Lincoln Electric Holdings Inc (LECO) 2011 Q4 法說會逐字稿

Greetings, and welcome to the Lincoln Electric fourth-quarter and full-year 2011 financial results conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Vince Petrella, Chief Financial Officer for Lincoln Electric.

Thank you, sir.

You may begin.

And thank you, Christine.

Good morning to all of you joining us today.

And welcome to the Lincoln Electric 2011 fourth-quarter financial results conference call.

We released our earnings this morning prior to the market's open.

Additional copies can be obtained on the Lincoln Electric website or by contacting our Investor Relations office.

Starting the discussion this morning will be John Stropki, Lincoln's Chairman and Chief Executive Officer.

John will provide commentary on the quarter and the year, as well as discuss some activity in our segments.

I will follow with some more financial numbers in greater detail.

We have included a PowerPoint presentation as part of today's discussion, which is available on the Lincoln website as well, under the investor webcast tab.

But before we get started with today's discussion, let me remind you that certain statements made during this call and in our discussions may be forward-looking, and actual results may differ from our expectations.

Actual results may differ materially from such statements due to a variety of factors that could adversely affect the Company's operating results.

Risks and uncertainties that may affect our results are provided in our press release and in our SEC filings on Forms 10-K and Form 10-Q.

Now, let me turn the call over to John Stropki

Thank you, Vince, and good morning, everyone.

Our results for 2011 fourth quarter were very positive.

2011 sales of $2.7 billion were the highest in Lincoln's history, and also marked the second consecutive year-over-year of very strong sales growth.

Sales in 2011 increased 30.2% over 2010, which in [theirself] were up 20% from 2009 results.

We obtained good leverage in most of our business segments.

The fourth-quarter strong operating results coupled with continued strength in sales and profitability, were particularly encouraging given the ongoing uncertainty in economic and political environments in several key markets.

We enter 2012 with very good momentum, particularly here in North America, our largest segment, where the overall manufacturing environment and relative Business metrics continue to improve, especially in the United States.

Our strong revenue growth underlines the fact that we remain focused, on track, and we are executing on our global growth strategy.

Our three US acquisitions of last year are contributing beyond expectations and demonstrating good upside potential.

Fourth-quarter sales rose 23%, to $695 million.

And net income increased 39%, to $57.7 million, or $0.68 per diluted share.

Full-year 2011 net income increased 66.8%, to $217 million, or $2.56 per diluted share.

Vince will provide more detail on the numbers later.

But first, I will review some of the segments and provide a little color about the activity in the regions.

First, North America -- in North America, our largest segment, sales were very strong in the quarter, rising 33% year over year to $362 million.

Third-party export sales increased $63 million, up 21% from the fourth quarter of 2010.

Exports to the BRIC countries improved 37% over the same period.

We also announced a price increase in the United States, effective October 3, 2011.

Machine pricing was increased an average of about 5%, with certain welding consumables, including select subarc and flux-cored wires, the pricing increase between 3% to 7%.

2011 North America sales were $1.3 billion, a 29% increase year-over-year.

As I said earlier, we are very pleased with the progress of our recent North American acquisitions.

Torchmate has been a great addition right out of the gate.

The products fit well with our customers, and has been embraced by our industrial distribution channel.

The team of people at Torchmate are energized, and we are thrilled to have them on our team.

Our products has been focused on the development of new orbital welding systems.

These products are used extensively in the industry, supporting the construction and maintenance of the energy infrastructure.

The new orbital welding products have been released with great enthusiasm by key customers.

Techalloy makes nickel-based alloy and stainless steel welding consumables.

These products are important to the energy-related industries.

Techalloy was carved out of Central Wire.

We have since consolidated operations in Baltimore, installed SAP, integrated the products into Lincoln's portfolio, and begun to manage the Business for improved profitability.

We will be moving the Techalloy operation into our Cleveland operations in the future, and we were just awarded a significant financial incentive package from the State of Ohio to help facilitate this move.

Business conditions in North America operations were stronger in the quarter.

Overall industrial activity, represented in key measures such as industrial production and capacity utilization across factories in the United States, both ran ahead of last year's comparable.

Industrial production in the US, excluding the high-tech segment, was trending at 3.9% ahead of 2010 as of December 2011.

Capacity utilization was running at approximately 76.2%.

And the Purchaser Managers Index also continues to indicate a growing economy, with Q4 measures stronger than Q3.

Finally, we experienced strong order trends through the fourth quarter and into the early stages of 2012.

Moving to Lincoln Europe.

Lincoln Europe Welding, the segment that also includes the Middle East, North Africa, and Russia, posted solid results for the quarter with sales of $127 million -- an increase of over 22% from the same period last year.

The two new businesses acquired in Russia in the last 15 months had a positive impact on sales.

