Lincoln Electric Holdings Inc (LECO) 2010 Q1 法說會逐字稿

Greetings, and welcome to the Lincoln Electric first quarter 2010 results conference call. At this time all participants are in a listen-only mode. The 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, Chief Financial Officer for Lincoln Electric. Thank you, you may begin.

Thank you Diego. Good morning. Thank you all for joining the Lincoln Electric 2010 first-quarter earnings call.

Financial results for the quarter were released this morning prior to the markets opening. Additional copies can be obtained through our investor relations department at 216-383-4893 or on Lincoln's website.

Lincoln's Chairman and Chief Executive Officer, John Stropki, will start the discussion this morning and provide commentary on the quarter and the segments.

However, before we start that discussion, a reminder 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.

Now let me turn the call over to John Stropki.

Thank you Vince, and good morning everyone.

As a result of the strategic decisions we undertook in 2009, which involved realigning our cost structure, capital utilization improvements, and introducing new fit-for-purpose products, we entered 2010 well-positioned for profitable growth. Now with the assist of a developing global economic recovery, our financial performance in the first quarter gives us reason for increased optimism for the remainder of 2010.

Total sales in the first quarter were $471 million, up approximately 15% from the same quarter last year.

An even more significant measure was that this [first] quarter marked the fourth consecutive quarter of sequential revenue growth.

In our view, 2010 economic growth prospects continue to be strong around the [globe]. However, recovery appears to be stronger in the emerging markets, with the developed regions of the world still experiencing some different and unique challenges.

During the quarter our operating performance continued to improve. Compared with the year-ago quarter, operating income, excluding special items, improved by $23 million to $35.5 million.

Again, we are encouraged by our strong start to 2010. If market conditions in the industry continue to improve, we believe we are well-positioned to deliver continued improving financial results in the quarters ahead.

Vince will provide more detail [of] the numbers in a few minutes. But first I want to cover the highlights of the economic environment in our industry by region, review some recent developments in important end markets, and take a quick look at our segments.

First, as we continued into 2010, global steel production and steel consumption will have a key impact on our business. Steel consumption is growing in all regions and on a global basis is projected to increase approximately 15% in 2010, with China leading the rebound.

Growth in consumption is further evidenced by the surge in shipments by US and Canadian distributors, up to 9.9 million tons, an 11.5% increase during Q1, compared with the same period last year. Crude steel production increased 23% in March within China to 55 million metric tons.

All of this is good news for the welding industry. However, along with the increases in steel production and consumption, there have been many commodity cost increases in iron ore, coking coal, and even scrap metals. The recent trend where mining companies are pushing steel producers to purchase iron ore on quarterly cycles rather than on historical annual pricing agreements has also resulted in upward pricing pressure within the industry.

These cost increases are being felt by us as well as the rest of the welding industry. As such, we have announced and we will implement price increases around the world averaging between 3.5% to 5.0% for both consumables and equipment. As I said, these price increases apply to both welding consumables and welding equipment.

Moving forward, we will continually monitor our pricing strategies relative to our input costs in order to maintain our margins and simultaneously improve market share.

Looking at our end markets around the world, the outlook is improving for many key markets.

The current forecast for the automotive/light truck sector is that global production will grow by 11% to 64 million units worldwide. With our full complement of welding solutions, Lincoln has a strong competitive position in the worldwide automotive sector.

And to meet increased demand, we plan to add capacity in both our India and China plants to serve the fast-growing automotive sectors in these two important markets. We are also increasing production schedules in our US, Canadian and Mexican operations. And lastly we are increasing our business in European's automotive sector and have become the major supplier of MIG wire to two of the leading global automotive manufacturers based in Europe.

As the transportation automotive industry strives to improve both quality and productivity, we anticipate renewed focus on our high-technology equipment and automation solutions.

The heavy fab sector is also projecting significant improvements in market conditions. Earlier this year that Caterpillar stated that it would more than double its 2010 purchase of steel to meet production in its factories.

When steel producers' purchases rise, welding usually tracks right along. According to a recent report, global construction equipment sales are expected to increase 8.5% this year.

In China, India and South America indications are for appreciable recovery in the heavy fab sector this year. Caterpillar is currently projecting growth in China at around a 10% level, and 8% in India. Local manufacturers throughout China and India are also projecting substantial increases in production levels and capacity increases.

On the agricultural equipment market segment, India sales are booming. India is now the largest tractor market in the world, with [unit] sales over 300,000 in 2009.

In North America expectations are that crop prices will show some strength and stipulates a replacement market as farmers upgrade their equipment before new emission standards drive equipment prices much higher.

In the oil sector prices continue to be volatile, in the $75 to $85 per barrel range. However, it is anticipated that leading energy companies will continue with plans to increase capital spending on oil and gas exploration and production in 2010.

The International Energy Agency expects global oil demand to hit a record high as the world economies continue to recover. One particular area in the energy sector poised for growth is the offshore oil and gas exploration. On our last call we mentioned large reserve discoveries in Brazil, which is becoming the world's fastest-growing offshore oil and gas exploration market.

Recently ExxonMobil announced it is considering starting its third well in the Santos Basin in the Brazil subsalt offshore oil region.

Other positive signs for this sector, the China [National Oil] Corporation will increase its exploration and production CapEx budget by almost 30% this year. The company expects to start nine new offshore projects for China coastal areas.

And recent actions by the Obama administration to expand offshore explorations in US territorial waters also could help boost this sector.

The ongoing dynamic is that declining production at the more mature oil fields will have to be replaced with resources from the so-called frontier regions, which are heavily dependent on high-technology welding solutions.

