Lincoln Electric Holdings Inc (LECO) 2011 Q1 法說會逐字稿

Greetings and welcome to the Lincoln Electric Holding 2011 first quarter investor teleconference. At this time all participants are in a listen-only mode. A 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. Vincent Petrella, Chief Financial Officer for Lincoln Electric. Thank you, Mr. Petrella. You may begin.

Thank you, [Aroya]. And good morning to all of you joining the 2011 first quarter investor call. We issued our financial results press release for the quarter prior to the market's opening this morning. Additional copies of the release are available through our Investor Relations department or on Lincoln Electric's website. Our Chairman and Chief Executive Officer, John Stropki will lead the discussion today and provide commentary on the quarter and the region. In addition to the audio portion of today's call, synchronized presentation slides are available through the webcast and will be posted for the replay.

Before we start our discussion I would like to 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. Now let me turn the call over to John Stropki.

Thank you, Vince, and good morning everyone. As the economies around the world continue to rebound our Company continues to make major improvements in our performance. Total sales in the first quarter were $599 million, up over 27% when compared with the same quarter in 2010. Our sales momentum continues and this represents our eighth consecutive quarter of sequential revenue growth and marks our strongest revenue quarter since Q3 of 2008. Equipment sales in the quarter grew 25% and consumable sales were up 29% compared with the first quarter in 2010.

Net income for the quarter, before special charges, nearly doubled to $47 million compared with the $24 million net income in the first quarter of 2010. Our operating efficiencies helped increase the margin rate to 9.9% for the quarter compared with 7.4% in Q1 of 2010. In the first quarter earnings per share doubled to $1.11 per diluted share compared with $0.55 in 2010. We are very pleased with our operating results for the quarter. Vince will give specific details in a few minutes, but first here are the highlights of our business performance by segment.

In North America sales were up over 21% to $280 million in the first quarter compared with the same quarter last year. Export sales grew by 10% and demand from the BRIC countries now account for one third of our export sales from our North American operations. The substantial growth in demand on our Cleveland operations has resulted in increased over time and a requirement to increase manufacturing head count by approximately 100 employees. Economic indicators continue to improve throughout the segment. US industrial production numbers for manufacturing, excluding high tech, are increasing. Coming in at 88.7 in March, which represents a 6% improvement in the index compared to March of 2010. The PMI for March of 61.2 continues to reflect strong business optimism for the United States.

Manufacturing in Canada is also expected to post a broad recovery. With industrial production forecast to be up in 2011 supported by a PMI in March of 73.2. GDP growth in Mexico is expected to exceed 4% this year. These figures bode well for welding product sales in North America. Expectations in the heavy fab sector are very positive. In the ag markets the forecast is for farm crop prices to show strength and for strong growth in the replacement agricultural equipment market as farmers upgrade to increase their productivity. In earth moving and construction equipment producers like Caterpillar and John Deere are forecasting very strong growth.

With the combined forecast for heavy fab equipment nearing the 2008 peak levels, capacity expansion investments are continuing by the major heavy equipment manufacturers on a worldwide basis. The industry's trend towards automated systems continue to gain steam. Our orders for robotic part automation environmental and training systems are growing at a very fast pace and we have a strong backlog of pending shipments. In Europe despite uneasiness in the Euro Zone, especially southern Europe, sales growth was very strong. Lincoln Electric Europe sales grew over 35% to $114 million in the quarter compared with the first quarter of 2010. The growth is indicative of the improved market conditions and our improving market share positions in hard automation welding equipment and the consumables. All of which continue to perform well in Europe.

All products are being favorably impacted by an uptick in the general industrial steel fabrication activity in automotive production in Germany which is at an all time record level. new products like our metal cord wire consumables designed for welding automotive chassis parts are gaining great acceptance with the German big three. The IMF still predicts GDP growth of 2% in Central and Eastern Europe led by Poland and Turkey. With western Europe growing at about 1% led by Germany and France. Poland remains the region's strongest economy and is forecast to grow 2.3% in 2011. In Turkey the economy is expected to be one of the fastest growing in our European welding segments.