A few key market segments within Europe show good resilience in the face of the overall challenging macroeconomic backdrop that prevails there.

As an example, power generation segments that serve the global export market, along with oil and gas and the mining segments, continue to hold up well, while the automotive sector has also remained fairly stable.

For the year, Lincoln Europe sales increased 41.3%, to $509 million.

Lincoln Asia Pacific sales in the fourth quarter were off 2% from last year, but up 16% for the full year, at $376 million.

Sales in the quarter were impacted by a slowdown in construction equipment spending, and also by sluggish growth in the automotive segment.

Both of these segments have felt the constraints of the tightened credit markets within China, for which we expect some relief in the second half of 2012.

The strong mining sector in Australia has been a key driver to our Australian subsidiary, which continues to improve its performance and grow its contribution to overall Asia Pacific results.

The overall macroeconomic outlook for Asia remains positive, with oil and gas and the mining sectors expected to continue to perform well.

This will be tempered somewhat by the slowdown in China's growth rate, which is creating some near-term headwinds as inventories throughout the supply chain recalibrate to the lower trajectory emerging there.

Looking at South America, in South America, despite the signs of a decelerating GDP growth, Lincoln continued to benefit from infrastructure investment in large-scale projects in the oil and gas, mining, and shipbuilding sectors.

Sales increased 25.5% in the quarter, led by robust growth in Brazil, Venezuela, and Argentina.

For the year, sales in Latin America were up 33%, to $157 million.

Our key industry segment and value-added solutions approach in the market, as well as leveraging our complete global product portfolio, continues to show good progress.

Our Harris Product Group had solid results for the quarter and for the year.

Fourth quarter sales were $77 million, up almost 18%; and increased 34.4% for the full year, to $343 million.

Harris Group products include soldering and brazing alloys, as well as welding torches and cutting tools.

A good portion of Harris products are sold into the HVAC industry and home and commercial construction markets.

In the quarter, the group's consumable sales increased 19.6% from prior year, and equipment sales increased 14.7%.

Our Brasstech brazing business in Brazil has continued to grow share, and is leveraging Harris equipment offers in South America through its strong distribution network.

For WCTA, one of Harris's retail product businesses, overall sales to Home Depot, Lowe's, and other key DIY outlets were up double-digit year-over-year, driven mostly from increased volumes in several new product introductions.

That is a review of the results of the Business segments.

Turning to the activity in the Industrial segments -- several of our welding industry segments showed strong growth in the quarter and improving potential for the near future.

Offshore construction activity remained strong in 2011, as emerging economies in Asia, the Middle East, and South America continue to develop their own oil and gas natural resources.

Globally, offshore investment activity is forecast to continue the increase through at least 2013, with the majority of the construction activity focused around countries like Brazil, China, and Singapore.

Lincoln Electric remains exceptionally well-positioned with a global deployment of a proven and robust solution to meet the most demanding requirements in offshore construction.

Global automotive and light vehicle sales continued to rebound in 2011, including a robust showing in the US at year-end.

Lincoln gained important new equipment and consumable business with many long-standing, key automotive accounts.

And we have also won some important new global customers in India, Brazil, China, Japan, Europe, Mexico, and the United States.

In the heavy fabrication segment, 2011 marked a year of strong recovery.

Global manufacturers of earth-moving and agricultural equipment posted record sales in response to favorable market conditions of strong commodity prices and increasing energy demands.

In addition, the global challenge to meet the infrastructure needs of a rapid urbanization movement is creating significant demand and expansion plans for earth-moving and construction equipment manufacturers.

2011 was an exciting year of growth in the Pipe Mill segment.

Significant market penetration of Lincoln's premium consumables was spear-headed by our SPX80 flux, which was developed in response to the strong demand for high-strength properties required in spiral pipe welding manufacturing, such as increased impact toughness and significant increased travel speeds.

We believe this product is the new benchmark for spiral pipe manufacturing.

On the equipment side of the business, our Uhrhan & Schwill subsidiary increased its already strong market share in this segment.

In the Power Generation and Process segment, the issuance of the first new license in the United States in over 30 years for the construction and operation of a nuclear power plant means that the nuclear industry in the US is potentially poised for a nuclear power renaissance.

Lincoln Electric, with our broad nuclear welding specific products and industry experience, is uniquely poised to lead the way in this rapidly growing segment.

That is a brief look at the segments.

Now, looking at some economic measures.

Globally, steel production utilization is one of the most important metrics among the several that are effective barometers for the economic impact of the arc welding industry.

The World Steel Association reported that world crude steel production increased 6.8% in 2011, setting a production record.

The global steel production forecast is for a continued growth of approximately the same 6.7% in 2012.

That is a quick overview of the market and results.