Also the pipeline and pipe mill sectors are very important to welding and are key segments where Lincoln has very strong participation. We have introduced a number of new, high-technology products targeted to strengthen our positions in these key segments.

As we have mentioned in previous calls, China's power generation sector is still accelerating investments for the construction of new nuclear [plants].

In the renewable energy market, wind tower fabrication is seeing some renewed activity. As an example, Brazil recently completed a successful market auction that will require the fabrication of over 600 large towers. Lincoln followed up that auction by holding a very successful wind tower welding productivity seminar in our facility in Sao Paulo.

In addition we have received important equipment orders from wind tower manufacturers in Korea and the US and have orders in the approval process in Denmark, Uruguay, Spain -- just to name a few.

Now looking at the results of our segments.

North America sales in the first quarter were up 7% to $256 million, compared with the year-ago first quarter. Overall North America sales growth continues to be aided by export sales as a result of a strong demand for our high-technology products designed, developed and manufactured in Cleveland.

During the first quarter orders improved on a sequential basis, with March being the strongest month. Early April results are indicative of a continuing upward trend in new export orders around the globe.

The US economic indicators continue to show recovery is clearly underway. Manufacturing continues a recovery, and the industrial production index in March increased 5.4% from the June 2009 lows.

With the US GDP expected to grow at an annual rate of 2% to 3%, the industrial recovery is clearly stronger than the recovery in the general economy, because manufacturing and construction took the brunt of the decline during the downturn.

Although US industrial production is improving, our concern is there are still capacity utilization rates in the low 70s. [Flat] resources will continue to have a dampening impact on capital spending.

However, the welding industry also continues to be hampered by a shortage of skilled and qualified welders, resulting in a drive towards automated work cell solutions. This has resulted in an increased number of customer visits to our automation center to review robotic solutions provided by Lincoln, and an overwhelming interest in our virtual reality system, the VRTEX 360. The virtual welding system introduced in late 2009 is revolutionizing training techniques for new welders around the globe.

In Canada a forecast for a solid recovery, with GDP forecast in the 3% to 4% range.

And although manufacturing levels are seeing a slow recovery, the automotive sector, led by General Motors and Honda, are starting to add shifts and recall workers.

Unemployment levels are forecasted to drift downward, and construction jobs are projected to get active pre-recession levels.

A significant development in the Canadian oil sands has a planned direct investment by Sinopec, the Chinese government-controlled oil company, of over $4.6 billion US in Syncrude, the Canadian sand producers.

In Mexico, after being the worst hit regional economy during the recession, a rebound in GDP growth is expected in the 4 plus percent range.

Turning to Europe, Lincoln Electric Europe sales of $88 million in the quarter were essentially flat on a sequential basis as well as on a year-over-year comparison. Consumable sales started to benefit late in the quarter from the modest growth in the region, as the automotive and pipe mill markets are showing renewed strength. Equipment sales continued to lag as capacity utilization is still showing a slow recovery.

The European rationalization efforts are expected to continue to help improve operating results through 2010, especially if market conditions continue to improve.

The Euro zone, faced with a number of challenges, especially the crisis facing Greece, still saw industrial production rise 0.9% in February from the month before, marking the second sizable monthly rise following January's 1.6% increase.

Turning to South America. Sales during the quarter were $23 million, which is an increase of 11% for 2009 but down on a sequential basis from the 2009 fourth quarter. This was primarily a result of the seasonal summer slowdown and the impact of the major Venezuelan devaluation in January of this year. Expectations are for continued improvement, as most countries in the region are forecasting positive GDP growth in 2010.

Brazil, the largest economy in the region, has seen GDP forecasts revised upward from 5.0% to 5.5%, with most of the region expecting flat to low single-digit growth. Rising commodity prices and the fiscal stimulus continues to support large-scale mining, oil and gas exploration, including offshore projects, some of which I mentioned throughout the region.

Recently heavy industry and the automotive sectors are also beginning to rebound.

Finally, the infrastructure improvements in Brazil associated with hosting two world sporting events in the upcoming years should continue to provide opportunity for welding sales.

In Asia Pacific, China continues on its upward trajectory, with the economy growing at 11.9% in the first quarter and a 2010 forecast of 10% -- all indications that China will soon surpass Japan as the second-largest economy in the world in 2010. The country's manufacturing sector is still experiencing rapid growth, although the winter season, combined with the January and February holidays, hampered first quarter results for some welding products.

Labor shortages and rapidly increasing factory wages are a new phenomenon in China and are beginning to drive technology shifts in manufacturing and engineering. Any drive towards higher efficiency and automation is a plus for Lincoln.

In China nuclear energy continues to be the major energy source alternative. There are indications that China will announce plans to increase capacity and build an additional [50] nuclear power plants over the next 10 years. This would translate into approximately $200 million in welding consumables and equipment potential.

India, the other large economy in the region, is still forecasting 2010 GDP growth of over 7.0%, compared with 6.7% in 2009. That country's booming automotive sector, I mentioned earlier, and the pipe mill business are key segments supporting the growth of our new facility in China.

In other areas around the region, shipbuilding orders are seeing some signs of life. Korea is showing positive signs, and the welding machine orders are recovering in Japan. The region's positive economic environment benefitted Lincoln Asia Pacific.

Sales including our Jin Tai acquisition more than doubled in the first quarter to $74 million, compared with the 2009 first quarter sales of $33 million.

Our operating performance continues to improve in the region as we continue our factory rationalization and acquisition integration initiatives, resulting in the region returning to profitability.