We are very well positioned in Turkey. With a strong JV partner, our state of the art manufacturing facility, and a significant market position in the country. Acquisitions added to the growth in Europe as our acquisition of MGM consumables business in Russia is complimenting our equipment and specialty electrode import businesses into the CIS region. With the completion of our Severstall acquisition in March, we are able to offer a much broader consumable product portfolio throughout the region. One area of concern for this segment, which includes the Middle East and North Africa, is the investment climate in the region, especially for the area sometimes referred to as Petro Arabia.

Of utmost important is that all of our employees in the region are safe and our offices have not suffered any damage. We do not manufacture in the region but we do support the market on an import basis through our distributor network. Despite the unrest in the area the anticipated impact of our sales from the region will not materially impact our overall results. Total oil and gas expenditures here and the other regions around the world are forecast to be over $500 billion in 2011. This creates a very robust market for welding and we anticipate that pipe and pipe mills and markets will also benefit from the boom in exploration spending.

In Asia Pacific the positive economic environment benefited Lincoln in the region. Sales grew by more than 22% to $88 million compared with the first quarter of 2010. China continued its upward trajectory. Although the government is starting to tighten fiscal policy to dampen inflationary pressures. The economy is expected to grow nearly 10% in 2011. China's manufacturing sector is still experiencing rapid growth and steel usage is at a very high level.

China's automotive sector is still growing at a record setting pace with 2010 car and light truck units at over 18 million units. With the vehicle density in China at 41 cars per thousand adults compared to developed economies such as western Europe at over 600 cars per thousand and the US at over 900 cars per thousand, China will be a fertile market for Lincoln's automation and consumable products for many, many years to come.

The other growth market in Asia is India, expecting to see a GDP growth of approximately 7% this year. Key segments such as the country's automotive business and the pipe mills are helping to grow business opportunities for our new Chennai electrode facility. The city of Chennai is positioning itself to become the world's number one automobile entire manufacturing center according to a report based on an MOU with Mahendra and Mahendra, a Mumbai based conglomerate, and other agreements with global automotive entire manufacturers.

Like North America, the heavy segment in Asia is showing dramatic recovery. Caterpillar enjoyed a 38% year-over-year increase in sales in the region in January of 2011 and Deere reported a 2011 Q1 sales increase of 30% for its equipment operations. The growth is for the construction and agricultural equipment. India is now the largest tractor market in the world with unit sales expected to reach over 350,000 for 2011. Products such as our Power Wave AC/DC for sub-arc welding are clearly increasing our market share for high end machines. And our locally produced consumables are also gaining market acceptance.

We have completed a number of expansion projects aimed at adding consumable capacity in the region and contributing to our growth in consumable sales. Our new state-of-the-art facilities not only supply products for the region but are also serving as a growth platform for exports around the globe. In the energy end markets, events in Japan could slow the growth of nuclear industry considerably. Our hearts go out to the survivors and all of those who lost loved ones in the devastation that shook Japan. We are fortunate that none of our employees in Japan were injured or displaced. Our supply chain has experienced only minimal interruptions as a result of the disaster.

However, with Japan being a world leader in electronic manufacturing we are keeping a close eye on future developments which could disrupt deliveries of electronic components not only to Lincoln directly but indirectly to our suppliers. Back to nuclear. China, Europe and the US have all announced a pause in their programs while they evaluate the safety protocols of existing and proposed new facilities. Investors were also carefully analyzing or reducing investments in utilities with significant nuclear power in their energy portfolio.

However, based on its low green house gas emissions and the low carbon footprint combined with the cost effectiveness and the renewable attributes, many feel that nuclear will stay play a key role in future energy requirements. In any event, nuclear was forecasted to fill less than 10% of the global energy requirements by 2020. And welding plays a key role in fossil fuels and other alternative fuels required for the power generation industry. All of which are still looking very positive.