Vince will now cover the financial results in more detail.

Thank you, John.

As John highlighted, our fourth-quarter 2011 financial results reflected a substantial improvement in revenue and operating earnings, compared with the fourth quarter of 2010.

Fourth-quarter 2011 consolidated sales grew by 23%.

Volume increased reported sales by 9.6% and pricing increased sales by about 6%.

Foreign exchange had a slight impact on sales, and acquisitions contributed an increase of over 8%.

Fourth-quarter gross-profit margins increased to 28%, compared with 26.2% in the comparable prior-year period.

There was no significant LIFO effect in the fourth quarter of 2011.

The prior year's fourth quarter did include a LIFO charge of $1.7 million.

Our operating leverage from higher volumes drove the overall margin increase.

SG&A expense for the fourth quarter was $112 million, or 16.1% of sales; compared to $93 million, or 16.5% of sales, in the prior year -- an improvement of 40 basis points.

The increase in SG&A expenses for the quarter is primarily attributable to the increase in bonus expenses, incremental SG&A from acquisitions, and an overall general increase in SG&A and R&D expense investments.

Operating income for the quarter was $82.4 million, or 11.9% of sales, compared with $52.3 million, or 9.3% of sales, in the same year-ago quarter, a 260-basis-point improvement year-over-year.

The 2010 fourth quarter included charges of $2.2 million, primarily related to rationalization actions and asset impairments in Europe, Asia, and the Harris Product segment.

Operating income before these charges was $54.5 million, or 9.7% of sales, in the prior year.

Equity earnings and affiliates increased to $1.4 million, from a $500,000 in the prior-year same quarter.

The increase was primarily related to the strong operating results from our 50/50 joint venture in Turkey.

The effective tax rate for the fourth quarter was 30.8%, compared with 20.1% in the 2010 fourth quarter.

A significant factor driving the lower effective tax rate in 2010 the prior year was a change in tax regulations in Asia Pacific, resulting in a $5.1 million reduction in income taxes.

Net income for the fourth quarter was $57.7 million, or $0.68 per diluted share, compared with $41.5 million, or $0.49 per diluted share, in the 2010 fourth quarter.

Excluding special items, net income was $38.3 million, or $0.45 per diluted share, in the 2010 fourth quarter.

There were no special items in the current year's fourth quarter.

On a geographical segment basis, and excluding special items, North America Welding achieved an EBIT margin of 17.8% in the fourth quarter, compared to 15.9% in the comparable quarter in 2010.

Volume growth of 16.7% helped drive the improvement in EBIT -- pricing contributed 5.4% and acquisitions increased sales 11.3%.

And as John mentioned in his comments, those acquisitions in North America included the specialty alloy consumables company Techalloy, and the cutting systems company called Torchmate.

There was also a decrease of 60 basis points attributable to foreign exchange effects.

Europe's Welding EBIT margin was 6.8%, compared to 2.1% in 2010.

Sales were up 4.6% due to volume.

Pricing increased sales by 5.4%, and acquisitions added 14.6% to sales in the region.

Again, the acquisition sales increase is attributable to the two previously discussed and announced Russian acquisitions.

Foreign exchange decreased sales by 2.8%.

On to Asia -- that segment recorded an EBIT loss of approximately 70 basis points, compared to a profit margin of 80 basis points in 2010.

Sales in Asia Pacific were down 6.3%, due to volume.

Pricing was relatively flat, and foreign exchange increased sales by 3.7%.

The volume decreases were primarily caused by the slowdown in the construction and related machinery markets in China.

South America Welding EBIT margin was 8.1%, compared to 6.3% in 2010.

Sales volume contributed 15.5%.

Price increases added another 13%, and foreign exchange effects decreased sales by 2.9%.

The price increases were primarily the result of the higher inflationary environment in South America, particularly in Venezuela.

The Harris Products Group reported a 5.6% EBIT margin in the fourth quarter, compared to 4.4% in 2010.

Sales volume in this segment contributed 6.6%, pricing an additional 12.8%, while foreign exchange effects decreased our sales in the Harris Products Group segment by 1.6%.

The increased pricing at Harris is primarily related to the pass-through effects of higher metals prices, primarily silver and copper.

During the quarter and for the total year, we generated $63 million and $193 million, respectively, in cash flows from operations.

We ended the year with a cash balance of $361 million.

Our net cash position ended the year at $258 million, and it resulted in a net debt to total capital ratio of a positive 20%.

Included in the Company's debt balance at December 31, 2011 is a senior unsecured note totaling $80 million, which we will repay in March of this year, 2012.

During the quarter, we paid cash dividends of $12.9 million, which resulted in dividend payments for the full year of $51.9 million.