Our new [Hearley] welding manufacturing consumable plant is nearing completion in China. This plant will give us additional flux and steel wire capabilities to serve the heavy infrastructure spending in China.

And lastly, looking at The Harris Products Group, our cutting, brazing and soldering business, sales in the quarter were $62 million, up 15% year-over-year and 13% sequentially.

Key drivers affecting the soldering and brazing business is a rebound in the US test HVAC replacement market, driven by a 9% increase in construction spending for new home improvements. In addition, higher pricing related to price increases for silver and copper used in products for HVAC market contributed to our sales growth.

Our strong retail position at Home Depot and Lowe's and others restocked was recent new product releases should contribute to growth in the DIY space if rising home prices continue to support home-improvement expenditures.

Our acquisition of Brass Tech in Brazil is enjoying market share growth in that region. And the distribution network gained as part of the transaction is leveraging pull-through of volumes of Harris gas apparatus equipment and consumable sales.

That's a view of the region and the market sectors.

Acquisitions play a key role in our growth and capital allocation strategies. And over the past several years acquisitions have added approximately 3% in topline growth on average to the company. As a benchmark, our expectation is to have acquisitions play an even more important role in our growth in the future.

Our last acquisition in China, which has helped us to solidify our market position in the world's fastest-growing welding market, adds to our list of successful purchases and added 8% sales growth from acquisitions in the quarter.

We continue to be excited about the opportunities we have to make other synergistic geographical and product portfolio acquisitions. We are also encouraged by the current climate, as we are seeing closer alignment between buyer and seller valuations expectations improving our potential acquisition pipeline.

Now before Vince covers the financial results, I would like to personally invite all of you to attend our investor analyst day that we are hosting at our Cleveland headquarters on Tuesday, May the 11th. This will be a great opportunity to meet and have lunch with our management team and to get more in-depth perspectives on our strategic initiatives and to observe live demonstrations of our exciting new product portfolio and the technology we are bringing to the market. We hope you can all attend.

Now Vince will cover the financials in detail.

As pointed out by John, our first quarter 2010 financial results reflected a significant year-over-year improvement in revenue and operating earnings from the first quarter of 2009.

Consolidated sales were up 14% compared to the first quarter, and EBIT margins excluding special items improved to $35.5 million.

The first quarter also represented our fourth consecutive quarter of sales growth, as sales were up 2% compared with the fourth quarter of 2009.

On a year-over-year basis, sales in North America were up 6%, South America increased 10%, and Harris grew by 16%, while Europe declined by 3%. Asia's revenues more than doubled, aided by the Jin Tai acquisition in China last year. Without the effect of the acquisition, Asia sales still grew by 16%.

Volumes increased reported sales by 6% over the prior year, and foreign currency effects increased sales by about 4%.

Pricing decreased sales by 4%, and acquisitions contributed an increase of over 8%, as mentioned by John earlier.

Please refer to the attachment to the press release for details of volume, price, foreign exchange, and acquisition changes by segment.

First quarter gross profit margins increased to 26.2% of sales, compared with 21.9% in the comparable prior-year period. The increase in gross margin resulted from leverage from increased volumes, cost reductions, and rationalization efforts around the world.

Cost of goods sold did include a charge of $2.6 million related to the devaluation of the Venezuelan currency and the change to highly inflationary accounting.

In addition, a LIFO charge of $2.9 million reduced gross profit in the quarter, reflecting our expectations for a rising cost environment. We do expect to continue to record LIFO charges during the remainder of 2010, approximating the run rate incurred for the first quarter charge.

SG&A expense for the quarter was $88 million or 18.6% of sales. The increase in SG&A expense was primarily driven by higher bonus accruals of $11.8 million, as operating profit increased substantially on a year-over-year basis.

Incremental SG&A from the acquisition of Jin Tai added $1.6 million in expense.

Foreign currency translations increased reported SG&A expenses by $3.6 million in the quarter. SG&A included a foreign exchange gain of $2.6 million related to the devaluation of the Venezuelan currency in the quarter.

Operating income for the quarter was $34.7 million or 7.4% of sales, compared with $1 million or 0.3% of sales in the same year-ago quarter.

The quarter included charges of $800,000 related to rationalization actions in Europe and Asia that began in 2009. The prior year's first quarter included a charge of $11.7 million, primarily related to headcount reductions. Excluding these special items in both years, operating income was $35.5 million or 7.5% of sales, compared with $12.7 million or 3.1% of sales in 2009.

On a geographical segment basis and excluding special items, North America improved its EBIT margin to 12.1% of sales, and South America welding improved by nearly 500 basis points versus the comparable quarter in 2009, achieving 5.8% EBIT margin.

The European welding segment reported a 1.2% EBIT margin, while Asia Pacific welding achieved a 1.4% EBIT margin. And finally, Harris Products Group rose to 4.3% EBIT margin.

Europe, Asia Pacific and Harris all recorded losses in last year's first quarter.

Net income for the first quarter was $23.7 million or $0.55 per diluted share, compared with a net loss of $3.6 million or $0.08 per diluted share in 2009's first quarter.

The quarter included after-tax rationalization charges of $600,000 and a charge of $400,000 to the income tax expense line related to highly inflationary status of Venezuela as well as the devaluation of the Venezuelan currency.

Excluding these special items, net income was $24.8 million or $0.58 per diluted share, compared with $3.8 million or $0.09 per diluted share in the 2009 first quarter.

