quarter, Europe EBIT margins were negative 3.3%, and the other countries' geographical segment achieved a 2.9% EBIT margin. First-quarter 2009 EBIT margins excluding rationalization charges were 7.1% in North America, a negative 6.4% in Europe, and a negative 1.2% in the other country segment.

All geographical segments' margins improved in the second quarter over the first quarter as a result of lower input costs and our cost cutting measures on a global basis. Our first half operating income decreased to $20.4 million or 2.5% of sales. The first half of 2009 included rationalization charges of $18.6 million and a pension settlement gain of $1.5 million. Excluding these special items operating income decreased to $37.5 million or 4.5% of sales in the first half.

The income tax provision for the second quarter reflected an effective tax rate of 36.9% compared with 26.3% in 2008. The year-to-date effective tax rate was 47.5% compared with 29% in the prior year. The higher effective tax rate was mainly due to foreign subsidiaries recording pretax losses with no associated current tax benefit. The Company invested $20.8 million in capital expenditures in the first half compared with $31.1 million in the prior year's first half.

Our 2009 capital spending plan will continue to trend substantially below the prior year's spend. Other uses of cash in the first half include the pay down of about $30 million of debt and the payment of approximately $23 million in dividends to our shareholders. Weighted average diluted shares outstanding decreased to 42,592,000 for the second quarter compared with 43,173,000 shares for the 2008 second quarter, a 1.3% decrease. Shares outstanding at June 30, 2009 were 42,523,871 shares.

Even during these most challenging economic times our financial position remains very strong. During the first half of the year we generated over $134 million in cash flows, raising our cash balance to $347 million at the end of the quarter. This improved our net cash position to $239 million and lowered our debt to total capital ratio to 9.5%. I finished my prepared comments and at this point I would like to open the call for any questions. Jackie?

(Operator Instructions). Michael Cox, Piper Jaffray.

Good morning, guys. A nice job on the margins this quarter. I was hoping that -- if you could provide a little more color around the SG&A. You've been running around close to $80 million here for a couple of quarters. Is that a good run rate as we look out the back half of the year? Are there still some expense reductions that have yet to flow through that would get that number below $80 million -- assuming the sales run rate stays relatively flat?

Yes, that run rate as a percentage of the top-line is a fair representation of our current cost profile. Most of our cost cutting initiatives are in full bloom at this point in time. There will be incrementally more cost cutting in the last part of the year. But that's not a bad proxy for where we stand now as a percentage of sales.

Okay, that's helpful. On the Europe side, what still needs to be done to get that business back to breakeven? Is it simply a matter of getting sales moving in a better direction or are there cost opportunities that could get you back to breakeven on the current rate of business?

Well, we're continuing to evaluate some additional cost cutting measures in Europe. We've announced and have completed a shutdown of one of our factories in Italy. There are some additional SG&A and operating cost reduction initiatives that are being planned at this point in time. We hope to see a continual improvement in our EBIT margin in Europe going forward.

I will say that the bulk of our liquidation of high cost inventory is now behind us with a significant part of those charges rolling through our accounts in the first quarter and diminishing -- probably getting cut in half in the second quarter and we don't expect to have that drag on our gross margins and EBIT margins going forward into the third and fourth quarter of this year.

Okay, that's helpful. My last question, we've been hearing some talk in the channel that your company is selling more direct, moving around some of the distribution channels that are out there. Can you talk maybe a little bit about the strategy or perhaps this is more just a one off?

I don't think there's any significant shift in our strategy, Mike. We've been very clear with our distributors that there are certain large end-user customers who they feel, who the customer feels are better served on having direct relationships with manufacturers in all of their product sourcing areas, not just welding. And in these very difficult markets there's no company that can afford to pay for a channel process that doesn't bring any value.

So in those situations we have a method to address them and we have always had a method to address them. I would say there's been much more consolidation of large end users not only in the US market but as large end users have grown globally where they're looking to have a global provider for their welding solutions, not just a local, a regional, or a national supplier, a global supplier and obviously we fit that bill quite well and we avail of the opportunities to take advantage of that.

Okay, thank you very much.

Mark Douglass, Longbow Research.

Good morning, gentlemen. Good job on the margins. Vince, can you run through them sales mix on the different regions?

Certainly. For North America price -- I'm sorry, volume decreased 39.3%; price was basically flat year over year; nothing from acquisitions; and foreign exchange had a detrimental affect of 0.7%. Moving to Europe, Europe's volumes declined 29.7%; price had a detrimental negative impact of 2.7%; no impact from acquisitions; and foreign exchange had a rather substantial 12.6% negative impact on the year-over-year comparisons or total 45% decline in the top-line.