The dividend rate was increased by 9.7% in the fourth quarter of 2011, to $0.17 per share.

During the quarter, the Company invested $15 million in capital expenditures, resulting in a full-year CapEx total of $65.8 million in 2011.

We expect our 2012 capital spending plan to approximate $65 million at the current time.

We spent approximately $66 million on the previously discussed acquisitions in 2011, strengthening our global geographical position and our product portfolio in both consumable and machine product lines.

Our return on invested capital ended the year at 16.9%.

During the quarter, we spent an additional $9.4 million repurchasing about 256,000 shares, at an average cost of $36.60 per share.

And for the year, we spent a total of $37 million on share repurchases, totaling 1.078 million shares, or an average price of $34.33 per share.

Weighted average shares outstanding for the quarter ending December 31, 2011, were 83.384 million shares at the end of the year.

That is the extent of my prepared comments.

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

Thank you.

(Operator Instructions) Mark Douglass, Longbow Research.

Can we talk about -- the margin performance in North America was very strong -- 19%, at least on net sales.

If volumes are maintained at current levels, is this margin sustainable?

Was there some seasonality in the fourth-quarter EBIT?

You might see it go down a little bit, and then would you have still some incremental margin leverage, modest volume gains in '12?

Well, we had a very strong quarter, obviously, in North America, Mark.

Our volumes were very strong on a year-over-year and a sequential basis.

We would expect that, as long as the volumes stay the same and our cost structure remains relatively stable, that we ought to have some similar types of margins going forward.

In 2012, there will be some headwinds from higher pension costs, because we finished the year with a much lower discount rate -- 110 basis points lower in 2011 than 2010.

And our relatively large pension plan had asset returns that were less than what we expected.

So, we are looking at about a $7 million to $9 million increase in pension expenses in 2012.

Other than that, though, I think we would expect to be in line with 2011 types of margins in North America.

Yes.

I would just add, Mark, we have talked over the years about the investments that we made in the facility to improve our cost basis.

We are clearly seeing some results in regards to that.

And based on the comments that I made, we also see some real opportunity with the three acquisitions that we talked about.

We spent a good part of the year integrating those acquisitions.

We think that they have a lot of traction ahead of them, and we are quite optimistic about the positive returns that we can get in regards to those three companies, also.

And you still have some more integration plans with the acquisitions?

It sounds like you are moving one to Cleveland --?

Yes.

That is probably -- that is a two-year project that won't happen overnight.

We have some internal moves to make here, and making space and getting the appropriate layout for that.

So, we will be operating that facility out of Baltimore for a couple of years.

But we are putting a lot of changes, even in Baltimore, that we think will have positive improvements on the productivity and the quality elements of those products.

Okay.

And then, speaking of that, with a COO now, I assume that help really drive continuous improvement.

What kind of plans do you have?

Or what is he going to be focusing on in '12, with Asia looking kind of weak here for the first half?

Europe, who knows?

But it's probably going to be a little weaker.

So, is he going to be focusing on those regions to help get them back to -- Europe used to be double-digit EBIT, and Asia is still kind of break-even.

I know you explained Asia and China will take a while, but can you explain some of the activities that he will be focusing on?

Yes.

I would say that Chris's real focus will be on the international operations.

Our North American business runs very well, we have a very strong position here.

Not to say that it too can't get better.

But his focus will be on taking best practice opportunities from our best practice facilities, and integrating those in our international operations in Latin America, China, and in Europe.

And we are already starting that process, and we are looking for strong returns as a result of that activity.

Okay.

So, there could be some upside in 2012 potentially, if these -- even on weaker volumes?

Yes.

I think the big question mark is Europe.

The volume -- we very much have a very strong fixed overhead cost in Europe, with the large capacity installed.

And if we see major significant downturns in the demand there, it won't be easy to offset that with any kind of an operational type of improvement.

But we are taking a good hard look at that market, and there are signs that there is a bit of a turnaround, and one day you can be optimistic and one day you can be pessimistic.

Sometimes it even changes during the course of the day.

But at this point, it doesn't look like Armageddon is ahead of us, and we think that we can keep a good, solid performance there.

Okay.

Thank you.

Steve Barger, KeyBanc Capital Markets.

This is actually Alex Walsh on for Steve.

Thanks for taking my questions.

First off, I think, Vince, you talked pretty convincingly a couple quarters ago about incremental margins in the low 20% range.

And after running a couple quarters below that, obviously incremental margin performance in the quarter was pretty good.

And I was just wondering if you guys can talk to how you are thinking about the sustainable incremental margin outlook for the consolidated Company?

Yes.

We did have our best incremental margin quarter of the year, at over 21%.

The average for the year was a little over 17% -- 17.3%.

I would expect that we will bounce around in the high teens to low 20%s in the next quarter or two.