Turning to South America. Sales in the quarter were up 50% to $34 million. Expectations are for continued improvement as most countries in the region are forecasting good growth from 2010. Brazil expects its economy to slow modestly compared to 2010 but still forecasts a GDP growth in the 4% to 5% range. Most of the rest of the region is also expecting mid single-digit growth while Venezuela is still forecasting a slower growth economy at around 2%. With the fiscal stimulus spending on the decline, rising commodity prices are supporting large scale mining and oil gas explorations including offshore projects throughout the region. The automotive sector in Brazil also remains a key driver for the economy. It's new vehicle sales were up 10.6% in 2010. The fourth consecutive year of record like vehicle sales now makes Brazil the fourth largest market behind China, US and Japan.

Looking at the Harris Products Group. Sales in the quarter were $82 million, an increase of 37% compared with the comparable quarter in 2010 and nearly 10% sequential growth from the 2010 fourth quarter. Commodity prices continue to rise and are effecting pricing in the brazing an soldering business. With copper and silver up dramatically over the past year, the Harris business has managed this cost price relationship to maintain margins and still enjoy a 11% volume growth. Our market position in brazing continues to strengthen domestically and around the world even though many of the key economic variables are at historic lows. Particularly new housing starts and commercial construction in the US. The global HVAC industry is still experiencing growth as a replacement market for air conditioning equipment is robust as aging installed units need to be replaced or repaired.

And finally the spark in retail sales which started in the fourth quarter at the DIY stores has slowed but has stabilized at higher levels than in 2010. In 2011 we remain focused on executing our global growth strategy. This includes growing our top line through acquisition which increase our market presence in fast growing emerging markets and add breadth to our already broad product offering. During the quarter we closed our acquisition of Severstal-Metiz Welding business in Russia. Combined with our recent MGM acquisition and our growing machine export business to Russia we now have a market leading presence in of the fastest growing welding markets in the world.

The second component of our growth strategy is to maintain our robust R&D investment in state of the art welding equipment, consumables and training systems designed to enhance energy efficiency and improve operator productivity and ensure weld quality. New designs of patented electronic converter based welders and applications specific developed consumables are in demand by customers around the globe. Our revolutionary VRTEX 360 virtual welding training system, introduced in 2010, is proving to be the global industry standard for educating the next generation of welders and creating a whole new market around welding education systems for us. Our acquisition during the quarter of Arc Products, an orbital welding companies, when combined with Lincoln capabilities, will give us an excellent product for this specific welding applications. Our strategy of providing the broadest product portfolio does not end with just our robust internal development pipeline.

During 2010 we teamed with IPG Photonics, the world leading hybrid laser manufacturer, and we now have product offerings scheduling to hit the market later in 2011. As we look forward the key variable for our industry, global steel production, continues at a strong pace. World steel reports that February's global steel production was up 8.8% over February of 2010 to 117 million metric tons. China's growth for the month, on a year-over-year comparison, was 9.7% and they remained about 45% of global production. But impressive year-over-year growth was also achieved in Turkey, up 35%, and Brazil up 11%. The global capacity utilization ratio increased 2.7% compared with February of 2010 to 82%.

This rising demand has driven raw material costs higher with spot iron ore prices up 8% in the quarter compared to the fourth quarter of last year. The tight supply of coking coal is expected to send these spot prices still higher. And many steel manufactures have already implemented price increases as profit margins are clearly being squeezed and more increases are likely. As a result of increased raw material cost we announced our second round of price increases of approximately 3% to 5% for consumables effective April the 18th in North America. Lincoln Europe and Asia announced similar price increases for consumable shipments after April the 1st.

As we have stated, pricing actions in other regions will continue to reflect local cost implications and market timing dynamics. For example, the Harris product segment price increases are reflective of the dynamic metal markets for copper and silver, while south American pricing is driven by the inflationary conditions of the countries in this segment. Our first quarter results have put us in a position for a strong 2011. Requirements for a global infrastructure expansion are still valid. The end markets for welding equipment and consumables are strong.