The effective tax rate for the first quarter was 31.6%. We expect that this rate should remain in the low 30s during the remainder of 2010.

Operating activities generated $15.6 million of cash flows in the first quarter, compared with $71.6 million in the same period last year. The decrease in quarterly cash flows from the prior year reflected the need for higher working capital to support the increase in sales levels.

In 2009 we generated $64 million in cash from working capital liquidations. Working capital efficiency remained relatively consistent with the fourth quarter of 2009.

During the quarter the company invested $9.7 million in capital expenditures, and our 2010 capital spending plan will likely remain below our recent historical spending patterns and also will not exceed annual depreciation and amortization expenses.

We at this point in time estimate a 2010 capital spend of between $40 million and $50 million.

During the quarter we paid cash dividends of $11.9 million. We also purchased $2.9 million of treasury stock under our authorized share repurchase program. Weighted average shares outstanding for the quarter ending March 31st, 2010 were 42,764,000 shares.

The company closed the quarter with a cash balance of $376 million, a net cash balance of $260 million, and a total debt to invested capital ratio of 9.6%.

The economic environment is clearly improving. We experienced sequential growth during each month in the first quarter, and the preliminary look at April reflects a continuing strengthening of orders and sales levels.

The breadth and speed of the recovery is of course unknown at this time. However, with the sequential improvement in orders and sales, a growing market presence around the world, and a sound financial position, we have reason to be cautiously optimistic that the remainder of 2010 will continue to show strong improvements in our operating results.

That's the extent of my prepared comments. Diego, I'd like to open the call for any questions.

(Operator Instructions). Tom Hayes, Piper Jaffray.

Congratulations on a nice start. John, you'd mentioned price increases you have in place at 3.5% to 5.0%. When did those become effective?

Most of them become effective in early May. It depends a little bit on the particular region of the world. The US was May the 3rd, I think. Europe already implemented some things in April and has a second stage scheduled for mid May. So it's all of them by the middle of May, some a little bit earlier than that.

On a sort of weighted average basis, we are estimating that the impacts of the price increases that have been announced to date on a worldwide basis would contribute approximately 3% to the revenue line in the second quarter.

Thanks. Maybe could you just talk a little bit about the product mix you're seeing. It sounds like there's some increased demand on machines, but is that still kind of lagging the consumable demand?

I would say we are seeing increased demand on both product segments. Again, a little bit different results by region, but our North American business is seeing nice increases on equipment, both in the domestic market as well as the substantial export market that we serve.

Lastly, on the SG&A leverage, nice job on that. I think on a previous call, Vince, you had mentioned that you expect roughly 60% of the cost cuts over the last year to kind of come back as business improves. Is that still kind of a percentage that's reasonable?

Yes. Probably a little bit higher than that. I can tell you that in the first quarter we estimate that the previously announced cost-cutting numbers last year, that approximately $7 million to $8 million of those cost cuts have returned in the first quarter of 2010.

So you might recollect last year our peak run rate was maybe $33 million in the last quarter of the year. That cost savings is now down to roughly about $25 million as we bring back staff to full levels of work hours and more productive capacity requirements are in need. So we keep monitoring that and perhaps report to you on that in the second quarter. But as it stands now, I would put the estimate at maybe 75%.

Last question, and I'll get back in the queue -- some of the other industrial companies here in the US cited some increased expenses due to the new healthcare legislation. Are you guys expecting any impacts that you'll announce?

No, we don't expect to have an impact from the Medicare drug benefit rollback. So we won't be announcing or taking any charges related to that specific provision in the healthcare bill.

Great. Look forward to seeing you in May.

Unidentified Participant, KeyBanc Capital Markets.

This is actually Joe, in for Steve. Just wanted to follow up on Tom's prior pricing question. Can you just talk a little bit about your expectation for how some of your customers are actually going to receive a price increase at this point in the cycle? I guess I am mostly curious about how it's going to play out in some of your more fragile developed markets.

Well, we've announced these price increases -- several weeks ago, and we have been out talking to customers in regards to it. As always, price increases are never the best conversations to have with your customers, nor the easiest. But we are fortunate that our customers all buy steel, and they know what's happening in their own steel purchases, and they are not at all surprised or shocked by what we are talking about.

So I think we will be successful, as we have been in the past, and our intentions are to maintain our margins.

Do you think that some of your competitors are going to be rational in the same respect?

Well, we have seen price increases from many of our major competitors around the world. I'm not familiar with all of their moves in each of the [other] markets. As I commented, they all face the exact same situation that we face, and they have really two choices -- they either increase the prices to cover their costs, or they suffer declines in their margin and profitability. We suspect the vast majority of them will take the necessary actions and respond.

Sure. I know inventory growth wasn't actually that much in the quarter. I'm just trying to flush out, was the growth in inventory more a function of buying incremental product ahead of demands? Or is it more a function of rising steel costs?

It was a little bit of both. But most of the increase was really supply chain needs to bring more raw material in to start to produce more products for higher demand needs. And also the same is true on the finished goods side from the end of the year to start to restore some of our inventories for higher sales levels.

Then my last question is in regards to the top line. If you go back historically, it looks like the average sequential change from 4Q to 1Q has typically been about in 8% increase. This quarter you had sequential improvement of about 2%. Was there something that actually dampened the topline performance in the quarter? I'm just trying to understand, was it just simply the lack of contribution from Europe? Or more exposure to South America? Was there something in there that can be skewing the numbers?