But we have also talked consistently, Alex, that we expect our business to be able to achieve a mid-20%s type of incremental margin.

So, we made good progress in the fourth quarter.

We showed a big jump between the third and the fourth quarter.

And if we can get some of our Asia Pacific profitability on track and continue our improvement -- sequential and year-over-year improvements that we see in some of the rest of our businesses, there is no reason why we can't achieve our objectives of mid-20%s type of incremental operating profit margin.

And if you -- that range that you threw out, if you exclude the added pension expense, what would that be?

Oh, I don't know --.

Is there upside to that?

Well, that pension expense is going to be what it is.

We have sight of that.

That is one of the items that we know will happen in 2012.

The die is pretty well cast on that.

So, if you just take $8 million, divided by what our sales number is, you get what that headwind is.

Got you.

Okay.

And then, with regards to organic growth in Europe -- obviously, pretty good growth there.

I think that was kind of bucking the trend from a lot of the industrial metrics that we monitor.

Was wondering if you guys could provide a little bit more detail on why you guys experienced as good of growth as you did?

I think the first thing, Alex, you have to look at is -- what is the European market, the way that we define it?

That includes Russia, the Middle East, and North Africa.

And as we commented, we have had very good sales growth with our Russian acquisitions.

The Middle East, based on the high price for oil, in particular, and the demands in China for natural gas has seen a very strong rebound from the 2009 collapse.

And that has been a strong contributor in that area, as is the year-over-year with North Africa, with the slightly improved political situation in Northern Africa.

So, that is a big driver.

And then, I would say that the final point -- and Vince can talk on maybe some more specifics, was that the areas where we have seen very positive results in Europe have been mostly Eastern Europe and the strong economies of Germany, in particular, where they have a very strong export economy -- again, driven around oil, gas, natural resource-type development equipment.

And we are a big player in that area.

All right.

And then, just jumping down the cash flow statement -- obviously, cash flow is pretty good.

Free cash flow conversion, actually, over the course of the year seems to improve sequentially with each quarter.

I was wondering how you guys were thinking about the run rate for free cash flow conversion, and if that was kind of a function of normal seasonality, or if we are actually at a higher sustainable run rate through '12?

Well, our free cash flow conversion is a function of two major variables -- one is what our income is; and then, secondly, and perhaps as importantly, is how we manage our working capital.

So, we expect that our earnings will continue to grow in 2012, and we also expect our working capital management to continue to improve.

So, those two metrics we are intensely focused on.

And we have shown over the past several years a continual and gradual improvement in average operating working capital management, and we fully expect that to continue.

And that will, over the longer term, aid us in growing our free cash flows for the business.

Do you expect working capital to be positive in 2012?

Well, we expect it to be a positive improvement in average operating working capital, so the ratio should fall.

Got it.

Okay.

Appreciate it.

I will jump back in line, thanks.

Walt Liptak, Barrington Research.

Thanks for the good quarter.

I wanted to ask you a little bit more about Europe, and understanding the way that you define it.

How would you characterize Western Europe?

I know you mentioned Germany being strong, but the volumes decelerated to up roughly 5% from up 12% in the third quarter, on a year-over-year basis.

And you mentioned it's getting better.

Were you thinking of Western Europe getting better?

Are we going to go negative in 2012?

Are we there yet?

Well, I would say, just to reemphasize what John said, Europe is characterized by some fairly distinct different markets for us.

The Middle East has been very strong.

If anything, the business there is accelerating on an upward trend, whereas some of our most important businesses on the continent, including Southern Europe, of Portugal and Italy, are actually contracting; sales volumes are falling.

And that contraction accelerated through the fourth quarter and into the first quarter of 2012.

So, in the aggregate, we saw growth in the whole of the European segment that we report.

But there certainly are divergences in the direction of oil and gas and energy-related markets that are primarily situated in the Middle East, and more industrial mature markets that are in the continent, including Southern Europe.

So, we have a mixed story there; but in the aggregate, we did show volume growth in that segment.

Okay.

Are the contracting parts in the Southeast, those countries, is that going to be enough that we might see the overall geographic region down, in terms of volume?

That certainly depends on how much they contract.

At the present time, they are not enough to offset the very robust activity that is going on in the Middle East.

Certainly, if the South and the rest of the continent, including the northern parts of Europe -- Germany, and the Netherlands and the UK start to slow, that is a possibility.

But the way it is, what we see right now is that we see growth in Europe, albeit a very modest type of growth.

I would say, Walt, if you look at the Purchasing Manager Index for Europe, it's actually getting some slight improvement in the last several weeks, as there is good hope of stabilization of the Greece situation.

So, it has moved up from 47 to 48 or 49.