Lincoln will continue to strategically focus on growth in the emerging markets. Value enhancing and complimentary acquisitions developing state-of-the-art products for supporting global welding solutions for our customers and end users around the world and returning strong value to our shareholders. On that note let me remind you that our annual shareholder meeting is scheduled for Friday, April 29, here in Cleveland. Next, Vince will give you more details on our financial performance.

Thank you, John. Our first quarter 2011 financial results reflected a significant quarter-over-quarter improvement in revenue and operating earnings from the first quarter of 2010. Consolidated sales were up over 27% from the prior year and our sales in the first quarter were higher than the fourth quarter of 2010. On a consolidated basis and compared with the first quarter of 2010 our volumes increased reported sales by 16.7% and foreign currency effects increased sales by about 2.3%. Pricing increased sales by 6.5% and acquisitions contributed an increase of 1.8%.

First quarter gross profit margins increased to 26.9% compared with 26.2% 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. The prior year included a $2.6 million charge related to the devaluation of the Venezuelan currency and the change to a highly inflationary accounting policy. SG&A expense for the quarter was $101.6 million or 17% of sales compared with $87.8 million or 18.6% of sales in the prior year, an improvement of 160 basis points. The increase in SG&A expense dollars was primarily driven by higher bonus accruals of $7.7 million as operating profit increased substantially on a year-over-year basis.

Foreign currency translations and transaction losses also increased reported SG&A expenses by $6.1 million in the quarter. The prior year included a foreign exchange gain of $2.6 million related to the devaluation of the Venezuelan currency. Operating income for the quarter of $59.5 million was 9.9% of sales compared with $34.8 million or 7.4% of sales in the same year ago quarter. The quarter included charges of $357,000 related to rationalization actions in Europe that began in 2009. The prior year's quarter included a charge of $800,000 primarily related to head count reductions again initiated in 2009.

Excluding the special items in both years, operating income was $59.8 million or 10% of sales this year compared with $35.5 million, or 7.5% of sales in 2010. Net income for the first quarter was $46.9 million or $1.11 per diluted share compared with a net income of $23.7 million or $0.55 per diluted share in the 2010 first quarter. An almost 100% increase year-over-year. The quarter included after tax rationalization charges of $231,000 and a $4.8 million adjustment for tax audit settlements. Excluding these special items net income was $42.3 million or $1.00 dollar per diluted share compared with $24.8 million or $0.58 per diluted share in the 2010 first quarter. The adjusted effective tax rate for the first quarter, excluding the tax audit settlements, was 30.4% compared with 31.6% in 2010.

Now I would like to move to the segments. On a year-over-year basis sales in North America were up 21.4% due to volume. Prices increased sales by 2.6% and foreign exchange increased sales by 1.1%. Excluding special items, North America improved its EBIT margin to 14.8% of sales, a 270 basis point improvement. Strong volume leverage drove the margin expansion. In Europe sales were up 17.4% due to volume. Our Russian acquisition added 9.5% to that segment to the top line sales and price increases over the prior year contributed 6.1% to sales. Foreign exchange increased sales by 1.9%.

Excluding special items, Europe improved its EBIT margin by nearly 380 basis points to 5% of sales compared with the 2010 first quarter. Margin improvements are attributable to volume leverage and improved pricing. On a year-over-year basis in Asia Pacific sales were up 12.9% due to volume. Prices increased sales by 2.5% and foreign exchange increased sales by 6.4%. Excluding special items, Asia Pacific EBIT margin was essentially break even compared with a 1.2% margin in the same quarter in 2010. Sales in South America were up 33.9% due to volume. Price increases contributed 10.5% to sales and foreign exchange increased sales by 5.4%. Price increases in South America are above the group average because of higher inflation rates on that continent.