And then the other countries segment which is all the rest of the world had a decline in volumes of 37.7% and an increase in prices of 3.4%; acquisitions contributed 3.3%; and foreign exchange had a negative impact of 6.9%. So overall in my prepared comments I highlighted that total sales were down about 41% and that's roughly 36% to 37% at volumes and then the other major proportion of the decline in the year-over-year top-line was almost a 5% decline in foreign exchange values.

Right. Can you talk about Europe, it's a little surprising that their volumes were off 30% versus the rest of the world including North America down 40%. Do you think you picked up market share there? Because Europe seemed to take another leg down in the second quarter versus other regions. I was just curious if there was something there that's improving for them or for you in particular?

I think it's a number of factors. The areas that we had and have great portfolio strength in, the pipe mill sector which I talked about, the energy sector with our metro product line, which is petrochemical and energy related are still quite strong as people scour the globe to provide solutions for future demands and current demands of energy. And we did exceptionally well in those product areas that offset some of the traditional weaknesses in the core businesses of automotive and general fabrication.

So do we think we're taking market share? Yes, I think we're taking market share primarily from the smaller local manufacturers that just don't have the depth in their product portfolio to really participate in some of these high-value kinds of projects.

Okay. And then on the pricing front, it's weakening sequentially. But with maybe some stabilization here in the steel prices. Do you expect it to continue to get weak? I mean, there are some difficult comps as well. What do you anticipate on price?

Well, this will give you a little bit more detail, but I would just say that I think we're going to see variability of that in the individual markets that we serve. This is a global market from a pricing standpoint. We talked about the consolidation or the fragmentation of the various different markets and obviously we'll see variability as a result of that.

I would add, Mark that third quarter of 2008 was one of our bigger pricing quarters where we raised consumable pricing for the last half of last year. And so on that basis I would expect the third quarter of 2009 to show a bigger decline in year-over-year prices than the second quarter and probably somewhere in the low single digits.

Okay. And Vince, can you just go through the rationalization charges per region?

Yes. We did file our 10-Q this morning, Mark, (multiple speakers) just very quickly in the quarter, the bulk of the rationalization charges in the quarter which totaled $6,877,000 were in Europe associated with a plant closure and relocation and that amount was $6,161,000. The other countries segment had rationalization charges of $595 million and North America had a rather modest charge of $121,000.

Okay.

You might recollect in the first quarter North America had the bulk of the charges associated with the US voluntary separation program of over $10 million.

Right, right. And then on the rationalization you said sequentially there were $10 million in savings versus 1Q and Q2?

Right. Well, 2Q we estimate that our savings were approximately $25 million as compared to about $10 million in the first quarter.

Okay, great. Thank you.

Steve Barger, KeyBanc Capital Markets.

Good morning. Just trying to think about sequential revenue in the back half of the year. You mentioned normally you see a seasonal decline, but given really low levels of activity in a lot of regions right now is there any expectation for a sequential increase anywhere?

Well, I think that's pretty difficult to predict, Steve. You're right in that this quarter is usually the more challenging quarter. In the Western world, the US and Canada you'll traditionally have plant shutdowns during the July/August timeframe of one or two weeks. And in Europe you have a month holiday that obviously impact the quarter quite substantially.

This year we're seeing people where they're extending those one- or two-week vacations, even maybe announcing that they expect to have one at the end of the year, obviously all predicated on where the economy goes. The difference maker could be if there is some positive trend on the economy and we're seeing what we think is the bottoming, and if that starts to offset some of the seasonal weaknesses then we have opportunity. If it doesn't we're going to have the traditional slower volume quarter that we experience on a seasonal basis around the world.

All right. When you talk about the bottoming activity, did you see a sequential increase in revenue from May to June?

Again, I think that you have details in terms of the number of days per month that are all in there. I would prefer to just say that we've seen a stabilizing impact and it's really too early to make any prediction about whether that carries forward. But we're encouraged that we've seen a stabilization.

Okay. And the sequential gross margin improvement, I think inventory was -- if our model is right then it was down about 10%. Are you actually rebuilding inventory for anything or is that still in drawdown mode? And how much of an impact was inventory reduction on gross margin versus just the cost cutting activities you were pursuing?

Well, we aren't building inventories at this time. We're bringing down our -- continue to bring down our inventories in line with declines in the top line. From the end of the year our inventories are down probably over $80 million and we anticipate that inventory levels will continue to come down.