However, in comparison to where it was a year ago, at 58, we have already seen a pretty big drop-off.

Right.

So, Spain and Italy have very high unemployment rates.

The matter is -- can it get much worse than it already is, with 21% or 22% unemployment?

The bet is it won't, but we can't absolutely say that.

So, if things stay stable, we will have a pretty good result.

If there is an absolute collapse, then it's impossible to predict.

All right, okay.

I understand.

John, you mentioned that you have a high fixed cost in Europe, but you have been restructuring it, from what I understand.

Is there more restructuring that you would initiate, if things continue to slow down?

We always have a down-term strategy.

And if we saw a massive deterioration in that marketplace, we would have some specific projects that we would undertake.

When I talk about the high fixed costs, we have multiple plants that are there to serve a pretty robust market.

And if we operate those plants at very low levels of utilization, that can create some challenges for us; and we would address those challenges as need be by looking at restructuring.

There is nothing specifically on the agenda at this point in time, but we will be prepared to do that if need be.

Okay.

During the quarter, Europe profitability came through pretty nicely, despite the deceleration.

Is that because of pricing, or is that because of the previous cost actions?

I would say it's a little bit of both.

I think our pricing in Europe has been stable, if not improved a bit.

And certainly, we continue to work every day at adjusting our cost base, and becoming more efficient and operationally effective.

Okay.

When was the last price increase in Europe?

Mid-last year.

And the European pricing environment is not very positive, I would say.

Based on the current level of capacity utilization and welding consumables in particular, it's a very difficult market.

We have seen some contraction in steel prices there, which has provided an opportunity to hold price with lower costs.

And to reemphasize Vince's point, the 2009 recession provided us with the challenge of resizing our SG&A costs in Europe, and our people there did a spectacular job of reducing our headcount and giving us a much lower cost base.

Had we seen the volume contractions that we have seen in Europe pre-2009, we would have had a much different result than what we have now.

And it's a compliment to the fine work that our people have done in Europe, in realizing the challenge and taking it to heart and making the necessary changes.

Yes, I think we can see that.

Have you seen any changes in the market, now that Colfax owns Charter?

There is a new name on the front door.

All right.

Okay.

All right, thanks very much, guys.

Brian Rayle, Northcoast Research.

Great quarter, thank you.

Thanks, Brian.

Quick question on -- most of my questions have been answered.

But on pricing versus cost -- obviously, you guys had a great volume quarter, good results, and the margins have been pushed up, but how much are your costs going up versus what you are seeing in pricing?

Well, are you talking -- I mean, it's a different circumstance in each different market.

Let me talk about --.

I mean, if you will give me detail by each segment --?

Well, I don't want to spend that much time.

Right.

Let me just say that from an overall kind of perspective, we are seeing decreasing or stabilized steel costs in most markets and in most kind of product segments.

It's different in different markets; but in general, stabilized kind of a cost.

With that type of environment, that gives us some predictability that we could adjust to, and I think we have demonstrated pretty good capabilities in that area.

That being said, we are also big users of chemicals around the world.

And as bullish as we have been because of the mining sector and the opportunity that has created for us in places like Australia and Brazil and other parts of the world for construction equipment sales and infrastructure, it has also put a lot of pressure on our chemical buys, both from an availability and from a cost side of things.

So, the cost increases led to price increases in the US that I talked a little bit about.

We are reevaluating what the forward-looking view of chemicals looks like, and it's likely we will have some further increases -- more selective, but increases where the chemicals come into play.

And then, on the equipment side, we have the issue of petrochemical-related issues, as well as electronics that will have to be addressed.

So, we pay deep and very close attention to those issues, and I think we have demonstrated for many, many years our ability to come up with the right formula to respond.

So, to interpret that, just to make sure I'm interpreting correctly -- pricing is now probably accelerating above the rate of cost increase?

Again, I would say that it will be different in each different market where we participate, based on the utilization numbers within those markets.

And then, just on --?

We are largely in line -- I'm sorry, Brian.

We are largely in line with our price increases over our cost adjustments.

There can be timing differences, and John is mentioning one of those.

But we will be looking, and we have in the past looked very closely at our price/cost relationship.

And we fully expect on an overall and on a global basis that we will maintain that price/cost relationship, and do what is necessary to pass through cost increases, primarily in the material area of our business.

And when you do that, you are talking on a margin basis, correct?

Or a dollar basis?

Largely on a dollar basis.

On a dollar basis.

Okay.

And then, when you -- the final follow-up question, I apologize.

But when you go to your customers, do you pitch this as being a -- our raw materials are going up, so therefore, you have to pay more?

Or is it a product mix sort of pitch?

Is there like a surcharge on --?

It's generally -- so, we have said in the past a number of times, Brian, that our customers know what is happening in raw material prices, particularly steel, because they are joining steel and other metals together.