Excluding special items, South America improved its EBIT margin by 20 basis points to 6% of sales compared with 5.8% in the first quarter of 2010. Compared with 2010, sales in Harris Products were up 10.8% due to volume. Price increases contributed 24.8% to sales, foreign exchange increased sales by 1.4%. The price increases were largely related to significant increases in metal costs, primarily silver and copper. Excluding special items, Harris Products improved its EBIT margin by 330 basis points to 7.7%. Strong volume increases in the equipment business led to the significant expansion in margin.

Operating activities generated $16.7 million of cash flows in the first quarter compared with $15.6 million in the same period last year. Cash flows for the quarter reflected the need for higher working capitals to support the increase in sales. The Company closed the quarter with a cash balance of $341 million, a net cash balance of $244 million, and a positive net debt to invested capital ratio. The Company invested $15.5 million in capital expenditures in the quarter. Our 2011 capital spending plan will likely remain in line with our 2010 spending pattern and should approximate our annual depreciation and amortization expenses. So at this point in time we would estimate a 2011 capital spend of around $60 million.

During the quarter we paid cash dividends of $13 million and our weighted average shares outstanding for the quarter ending March 31, 2011 were 42,176,000 shares. Finally, we invested $17.9 million in acquisitions in the quarter to purchase Arc Products, an orbital welding company in California, and Severstal's consumer welding business in Russia. The economic environment continues to improve. We experienced strong sequential growth in the final month of the first quarter and the current April view reflects a further strengthening of orders and sales levels.

With that I would like to open the call for any questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). One moment, please, while we hold for questions. Thank you.

Our first question is from Mr. Tom Hayes of Piper Jaffray. Please proceed with your questions.

Good morning, John. Good morning, Vince.

Good morning Tom.

Hey Tom.

I was just wondering if maybe you could elaborate a little bit on the general level of capacity you're running at? I know John you mentioned early in your prepared remarks some expansion in the Cleveland facility. I was just wondering globally what you are seeing and then as far as the expansion projects you had going on in China.

Well, I would say in general, Tom, we've got plenty of additional capacity available to us both in equipment and consumables on a global basis. The expansion that we spoke about in Asia is really geared around increasing our Mig wire capacity, our submerged arc flux capacity in Asia, particularly in China, and then the expansion in India where we have the plant done and we're more fully populating it with production equipment. And then lastly with the acquisitions that we made in Russia we're already bumping up against Mig wire capacity into that marketplace and we'll be adding significant new volume capabilities in that region. In the other regions we're working a lot of overtime as I indicated we're hiring people, but we still have pretty good assets in place to meet the forecast that we see in demand.

Okay. And in the release I think in your outlet you all indicated that you think there is -- or you guys have done a focus on new products. Is there any way to quantify the contribution to total sales from new products you've released over the last year or two?

Well, Tom, we show at our investor presentations and we'll probably show it at our annual meeting that approximately 45% of our equipment sales are from products that have been released over the last five years.

Okay.

And we think that's a great metric to track and we think that helps us to really kind of out distance ourselves from our competitors and keep our products were becoming commoditized around the world.

Great. I will a jump back in the queue. Thank you.

Okay.

Thank you. Our next question is from Mr. Steve Barger KeyBanc Capital Markets. Please proceed with your question.

Hi. Good mornings, guys.

Morning, Steve.

When I go back and look at your revenue cadence from 2004 to 2007 when the end markets were just great, first quarter was typically the lowest revenue quarter. Is there anything happening with this global industrial production ramp that's going to change that pattern?

Well I would say it's just been a continuation of a rebound back to those high levels of business that we saw. I mean we've had, as I said, we have had eight consecutive quarters of sequential type of growth. So as long as we continue to see the type of momentum that we have seen in the past eight quarters, I think that bodes well for the expansion that we have already experienced.

And your not seeing anything right now that would suggest that is changing? Based on what you have seen in the first quarters and what you're hearing from the end markets? I mean it sounds like your pretty bullish across the board on end markets.