There isn't anything in particular that we could point to or cite for the sequential move between the fourth and the first quarter. I would say, though, that the quarter started out very slowly, and probably unusually slow for a first quarter for us. There were some, as a know, weather-related issues in different parts of the world. But the quarter strengthened sequentially, and March turned out to be a very strong month for us during the course of the first quarter. So I would expect to see some good sales increases sequentially in the second quarter versus how we started out the year in the first quarter.

Yes. And the follow-up point of that is that we had a very strong fourth quarter and a surprisingly strong December in North America. So that set a little higher bar than we would've seen traditionally.

As a follow-up to that, do you think that that was a function of just general stimulus, or was that actual demand that might have pulled forward some business into 4Q?

It was heavily driven by export demand and the timing of those. I don't know of any particular individual driver, just the way it happened to play out and our ability to ship in the first quarter -- or excuse me -- the fourth quarter. So no single point that we did that, and as Vince -- to his point, we've seen a very strong rebound of those same type of orders as we transition through the first quarter, particularly in the kind of results that we saw in March and the continuation of that in our early April results.

Great, thanks for the time guys.

Walt Liptak, Barrington Research.

Congratulations too. I want to ask a first question I guess as a follow-on to the last one. You were talking a little -- I think a little bit about the sequential improvement that you saw throughout the quarter from January, February and March. And I'm wondering if you can provide us with a little bit more color -- what did March look like? In terms of if business did pick up, was it consumables? Or equipment? Was there a geographic region, etc.?

I'll start by saying that we saw a pickup across most of our businesses around the world, maybe save for Europe. We saw probably a greater strengthening on the machine side of the business, particularly as John cited, in export markets. So March was depicted by a very strong pickup in the equipment side of the business, particularly in international markets.

Have you seen a refresh in inventories yet on the consumables side?

We don't -- we really can't comment on what end users and distributors might be doing with inventories, but we think there is some of that that's likely going on. But we don't think that the overall strength of the order levels across the board can really be explained by inventory restocking.

Yes. The better visibility that we have on the inventory levels really comes from end-user demand. The distributor and end-user demand is up, but we can track the end-user demand at a much closer level, and I would say that really is -- that the increase in demand is really driven by production increases that we have seen most of our large end-user customers experience.

We talked specifically about Caterpillar, but we see the same kind of things from a John Deere or a Case-New Holland in the heavy construction side of it. The automotive numbers are quite a bit better around the world, and in that particular market we think we are capturing some significant share too.

That's good to lead into my next question, which is, in your commentary, John, you talked about increasing capacity in China and India. I understand that. But I wanted to understand a little bit better the North American production increases and if that was focused on automotive only of if that was across the board. And then what I'm trying to get to is if there is going to be -- there's higher production in the second, third quarter expected, do you absorb more fixed expenses?

Well, I'll comment on what we are seeing. Vince can talk about the financial elements of it.

But first off, let me go back to your initial point about increasing capacity in China, India. I'd like to emphasize the fact that our plants are both there, with the exception of the [Hearley] flux facility that I talked about. We have a footprint to be able to add production equipment in both of those markets without significant additional capital expenditures, other than the production equipment. And that can happen fairly rapidly because the footprints are built out.

In the production increases that I talked about in the Mexican, Canadian, European, and the US markets, I would say those are pretty broad spread, that most of our markets, as I tried to hit on during my prepared comments, are seeing increased production. Even in the softer European market we are seeing increased production in certain segments, and then in the stronger markets of India, China, Latin America and Europe, it's pretty broad expansion in most of the major end-user markets that we are focused on.

I would simply add that I do expect the second quarter to have higher manufacturing utilization rates, simply because the March month was at the highest rate during the first quarter, and then April has continued to show the same if not greater results.

And then finally just a reminder that our second quarter traditionally is the best quarter of the year from a seasonality standpoint. We are not a tremendously seasonal business, but second quarter has played out to be the strongest quarter of the four quarters on a traditional basis.

I've got a few more questions, but let me just ask one before getting back in queue. You mentioned I think on your outlook, without giving specific guidance, that you expected first quarter to be a low I think for operating profit for 2010. Are you expecting the second quarter is going to be like the peak? Or are you expecting sequential improvement throughout the year on a -- I guess on an operating income basis?

Well, I don't think I'll go out any farther than the second quarter. But at where we stand now, I would expect our second quarter operating profit margins will be higher than our first quarter operating profit margins. And certainly that's, again, from a seasonality standpoint has generally been the case, and we do have growing volumes and stronger underlying order levels aiding us, at least through April as it stands now. So I would expect that will carry us at least through the second quarter and arrive at higher operating profit margins for sure in the second quarter.

And gross margins, you'll have a price increase plus absorption of manufacturing costs, so gross margin ought to be up as well, too?

Yes, I would think we're -- get a tick or two in the gross margin line. But remember on the gross margin side we are also getting the steel cost increases too. So that's not a -- just a freebie.

And a tick is a full percentage point?

No, no. I don't think (multiple speakers)

All right. Thanks guys, I'll get back in queue.

Mark Douglass, Longbow Research.

So what is a tick, Vince?

I don't know. I'll define it after the second quarter for you.

Okay. Back to -- you mentioned about a 3% to sales in pricing in 2Q. That would be a year-over-year, and that would mark an inflection point versus (multiple speakers)

Actually, that sequential. So from the first quarter our sequential increase in sales would be about 3%. Now, if you were to -- want to look at a year-over-year, that will likely still show some decline in pricing on a year-over-year basis in the second quarter, somewhere around maybe 2%, just looking at the match from the second quarter of last year and the second quarter of this year's estimate. So again, I'm glad you asked that question, because second quarter will still show some modest decline in pricing on a year-over-year basis.