And so, they can see when pricing is changing, and they can expect us to come at some point and ask for those cost increases to be passed through.

So, we generally don't do it in the form of surcharges, although there are situations and examples of us doing that.

But the bulk of our price increases are across the board, on the basis of what is happening with input costs in primarily metals.

Okay, great.

Thank you very much.

Great quarter.

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

A couple of things -- first, taking a multi-year look at how Asia has performed, you have had this year, I think, some increase in terms of organic volume -- not quarter, but for the year.

Pricing was a little bit better this year than it was last year.

But when it all gets flushed out, it seems like your margin in '10 and '11 has been kind of similar, despite the fact that the top-line stuff looks like it should be better.

You had some similar issues in Europe; you tackled those really effectively.

Is there a more aggressive approach to Asia Pacific on the cost side that is necessary here?

Or maybe even just a change to the spending side that might be necessary, given what remains reasonably anemic margins in that region?

Holden, we are attacking all areas of our Asia Pacific and China business.

We are looking at costs, we are looking at our positioning in the marketplace, we are looking at pricing.

We are not satisfied with the progress that we have made over the past couple of years.

And we are very intensely looking at the whole business model in China, in particular, in order to develop a more sustainable business model that can be improved over the short and intermediate term.

So, there isn't anything that we aren't looking at and challenging in Asia Pacific, and in particular, China.

Now, as a reminder, as a backdrop to the challenges that we have in that geography, China is just simply a much larger, fragmented market, with many more competitors and a more price-sensitive environment than what we experience anywhere else in the world.

We expect in the longer term that we will see some improvements in that landscape; but we can't wait for the longer term, and we are looking at all potential actions to improve that business today.

And so, there isn't anything, in summary, that we are not looking at in that marketplace.

I would just add, Holden, we have really three pretty significant initiatives underway.

The first is, we are consolidating plants.

We mentioned the fact that we are building a new stick electrode factory.

We have been operating in a very inefficient rental facility that has both capacity constraints and operational costs; that will be completed next year.

We are combining two flux plants that we have into a new facility and operating one; those should provide very positive influence.

Secondly, we have restructured our operation there, gone to a share service company that will reduce a lot of the back-office costs that we had of operating independent companies.

And also give us a much stronger face to the customer of one company versus four or five, which is what we had previously.

And last, we have stabilized the business in China, such that we are now beginning to have a focus on where we can use the low cost of our Asian China operation for export opportunities around the world.

And the early returns of that are very positive, both in volumes and in the significant improvement in margin opportunities, because of the higher price market for those kind of products of the markets that we are focusing on, versus the price for those products in China.

Okay.

And so, how do you -- do you feel like 2012 in Asia could be kind of like Europe in 2011, where those initiatives result in a meaningful improvement in the operating margin?

Or, given the destocking that you are seeing, at least in the first half, and the slower environment, are we still looking at maybe '12 looking a lot like '11, with benefit beyond once volume starts to come back?

I think a lot is going to depend on how quickly the Chinese government loosens up the capital markets.

We expect, at least for the first quarter, for volumes to be significantly constrained.

We are optimistic that would improve in the second half of the year, based on the commentary and the vibrations that we are getting in the market.

Whether that is in the second quarter or not, we don't know.

And I would look at kind of flattish type of results, unless there is a significant improvement in the economic model within the Chinese economy.

Okay.

And then, my next question is -- traditionally, Q4 is a weaker EPS quarter.

This year, you did see the sales come down a little bit, as is seasonally typical.

But obviously, you did very, very well on the cost side; there is no LIFO or anything in there.

Did you not take -- maybe production, did you push manufacturing work, maintenance out?

How did you achieve non-seasonal EPS?

On the LIFO side, we did take charges for the full-year 2011 of $7.4 million.

And none of that came in the fourth quarter.

So, the first three quarters of the year bore the brunt of our inflationary estimates for the full year.

And so, there was no detriment to a LIFO charge.

The prior year's fourth-quarter did include $1.7 million that I mentioned in my prepared comments.

So, that certainly aided the quarter in our North American segment, where we have LIFO accounting.

Secondly, we have fairly strong backlogs, particularly in our North American operations, at the latter part of the fourth quarter, which traditionally we would have seen some slowdown in production.

So, even though sequentially our production levels were down from third quarter, we operated at a much higher level in the fourth quarter than we would have traditionally have operated.

Okay.

And was that a sudden adjustment, on the fly?

Or was that kind of expected through the quarter?

It was perfectly anticipated and perfectly executed.

(laughter) Okay.

And we had some mix improvements in the quarter that aided margin, as well.

That may or may not be the same case in the first quarter of 2012.

Was that end-market mix, or between consumables machinery?