Is there any way that we should be thinking about cash conversion in the back half? What's possible relative to what you've done in the first half?

As far as cash conversion, the expectation that the top-line will moderate and not decline on a year-over-year basis in any greater accelerated fashion compared to the first half, my expectations would be that the cash flow generation from working capital management, accounts receivable and inventory will start to abate compared with the first half.

Okay. John, I wanted to go back to your statement about the Shanghai nuclear plant win. Can you frame up what the revenue potential is there? And is that reactor similar in size to some of the others that are in planning or construction over there? I think you said they're going to build 30 plants.

Yes, most of the commitment plants are of similar size, they're the Phase 3 generation. And I think if you followed the dialogue that took place when Secretary Clinton was in India, the Indian government had announced nine new nuclear plants and they gave three to the US technology, three to the French technology and three to the Japanese technology. All of those plans are relatively the same in terms of their megawatt generating capacity, it's a little bit different technology in how the reactor works and the cooling elements of it.

But they're significant, not necessarily so much from the volume of welding consumables but because of the value of welding consumables. It's a very challenging approval process with the engineering firms and the owners. And in China it was especially challenging, but we're mostly over that hump which is going to open up a -- I would categorize it as a significant opportunity for us and one that's got a fair longevity associated with it.

Sure. And just so we can think about the opportunity, is there $1 million of welding material in a nuclear plant or $500,000 or --?

Well over that and that doesn't include the equipment.

Oh, okay. And the same thing, nice positive comments on the 20,000 wind towers in China. Since you had a wind forum at your plant here in the US, do you have a wind tower forecast for 2010? And are you seeing orders start to come through given that we have the investment tax credit stuff in place now?

Well, I mean we could give a very accurate forecast based on the government's commitment to generate X percent of the forward-looking power demands by wind energy. What we can't predict is how the bureaucracy is going to play out in the licensing process. And the real challenge is not getting the land and the space for the wind energy, it's the permitting of the transmission lines to these areas that are generally remote and that's under FERC control. And that might be a better conversation to have with the Energy Department than with someone like us.

But I will tell you that there are a lot of fabricators that are making significant investments and bets on this being a reality. And we're seeing the process unfold much more rapidly in other parts of the world where the bureaucracy maybe isn't quite as cumbersome and the process isn't quite as slow. But we think we are exceptionally well-positioned to participate in that.

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

James Bank, Sidoti & Company.

Good morning. A lot of my questions have been answered, but Vince, I just wanted to follow up on a previous caller's questions. I didn't know if you were speaking directly to Europe or the Company as a whole when you said that there was basically some head -- or excuse me, some tailwinds with the gross margin and EBITDA margins improving. I was just wondering if you could clarify that for me.

Yes, James. What we've been talking about for some time with Europe was the impact of liquidating higher cost inventories and the most significant impact from that liquidation occurred in the first quarter. We said at the time, the fourth quarter call and the first quarter call, that we believe by the first half or into the third quarter of 2009 that the bulk of the high cost inventory would have worked its way through the system. And then reviewing our estimates of the impact of that from the first to the second quarter and now into the third we expect there to be no further significant material impact on our margins in Europe in the third quarter from the high cost inventory liquidation.

Well, how much of that would you say was attributed to the near 400% basis point sequential gain in gross margin?

Probably upwards of half of that.

Okay, fair enough. And the additional cost savings, John, you mentioned this in your prepared remarks. Was there anything substantial that would rival what we've already seen in regard to the $80 million cost savings you guys had announced way back and then the additional $20 million, I believe, on the last quarter -- last conference call. Is there anything of equal weight potentially down the pipeline?

No, we have some meaningful projects that we will accomplish or begin in the second half of the year. But there's nothing singularly or cumulatively of that overall magnitude. I mean, we pick the low hanging fruit quickly and I think we've demonstrated that we harvested that quite successfully. Now we've got more difficult projects on the plate, they're committed to. Obviously there are challenges in terms of the public announcements of those, but we will be moving through those in the next few months and you'll be able to see both the cost and the savings potential that they demonstrate. I would just reiterate my point is that we're taking the opportunity of this global crisis to dramatically improve the cost basis of our welding platforms around the world and when we were done we will have a portfolio that I think is unrivaled in the welding world.

Okay. And in regard to renewable energy, I think some of the bigger focus was on wind, but is there anywhere else that you guys are finding some opportunity?