Okay. And then there is nothing in the market dynamics that would suggest that the price increases you're instituting now, you won't be able to get the same type of benefit that you got say in 2008. In fact I might even argue it would be a little easier because in (technical difficulty) 2007 it accelerated nearly sharply.

I'll start by saying I don't see why our projections won't come through. You have probably read as much as we have, and our customers and the marketplace have seen the commodity price inputs increasing, and steel is certainly rising. And I would think that there is an expectation that we would be raising our prices as well.

Right. You've never -- I don't think you've mentioned what your order book is. Can you at least say that the book-to-bill is over 1 -- if not say what the book-to-bill is?

We don't track and disclose that publicly. But I can say at this point that the orders are a bit higher than what our sales levels are. But we are pretty good at catching that up, and I wouldn't expect that that will go on for an extended period of time.

And then John, you talked about the wind towers and a pickup in interest. Would that be full-blown automated equipment? Or are you talking just the power supplies? Or --?

Well, it depends. There are three opportunities for us in wind tower fabrication. The number one priority for us is always the consumable side, because it's a continuation and it's a good margin and high-volume kind of business. And we are always focused on that as our top priority.

Secondly, we go after the welding equipment, and our -- wind towers are generally fabricated using submerged arc, at least a significant portion of that. We by far have the best automated submerged arc equipment available anyplace in the world, and it's getting traction even in very difficult markets -- I mentioned Japan and Korea.

And then the third part is the automation side where we would sell the complete fixturing. Depending on the size of the facility, we may or may not participate in that. On the very, very large turnkey kind of facilities, that's not something that's generally in our sweet spot, but then we have a strong automation partner that we would work with on a regional or even some cases global basis, where they use our equipment, encourage the customer to use our consumables, but they provide the automation fixturing and tooling.

Right. It just seems to me that you didn't provide the full suite until I guess more recently?

Right. And we've captured some nice orders for the full suite, as you mentioned, but they are generally in the neighborhood of $1.5 million to $2.0 million orders, where some of the very, very large type of facilities can be in the neighborhood of $15 million to $20 million, and that's not something that we generally play in.

Right, but it definitely provides an opportunity for growth.

And then I would ask too, then so just in general automated welding cells, whether it's robotic welding cells with FANUC robots and the like, would you expect that to provide say a strong growth mechanism in this next cycle, since you didn't really participate it didn't seem to a large degree in producing welding cells in prior cycles?

Well, we are seeing a very strong interest in our automation offerings, both in hard automation as well as in the robotic automation. Companies that are increasing their production are really looking at automated solutions to do it, not for manpower to do it. They like the ideas of being able to do it without having to hire people and then suffer the consequences of that as well as deal with the shortage of welders that I talked about. So we expect that automation will grow quite importantly during this year, if the production levels continue to expand as we are seeing in the first quarter.

Right now it's just more -- higher interest levels, not necessarily a big uptick in sales?

Well, we are seeing -- clearly we are seeing a much higher interest level, but we are also seeing a higher building -- built in sales level too.

Okay, thank you.

James Bank, Sidoti & Co.

Vince, the $7 million to $8 million number you disclosed earlier in regard to the discretionary spend in the quarter -- I'm sorry, is that sort of the run rate you were inferring too for the year? Or for the quarters we could expect? Or would we maybe look for that to sort of ramp up as we go through the year to kind of come up to that 70% or 75% of the $140 million cost cuts coming back?

Okay, so when we were discussing our cost-cutting efforts last year, we were giving you the numbers through the first, second, third and fourth quarter. I believe we ended the year in the fourth quarter disclosing that we had cost savings over our baseline in 2008 of about $33 million. And we also talked about how much of those savings were temporary and how much of those might have been permanent.

In the earlier question I gave some guidance that maybe 75% of those costs will be coming back as we ramp up our productive labor operations and restore wages and salaries.

So if you take the $33 million in the fourth quarter and you say, well, what was your cost savings in the first quarter 2010? That number is right around $25 million. So the $7 million to $8 million is what has been restored into the operations as we restore productive activities to meet the higher demand levels.

So the two numbers that you would be interested in the first quarter would be -- our cost levels are still down from 2008 levels by about $25 million. But the difference between the $33 million and $25 million fourth to first quarter is what has been restored in paying people more to produce product that's needed for our higher demand levels.

Okay. And what was that LIFO charge number? I'm sorry, I couldn't catch that (inaudible - microphone inaccessible)

So the LIFO charge in the first quarter was $2.9 million. And that -- where we stand today, that's sort of the expectation of what the charges will be on a quarter by quarter basis going through the remainder of the year. Now, that's obviously subject to revision, depending upon the inflationary environment and where our inventory levels end up at the end of the year. But that's our best estimate today.

And your pricing, was this also in response to Aerogas coming out and I guess setting prices in June? Or had you guys already planned this, and Aerogas was responding to your increase?

Well, we announced our increases before Aerogas announced theirs.

Okay. And that's a pretty big swing in terms of the almost 4% unfavorable impact on pricing in the quarter to basically a 3% contribution in the second quarter, but I guess the outlook that you have, you have the confidence that that will be in fact the contribution to sales?

That's what we are estimating.

Okay. All right. Great. Thank you. That's all I have.

Jason Rodgers, Great Lakes Review.

Looking at Jin Tai, do you have what the EPS contribution was for the quarter, as well as your expectations for sales and earnings contribution for the year?