I would say in general the end markets are pretty strong. I did comment, I think that we have some concern over the automotive sector with the part shortages and the major manufacturers have indicated. I think that that's a short-term issue and I think that the capacity will be rebuilt there. There's likely to be some impact in that sector in the second and third quarter but I don't think it's going to be overall meaningful in terms of total type of results.

Got it. And very good price increases in the quarter. Do you expect to take more aggressive proactive action if we see continued input cost inflation or -- and will the market kind of support that because of demand or are you gearing more towards reactive moves to just cover your costs?

I think our message has been pretty clear, that when our raw material costs accelerate that we pass those increases on to our customers and I think our track record of that's been pretty successful. It's not something that we enjoy doing, but it's something that we're required to do in order to protect our margins and our shareholder value.

Right. Okay. And it looks like the incremental margin was 19% in the quarter. Do you think upside is likely given the strong in-market activity you are seeing? Can we expect to get back to the low 20% numbers you were able to put up in some quarters back in 2006 and 2007 when revenue growth was running high teen and low 20% range?

Yes. Steve, I think clearly we have the capability to get into the mid, even high 20's on our operating leverage. We're.

Wow.

Still nowhere near where our volumes were and our EBIT margin profitability profile that we were able to reach in 2008 and even 2007. So I think there's more to run there.

Okay. And last question and I will get back in line. I'm sorry if I missed this, but end market activity in Asia ramping nicely with the exception of some of the issues around Japan or automotive, but the operating income is still struggling kind of from that small base. Were there specific headwinds that might reverse in the near term there or how should we think about operating income cadence in Asia Pacific?

Well, let me first address the end markets. I mean we continue to see strong weakness in the ship building industry and I think we've commented on a number of calls that has a pretty dramatic impact on our Flux-Cored wire business so when I talked about those areas where we were increasing capacity in Asia, Flux-Cored was not one of them. We're still operating a very low level of utilization in that factory and that has a negative impact as far as the performance is concerned. Other than that we think that the markets are pretty strong and we should see continued improvements, but it's, as we have said all along, it's a very challenging market. There's a lot of competitive pressures and it's our ability to adapt to those pressures that will determine our long-term success rate which we expect to have.

And I know it's a tough market to get your arms around probably from a share standpoint but do you think that you're slowly taking share or is it still kind of static with where you are an you're just growing with the end markets?

Well, I would say in certain product sectors we think that we are definitely taking share, particularly on the high end markets which we have traditionally focused on. Our exports in those regions continue to be very positive, the relationships that we have with the multinational customers that we serve in those markets are very positive. But there are also certain segments that we're walking away from market share from because we just don't view them to be long-term margin appetite areas and we'll continue to shed those customers of which we don't think that represent that long-term value proposition for us.

Got it. Thanks. I'll get back in line.

Thank you. Our next question is from Mr. Mark Douglass of Longbow Research. Please proceed with your question.

Hello. This is Mark.

Yes, Mark.

Okay. Good morning, gentlemen.

Morning.

And congratulations on taking delivery of a fairly large lawn ornament, I guess.

Yes.

Yes. So that will be fun to see here. So on the -- Vince did you mention, was there a LIFO expense in the quarter.

Yes, there was. It was about $2.6 million charge.

$2.6 million. And that's what we would anticipate going forward for the rest of the year right now or.

Yes. Based on current estimates of our inflation rates and our ending inventory quantities at the end of the year that rate of expensing should be considered our best estimate at the end of the first quarter.

Right. Okay. Thanks. On Harris group, obviously a big surge in sales, obviously quite a bit of that was due to pricing, but the volumes are still, I mean in my mind, surprisingly good there. Can you say, you mentioned global replacement demand in HVAC. John, can you talk about US residential HVAC replacement demand? I think inventories were depleted a little bit people said in the channel. Is that what led to some of that volume improvement there are or is it just you expect a general good trend in residential HVAC at least in the US.