Well, I was in Brazil a couple -- two or three weeks ago and visited a large manufacturer of hydroelectric power plant components. And they have about a three-year backlog. Again, that's generally very high end welding type of technology. They've also put a plant up in China for the same kind of reason. I think that the scale kind of issue -- I mean if the wind tower activity around the world goes forward the way governments are committing to it, and again, I can't guarantee that's going to happen, it's by far the most substantial side.

What I do know is that the world needs energy and a lot of the energy producing facilities that exist in the world and particularly in the US are becoming obsolete either based on their age or their greenhouse gas emissions. And something has got to take the place of those and all of the alternatives, quite frankly, are pretty promising for the welding industry.

Right, right, okay. Perfect, thank you both.

(Operator Instructions). Holden Lewis, BB&T Capital Markets.

Thank you, good morning. I wonder if -- well, a little bit more on the savings side as well. The original savings, both the $80 million and you basically had about 100 -- I think $105 million in total annualized savings between the European rationalization and total cost. I mean, essentially in Q2 got essentially all of that in there, right. So the cost structure that you see in Q2 is kind of what you would expect to see in Q3 and Q4, is that the right way to look at that?

At this point in time, based on what we've announced at the year end and at the end of the first quarter, those initiatives are in a full maturity at this point in time.

As John has noted and as I continue to discuss, there are other initiatives and other announcements that may very well be made during the course of the third and the fourth quarter of this year and we continue to evaluate all opportunities to align our cost structure with current business levels and to take this as an opportunity to make some decisions that are important to the Company from a longer-term perspective.

So it's correct, Holden, that our run rate in the second quarter is in line with what our expectations were for all of the previously announced cost savings initiatives.

Yes and just maybe as a follow up to that, Holden. When we announced the cost savings we took a fairly conservative view of calculating the savings versus the actions that we were committed to making. And in some cases we're seeing that those initiatives are generating more than the conservative view that we have taken, some maybe less. But I think we're optimistic that we can stay the course of the $100 million and we may get some incremental improvement in those actions as we find ways to take better opportunities of the changes that we made.

And within all of those -- within all of that basically you had one plant that you shut, right? I mean, for all those cost saves that was the total big infrastructure decision, is that right?

That was the only plant closure that we've announced.

Okay. Now the additional steps that you might take, it sounds like and you said it's not really low hanging fruit at this point. Is it more in line with that kind of thing? We're talking about more structural changes rather than simply OpEx changes? Is that the (multiple speakers)?

Yes, there are some -- we're evaluating a number of different scenarios. But likely it will be to reduce the overall fixed cost structure.

And for a change the sort of geographic spread?

Correct.

(multiple speakers) and all that? Okay.

Yes.

Just one follow-up point on that. One of the opportunities that we do have, and it takes a while for it to materialize, but it has in every instance where we have done this is that the plant properties that we own, when we rationalize facilities, generally have a fair amount of value associated with those.

And to Vince's point, we had a very nice gain in the quarter from the sale of our joint venture property in Turkey where we closed that facility, expanded the production and modernized the facility and actually the sale of the property comes nearly close to the rationalization efforts that are part of it, it just takes a while to realize the revenue stream of that or the profit stream of that.

Okay. So you don't want to get any broad sense of what kind of savings you might be able to recognize in 2010 from these types of things, even if you don't talk about specific projects?

Well, we will talk about the specific projects when we announce them and just stay tuned because they'll be coming.

Okay, fair enough. Okay, that's great. And then in terms of the $80 million in OpEx savings that you've generated, as we now move into the second half of the year and approach 2010, I mean some of those things were wage freezes and 401(k) match and a lot of things that maybe there's the ability to put a near-term cap on. But you go into 2010, of that $80 million in savings, if volumes stay flat, does any of that $80 million necessarily have to come back into the model or can you keep that $80 million as long as volumes remain flat?

No, the bulk of the cost savings, Holden, have been our ability to reduce our hours and our productive labor costs primarily in North America and then other regions of the world. So when volumes improve, as they inevitably will, we will have almost immediate capability to satisfy in excess of a 20% capacity utilization or volume increase simply by increasing the hours of the bulk of our workforce around the world. So we have a tremendous amount of flexibility built into our initiatives and our structure in order to take advantage of the upturn when it comes in the future.

Okay.

And Holden, again I would add to that is the way we've been able to do that, which is part of our historical methodology of reduced hours and guaranteed employment as well as some very creative programs in Europe, have allowed us to maintain the depth of knowledge that we have within our people without sacrificing either them or the Company's future. And I think that when we do see this improvement we will be very well positioned to capture it because we're not going to be training new people in either the technology side or on the production side to take advantage of those upside opportunities because our core employee base around the world remains mostly in tact.