Well, the EPS contribution was right around $0.02 per share in the quarter. So we are still estimating it will contribute this year maybe $0.08 to $0.09 per share.

And then the sales in the quarter were roughly $33 million, I believe. Actually about $34 million.

Looking at your cash, the share repurchases in the quarter, do you have the number that were purchased or the average paid?

Yes. We purchased 60,000 shares at an average price of about $47.82.

What's your thoughts on further share repurchases?

Well, as we've discussed in the past, that from time to time we'll take some shares out of the marketplace, and we don't have a pace and a systematic repurchase program. One goal is to avoid the dilution of our shares from stock option exercises, so we'll certainly try to keep our share base relatively stable. And then from time to time we will take a few shares out of the marketplace.

Okay. And then looking at April, the strength there, is any of that attributable to pre-buying ahead of the price increase?

I don't think a lot. Our terms are price in effect, time of shipment, not time of order. So anybody who would try to buy in excess of demand, we wouldn't be able to ship it anyhow. So there's always some of that, but I don't think it's significant.

Finally, looking at the stimulus opportunities in the US, are you seeing any pickup there?

Not significantly, no. And I think that really quite frankly is good news for us because the demand increase that we are seeing is not going to be driven by one-time stimulus kind of funding.

There's still talk that there's a lot of stimulus money yet to be spent. What it's spent on is probably the bigger question, and what the impact is long-term is what's really more important to us.

So we are encouraged that the increase in volumes that we've seen is broader based than one-time spends and I think more sustainable than one-time spends.

Yes. Thank you.

Walt Liptak, Barrington Research.

I'd like to follow up on your comments on acquisitions. Again, I wonder if you can give us some clarity on maybe what the pipeline looks like, the size of deals that you would be willing to do, or the number of deals, geographic region.

How about we just give you the list of the companies we are going to buy in the next 30 days.

If you want to.

Oh, okay. Well, I really can't do that.

Again, Walt, I think we've got a pretty consistent message there, that we know the welding industry, we know those companies that we think would be good fits for us. 2009 was a quiet period, for all the reasons that most M&A activity dried up, because valuations were very difficult. As people are coming out of this difficult cycle, they are looking to what their future results can generate versus what a divestiture could generate. And conversations are heating up.

So we are optimistic that there will be good opportunities for us. Vince commented specifically on the success we've had with the Jin Tai acquisition, and those are the kind of things we will continue to look at.

We don't overpay for businesses. We are patient. And we know how to buy and integrate businesses that represent good, long-term value to our shareholders. And that's a continued focus of what we will do in the future.

I might add, Walt, that John in his prepared comments pointed out that over the sort of longer term we have added approximately 3% on average to the top line from M&A and acquisition activity. And we think that's a good number, but we have some objectives to try to hit on an annual basis at least 5%.

So we are comfortable with that kind of a strategy. We would just like to be a little bit more consistent and ratchet that 3% number up maybe 2 or 3 more percent, and we are very comfortable in adding that to our business model and integrating those businesses and gaining the synergies and the leverage that we know that we can gain by adding businesses in our welding sector.

Are there any large acquisitions out there? Or are these smaller, bolt-on acquisitions?

Well, there's always the opportunity for a larger acquisitions, and we are not going to necessarily turn away from an opportunity to add more than 5% to the top line, if it makes sense and we can get it at the right price and it's strategically important to us.

And then you've mentioned pricing, that you're patient with pricing. Have you guys talked about accretion? And what's your accretion objective now? Would you do a neutral deal? Would you do something that's dilutive in the first year?

Yes, that all certainly depends on the individual facts and circumstances of the property we are looking at and what we need to do to get it closed and how strategically important it is. We generally [will] use as a guideline that we like to have deals that are immediately accretive. We like to be able to exceed our cost of capital or have a return on invested capital within the first two or three years of the transaction. So there are obviously exceptions to that, but those are sort of the guidelines that we like to live by.

Okay. Good. And just a couple of more quick ones. Restructuring charges? Any more going forward? Or are we done for now?

There will likely be some rationalization charges that continue to trickle in during the course of 2010 that are related to actions that we took in 2009. But there's no new and significant actions that I'm prepared to talk to you about today. We feel that we have taken the biggest bites out of that in 2009 when the opportunity arose to align our productive capacity to the volume and business levels that we were faced with in 2009. I think we are hopeful that 2010 doesn't warrant those types of actions going forward.

And then, Vince, one on the devaluation. That looks like it cost you about a nickel in the quarter. Is there more risk from overhang there? Or are we done there for the year?

In the second quarter there will be a similar charge that hits our cost of goods sold to what hit cost of goods sold in the first quarter. And then that should be the end of the one-time charges that were necessary as a result of the devaluation and change to highly inflationary accounting in Venezuela. So in my prepared comments and in the press release we discuss a $2.6 million charge to cost of sales related to Venezuela. So we would expect something similar in the second quarter, and that should be the end of it.

Great. Thanks guys.

Holden Lewis, BB&T.

I wanted to -- the SG&A line, I think you gave a lot of color as to why that was up annually, which made sense. But it looked like sequentially you did a really good job containing those costs. On lower revenues in Q4 you actually had a higher SG&A line than you did in Q1 -- it looks like. Yet you're talking about reinstating costs that weren't there in Q4. Can you sort of talk about -- is that further cost compression elsewhere in the business? Or to what can we explain that strong sequential performance on the SG&A?