Well, Mark, I will start by saying that the greater improvement in that business was in the cutting or equipment

Okay.

part of the business and that increased more than the brazing and soldering or consumables part of the Harris business. And one of the areas Mark and the slide kind of touched it but it didn't really specifically mention it in my remarks, the alternate fuel gas demand is increasing dramatically based on the shortage of acetylene in the United States and the Harris product line has a substantial advantage over most, if not all, competitors on alternate fuels. And I think many people are recognizing that and there appears to be a pretty significant conversion process under way. And when customers switch from acetylene to alternate fuels, the recommendation of the gas associations are that they need to change out the regulators,

Right.

the hoses and then obviously there's a different cutting tip and process or apparatus that's used there and again Harris has a much stronger position than traditional competitors in that area. So that's driving that platform. But we also think we're gaining a significant ground internationally with our Harris product line and the new facility that we have now up and running and producing a very good cost basin, Poland, is giving us some attractive opportunities in new markets.

Can you quantify at all what the impact of the acetylene shortage was?

I think it's too early. We're going to let it play out over an extended period of time. I mean we've got a big burst of demand in that area. I think the important part will be does it hang long-term. We think that there will be some long running conversions when people really have the opportunity to test out the alternate fuels they'll find out that there are some advantages to them and including the availability of alternate fuels versus acetylene, but clearly acetylene costs are going up quite dramatically based on the shortages and the need for people to import carbide from far reaches of the world. So if the conversion is forced on people and they find out that it represents a very good alternative, then which think many of those customers will just switch and stay with alternate fuels which will benefit us over the long-term.

Okay. But what happens with acetylene prices. Okay. And then, again, I like asking this question. How were the large machine sales in the quarter, robotic sales, fully automated hard automation?

Very robust. All three of our North American facilities, Mexico, US and Canada, have very strong bookings in automation products of the types that you mentioned and the quote level is very robust. We think that future is very bright and we continue to invest to be sure that we capture a big part of the opportunities there.

Okay. Thank you.

Thank you. Our next question is from Mr. Walt Liptak with Barrington Research. Thank you. Please proceed with your question.

Thanks. Good morning and great quarter, guys.

Morning, Walt.

I wanted to ask, we talked about this it seems like every quarter but the gross margin is still below where you were back in that 2007, 2008 time period. I wonder if you could talk about what's the most significant overhang on that gross margin? Is it catching up on the raw material costs or is it getting more volume through the plants?

Walt, the two most important factors that are driving our gross margin comparison today versus 2008 would be our volume. So our capacity utilization is still down fairly significantly in our two traditionally more profitable segments being North America and Europe so we have a fair amount to run there to get back to our 2008 levels. And then, secondly, our mix has changed a bit between 2008 and 2011 between our more profitable segments and our less profitable segments. So there's a greater mix away from North America towards the rest of the world that doesn't have EBIT margins of 15 plus%.

Okay. When you talk about capacity levels in North America, what level do you think you're running at?

We still have a fair amount to go to get to where we were where we were in 2008.

Okay. Pricing improved a little bit in Europe which was nice to see. Can you talk a little bit about the volume as well as the pricing? It was a little bit better than expected.

Yes. Pricing went up in Europe because raw material inputs increased at some of the higher levels in our world. The volumes were very strong, as John pointed out in his comments, our European volumes were up 17.4%. I will remind you, though, that Europe lagged the rest of our world in terms of its resurgence after the 2009 declines. And so their comps are not as difficult perhaps as North America that started to see increase in its volume levels in March of 2010. And Europe really started to improve in the latter part of 2010, but strong volume increases in Europe and good momentum going into the second quarter.

Okay. Alright. Good point. And then lastly what tax rate are you expecting for the full year?

Well, the rate that I quoted in my comments on an adjusted basis are about 30% is what our expectation would be based on our earnings mix at this point in time for the full year.

Okay. Great. Okay. Thanks very much.

Thank you.

Thank you. Our next question is from Holden Lewis of BB & T. Please proceed with your question.

Thank you. Good morning.