Okay, so -- if volumes were to remain flat then that $80 million stays out, there's no reason (multiple speakers)? Okay.

Yes.

And then can you also just comment on production levels. I don't know if you have a sense of where you were during the quarter system wide. But if you're getting to the point where your inventories may come down but not -- you're not going to see big drops. Can we anticipate you raising production even if volumes stay flat just to come back in line with demand? Or where do we stand in the second half with production increases?

I would expect some slight increases, particularly in Europe because -- Vince talked about the inventory reductions that we had to accomplish in Europe. And most of that came by just basically dramatic slowdowns in the operations there. So if the production levels stay or the volume levels stay where they are now, we would have to have some improvement in the production in certain key facilities around the world. In the US that's not really the case, we're much more day to day in terms of our fulfillment situation and our employment pretty much tracks the incoming volume levels. But we substantially reduced production in Europe to liquidate the inventory position we were in.

Okay. Are you able to give some order of magnitude potential impact on gross margin from that step up in production?

I don't think so at this point.

All right, thanks, guys.

Michael Coleman, Sterne, Agee.

Good morning. You've already addressed a portion of this which is the improvement in gross margins from the liquidation of high cost inventory in Europe. But I wanted to ask about North America and the price/cost gap in the quarter. It looks like the pressure on pricing is relatively muted. Did you see a benefit, were you able to stay ahead with cost coming down faster than price in the quarter in North America?

Yes, we did have a benefit from that, Michael, in the quarter.

In terms of the magnitude of the tailwind on a dollar basis?

That's hard to -- I wouldn't want to try to estimate that at this point.

Okay.

The other component of that, Michael, that shouldn't be lost in the translation again is I would say it's product mix too. Is that the projects that we talked about that are stronger in the energy sector are generally higher margin, less commodity-based products than say in the automotive sector. So if the automotive sector is weak, which has the impact on volumes that we've seen, but the energy sector is strong, you see the volumes go down but the price realization on the energy side is much more positive.

Okay. Also, was there a -- in North America again -- a LIFO credit or a LIFO benefit?

Yes, we had in the quarter a LIFO credit of approximately $6 million.

Okay. On the China -- or pardon me, just on wind where you mentioned you had 33 of 38 power manufacturers that you've signed up as customers, has the benefit of deliveries for the equipment, have you realized the deliveries for those or is that something that would happen in the back half of the year?

I would say mostly they're realized. The long lead time in that portfolio is really the tooling and the fixturing. Generally what happens is we sell the equipment to the people who are building the tooling and the fixturing and then they go through a process where they have an engineered system and they're getting progress payments on those from the end-users and we're not in that side of it.

There are still several important projects in the pipeline and we're trying to go up the food chain in that where we're actually selling a larger portion of the projects. But at this point in time those are the ones that we know about and then we have realized. There may be a few that we don't know about, but those are the ones that we know about.

Okay. Lastly, on your consolidation of a minority position in China, what will that add on a quarterly basis or for the back half of the year to the rest of world segment in terms of sales?

You mean it when we complete our acquisition of the joint venture partner?

Correct.

Well, the run rate for the first half of this year is approximately $130 million on an annualized basis. So that will be what will be added to the top-line once we complete the acquisition on an annualized basis.

Okay, added to the acquisition on an annualized basis. And that acquisition is going to be completed in --?

Hopefully any day now. We're very close to completing the transaction and we could be announcing the completion of that transaction at any point.

Okay. Thank you.

Holden Lewis, BB&T Capital Markets.

Thanks. I guess also can you comment on what the pension expense was during the quarter?

Yes, it was -- pension expense, Holden, increased about $4 million in the quarter.

Year over year?

Year-over-year increase of $4 million.

Okay, fair enough. And that's versus up what -- $8 million I think in the first quarter?

Yes, close to $8 million in the first quarter.

Okay. And then also, this is just a number I missed. But I think John, you mentioned sales in the Euro-zone were down some amount and I missed the number.

Yes, it was about -- by a percentage basis?

On a percentage basis, yes.

Actually, Holden, I gave some numbers on Europe broken down by volume, price and foreign exchange.

Sorry, no, I was actually talking to John's --

32%.

32?

Yes.

In local currency.

Local currency.

Got it, okay. Thanks, guys.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Thank you, Jackie, and thank you all for joining us on the second-quarter call. We very much look forward to talking to you at the end of the third quarter. Thank you.

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