Well, a lot of the actions that we took in 2009 continued to mature through the fourth and into the first quarter of this year. So if you look at the fourth quarter versus the first quarter, the aggregate SG&A is relatively flattish when you take out special items and look at the run rate. So I wouldn't say there is a tremendous change between the fourth and the first quarter, but certainly we've been ratcheting down SG&A and discretionary spending through the fourth and into the first quarter of 2010.

Right. But when you talk about costs coming back at like a $7 million to $8 million clip in Q1 and then as you said sort of flattish sequentially, I guess when you say that actions would've matured, I kind of thought that the addition of the $7 million or $8 million would have tended to reverse that. So it just looks like there's some other good things taking place beneath some of those other items.

Well, understand that the rationalization charges that we are taking -- and we still took some more in 2010's first quarter, we took more in the 2009 fourth quarter -- those rationalization charges are largely related to severance payments made to people in Europe and the Asia and Pacific region. So those charges translate into lower salary and wages that are directly linked to taking the charges. So even though we made announcements of actions in the prior year, the timing of actually -- of paying the people and asking them to leave are more coincident with the SG&A declines in future quarters.

So the way to look at it is even though you've sort of talked about a $33 million run rate in Q4 and some of that coming back, the fact is, you're also adding I think additional savings onto that number with sort of these incremental restructuring actions that you're doing?

Yes. And I want to point out that the $7 million to $8 million that I talked about that came back, it's almost exclusively to the cost of goods sold line. So you can throw the -- the whole $8 million of cost restoration, if you will, came into cost of goods sold as we add productive labor hours and greater pay to the manufacturing plan.

But the new charges and severance are more hitting the SG&A line then?

Yes.

So it's moral mid-level management, that kind of thing, as opposed to manufacturing line workers?

Yes. SG&A, salaried employees.

Okay. Then just -- you're clear for the Venezuelan devaluation. You said that you have a $2.5 million charge in Q1 and Q2. Why would that -- is that just because that's one of the anniversaries? Or is that truly a one-time item? The devaluation obviously is an ongoing issue, and the hyper-inflation I assume is an ongoing issue, and that's with respect to (multiple speakers) Q3. So wouldn't that be sort of -- wouldn't those costs be new versus last year but in the model going forward?

No. The charges that go through the cost of goods sold line that started rolling through in the first quarter are related to inventories that were held at the end of last year, translated at a higher exchange rate. So when the devaluation occurred and the exchange rate changed from 2100 to 4300, we are still carrying inventories at those -- at historical exchange rates. And so when you now translate and sell those inventories in 2010, you're basically going to take a 50% loss on all the inventories that you were holding when the devaluation occurred.

So we haven't rolled out completely all those inventories in the first quarter. Probably half of them came out. So the rest of that charge will come through as we liquidate inventories that were carried at an exchange rate that got devalued by 100%.

Great, thanks. That makes sense. And then sort of -- hopefully the last thing on the price talk, are you aiming to put in pricing that sustains your gross margin? Or just protects the dollar value? I guess that gets to -- are these price increases something which is going to actually be a boost to EPS? Or just something that's going to defend EPS?

At this point in time we are defending our dollar margins and raising pricing to cover what we view to be increase in input costs on the cost of goods sold line. So we wouldn't expect the pricing increases on their own to drive margin increases. But we would -- gross margin, that is, but we would expect the volume improvements that we have in the second quarter to contribute to higher leverage and therefore some margin expansion.

But at this point in time, we are trying to pass through the gross profit dollar increases and input costs.

Right. But the leverage would come from higher volumes as opposed to price, right? Because if you're putting in price to defend the gross margin dollars, then your gross margin percentage comes down and therefore the -- you wouldn't get any -- is that sort of how you're looking at it?

That's correct.

Okay. And then I guess lastly, talk about construction trends for a little bit. Most of your markets are coming back. Typically you do see better Q2, Q3, in part because commercial construction's a meaningful end market. Are you seeing -- is that end market also coming back? Or is that one that's sluggish? And how do you expect that to play out in the typical seasonality at the top line for you?

Yes. Well, I don't think we are getting much or -- if any bounce on the commercial construction side in the North American markets. There clearly is still the large commercial construction activities in Asia, some parts of Latin America. The construction that's driving our business, both equipment and consumables, would be energy and infrastructure related, not commercial building kind of construction.

So any improvement in the commercial construction market would be additive to the demand that we are currently seeing, although I -- most of the reports that I've read don't forecast the significant commercial construction type of activities in the foreseeable kind of future.

Okay. But a lot of your commercial stuff that you reference is more infrastructure in nature, and so you are seeing pickups there, so seasonally you should see sort of the typical pickup?

Yes, although again, the infrastructure kind of related projects, particularly on the energy sector, are not generally that seasonal. The kind of work that's done there is not weather dependent kind of activity. If they can pump oil in the Gulf of Mexico, they can build year round, and in those places where the climate is more severe, most of the fabrication of that is done in more favorable kind of climates.

I guess the one exception to that would be the pipeline activity that takes place in the very harsh climates of northern Russia or Alaska or someplace like that, where they have to get in and do that construction in the short cycles that are available in the mid summer. So we are seeing some improvements and expect some improvement in the pipeline activities in those climates during the course of the summer months.

Okay. All right, thank you.

There are no further questions at this time. I'll turn the conference over to Vince Petrella for closing remarks.

Thank you Diego, and thank you all for joining our first quarter call. I'd like to reiterate what John said about our institutional analyst and investor day on May 11. I look forward to seeing you all there in Cleveland. And for those of you that aren't able to make our investor day on May 11, I look forward to talking to you at the end of July to discuss the results from our second quarter.

Again, thanks for joining us today. Goodbye.

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