Good morning, Holden.

On the, I guess the third piece of the gross margin I would have thought you would have mentioned, and maybe this is less of a 2008 versus 2011 question then sort of a sequential question, but the price cost dynamic, you did see a little bit of a sequential increase in the gross margin, but I was surprised by how much pricing you got relative to Q3 and given 6.5% pricing, I might have thought that the gross margin might return to sort of that 27%, 28% range. But I'm just trying to gets a sense of, as the new pricing goes in, where does that pricing metric tend to go and as it goes there are we talking about 28%, a return to 28% type gross margins as pricing stabilizes? Can you give some color there?

Well, Holden, that would have been my third item, would be increases in raw material through put and the compressing impact it has on margins. And that certainly did affect the Harris Products Group, and to a lesser extent, South America Welding, but in terms of getting to 28% I think that's certainly within the realm of our capabilities based on our current mix and where we stand in terms of our volume levels in North America and Europe. And the higher obviously, the input cost that we pass through go, the more compression that we have on margin, but we don't expect that to have a major impact for the rest of the year.

Right. And so I guess when you think about the price cost dynamic, it was obviously a challenge in Q4. Was price cost a net negative, a net neutral in Q1 and where are you expecting it to balance for the year?

In terms of the margin percentage or the gross margin dollars? From a percentage standpoint I would say it was probably somewhere neutral.

Okay.

Or slightly -- very slightly negative.

Oh, okay. All right. So from a percentage stand point you believe that gross margins are kind of where they would have been. You didn't see any big negative there then from a gross margin perspective?

Not big but slight.

Okay. Great. Thank you.

Thank you. Our next question is from Chuck Murphy with Sidoti and Company. Please proceed with your question.

So most of my questions have already been answered. Just a quick one regarding Harris Products. Did you say sequentially how much the price changed?

No, we didn't, but for Harris products in a year-over-year basis prices changed by about 25%.

Okay. I mean how does that pricing work? I mean is that less frequent than the other businesses or is it the same or.

It's more frequent because it's based on the silver in particular almost a daily market. Both the silver and the copper are priced based on LME type of exchange rates and we adjust from there.

Got you. Okay.

Silver cost has risen on year-over-year basis as you probably know over a 100% and copper is up probably 70% plus.

Got you. It just seemed like the price seemed to jump a whole lot more this quarter than it did the last few. I didn't know if something had changed.

Well, yes, silver really ramped up in the last quarter. You know it's in the mid 40s now and a lot of that increase, Chuck, was in the first quarter of 2011.

Okay. Got you. Okay. And in general do you find it easier to increase the prices for Harris stuff versus the other business or about the same?

No. It's not easy for any of them. We're just very persistent in doing it.

Got you. Okay. Thank you.

Thank you, Chuck.

Thank you. Our next question is from Jason Rodgers with Great Lakes Review. Please proceed with your question.

Hi. Just another question on capacity. Looking at the employee count are you satisfied for where it is right now or do you feel like you need to keep adding employees?

Well, I had indicated that our intentions are to add approximately a hundred production related people in our Cleveland operations. We're also adding some people in other markets around the world. Cleveland is just a little easier to track. We're not where we want to be. We're still working a little more overtime than what we would like to work, but that's one of the benefits of our employment arrangement with our employees. They will work the overtime when it's required and they're out doing that right now. So we're fairly diligent in our hiring, demanding in terms of the quality of employee that we look for and we won't compromise our standards to meet the volume required so we're patient in getting there.

It certainly is worth noting, though, that when we talk about capacity utilization, from a bricks and mortar and equipment stand point we have a fair amount of available, in general, capacities. But when it comes to people, some of our most important businesses we're tight. And so it will be the people capacity additions that will be largely the focus in 2011.

Thank you.

Aroya, are there any more questions there.

There are no further question questions at this time.

Thank you very much and thank you all for joining us on this first quarter call and look forward to reporting and discussing our results of the second quarter in late July. Thank you very much.

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