Or where was the --?

It was between machines and consumables -- categories of machines that had higher margins, and categories of consumables that had lower margins.

Got it.

Okay.

Thanks, guys.

Walt Liptak, Barrington Research.

Just a couple of follow-ups -- just to talk a little bit more about Asia, the destocking that you are talking about -- we have been hearing about machinery markets slowing since Spring last year.

And now, it's finally really showing up in your results with volumes.

And that is -- why are you lagging so much, do you think?

Is it that destocking of inventories is finally a catch-up, and that your welding equipment just lags overall machinery in China?

First, let me say that it's not so much destocking of inventories of our products with our customers, but our customers' destocking of their finished product inventories.

If you follow the commentaries of the construction equipment companies in China, they saw some pretty significant slowdowns in their volumes -- Hitachi, Komatsu, in particular.

But more so, what you don't see are the Chinese national construction companies that had very significant slowdowns in their business.

And so, they are bleeding through that.

And again, our expectation is that the capital markets are going to free up a little bit, and there will be a turn on of the spigot.

We should see some improvement on that -- and again, as I said earlier, by at least the second half of the year.

Okay, I understand.

And just jumping around a little bit, the inventories came in, it looks like $47 million?

So, I wonder if you can comment on the geographic region where that happened?

Well, inventories largely followed our changes in sales by region.

And most of that would have come in, in North America.

We maintained and improved slightly our days sales in inventory; and improved, actually, in our international operations more dramatically.

But the bulk of the inventory increase would be in North America -- again, following the size of the operation, as well as the growth in the top line.

And North America had one of the highest, if not the highest growth in the top line of any of our operating segments in the quarter.

Okay.

Maybe I'm reading this wrong.

In your cash flow statement, you had $47 million of cash inflow.

That is a good thing for inventories.

What are you looking at?

Just your cash flow statement.

Are you looking for the quarter?

Yes, for the quarter.

No, that is actually a usage.

Oh, I'm sorry.

What was your ending inventory?

Year-end inventory was $373 million.

Okay.

And the last couple of things -- tax rate, what is your expectation for 2012?

Should be right around 30%.

Okay.

And D&A?

This year it was $62 million -- 2011, it was $62 million.

So, I would expect it to be somewhere around $62 million, $63 million, $64 million at the most.

Okay, great.

Okay, thanks.

Greg Halter, Great Lakes Review.

Question for you regarding whether or not there was any M&A step-ups, either -- in the fourth quarter?

No.

The M&A -- the acquisition initial accounting step-ups have washed all through before the fourth quarter, so the fourth quarter was relatively clean.

The last two acquisitions of the year 2011 were really in July, the end of July.

And that washed through by the fourth quarter.

All right.

And I think, John, in the past, there has been some quotes about approximately 120,000 miles of pipeline planned out there.

Is that number still in the realm of possibility over the coming years?

Yes, I think it's very much so.

I think we had to take like 3,000 miles out because of the XL pipeline decision that the Obama administration made.

But we are hopeful that they will correct that mistake and put that back on the agenda.

But all the activity that we see looks very positive still, in terms of oil, gas -- and now, even in the water pipeline area, we are seeing some good opportunities.

So, I think we are still pretty bullish about oil and gas pipeline activity.

In the grand scheme of things, while Keystone is important for the US, out of 120,000, it's not that big of a deal.

Yes, it's a big deal for the US market.

But you are right, from a global [down] perspective, it's -- most of that pipe, or a good part of that pipe, has already been made; so, we have benefited from the construction of the pipe.

We would have loved to have enjoyed the installation side of it, and eventually we will.

Be patient.

Okay.

And finally, I know you had the relationship with IPG Photonics for about a year.

And it was asked before, but just wonder if there is anything more specifically you can discuss there that may be going on.

No significant changes.

All right.

Thank you.

So, I wanted to -- before we -- and I think that might have been the last question.

I wanted to go back to the cash flow statement and address Walt's question.

For the quarter, our inventories on a year-over-year quarterly basis actually decreased by $47 million.

So, that was generating cash on a year-over-year quarterly basis.

But, Walt, from a full-year perspective, we actually increased inventories or used cash of about $52 million.

So, full-year, year-over-year use of cash, $52 million.

Fourth-quarter, year-over-year generated cash of $47 million.

So, the quarter was a very good working capital inventory quarter.

But year-over-year, we did use cash of about $52 million, or about the same amount that we generated in the fourth quarter.

So, hopefully that clears up your question, Walt.

With that, Christine, are there any more questions?

We have no further questions at this time.

Thank you very much for joining us today.

We look very much forward to discussing our first-quarter results with you, 2012 results, towards the end of April.

Have a nice day.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation, and have a wonderful day.