Lincoln Electric Holdings Inc (LECO) 2012 Q1 法說會逐字稿

Greetings and welcome to the Lincoln Electric Q1 2012 financial results conference call.

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

A brief Q&A 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, CFO for Lincoln Electric.

Thank you.

Mr.

Petrella, you may begin.

Thank you, Latonya.

Good morning to all of you joining us today.

Welcome to the Lincoln Electric 2012 first 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.

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

I will follow up with some additional financial numbers after John's comments.

A power point presentation is part of today's discussion and is available on the Lincoln website under the Investor Relations tab as part of today's webcast.

The presentation will also be posted along with a replay of today's webcast on our site later today.

But before we get started, 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 first quarter results were very positive setting a record for the highest sales quarter in our history.

Overall profitability and cash flows also improved significantly.

Strong performance in the quarter resulted from improved product mix and better pricing dynamics in all of our segments.

We experienced very strong sales in North America driven by demand in both the export and domestic markets for our high technology equipment.

Recent acquisitions also played a role and had a very positive impact.

Sales were up 21.4% to $727 million.

Operating income rose 54% to $92 million or 12.6% of sales and net income increased 37% to $64 million or $0.70 -- $0.76 per diluted share.

Excellent sales results for the first quarter of 2012 and a great start for the year.

Looking at the segments.

Our North American operations is had a very strong growth in the quarter.

Sales rose 36% year-over-year to $381 million.

Export sales increased 43% from the same period a year ago and export sales to the brick countries including inter company sales were up over 21% over the same period.

Consumable sales were strong across-the-board giving strong sales in the automotive and transportation segments.

We also saw continuing strength in both the construction and AG equipment manufacturing segments.

While the equipment sales grew significantly in the quarter as our customers continued to embrace Lincoln's waveform technology.

The launch of our new energy efficient Flextec Inverter Platform has been one of the best in our long company history.

Automation sales continue to accelerate in North America as customers invest in tools that help them reduce their costs and improve quality.

Our recent North American acquisitions, Torchmate, Techalloy and ARC products, all performed quite well in the quarter.

Continuing to expand our specialty consumable product offerings during early March we acquired Wear Tech a manufacturer of cobalt-based consumable products with operations in California and Port Talbert, Wales.

We are also quickly integrating Wear Tech into our broad consumable product portfolio.

The general industrial economic environment in North America remains positive but appears to be moderating.

Key industrial metrics that we follow such as industrial production and capacity utilization across factories in the United States are running ahead of last year's comparables but showing some month-to-month volatility.

Total manufacturing industrial production in the US excluding high tech segment was trending five points ahead of 2011 in March of 2012 while capacity utilization was running at approximately 78%.

The US Purchasing Manager Index also continues to indicate a growing economy although the measure is softer than the Q1 2011 measurement.

Turning to our Lincoln Europe Welding segment.

The economic environment continues to present both challenges and opportunities.

Basically along geographical lines and market segments.

While southern Europe remained challenged we did see improvements in the region coming mainly from the UK, France, eastern Europe, Russia, the Middle East and Africa.

With consumable demand and volumes in the traditional European core businesses generally down, we have focused heavily on margin improvements through price discipline and driving product mix towards higher value equipment and chemistry-based consumable products which contributed to a margin improvement of over 3% of sales compared to last year.

The energy driven business and particularly the oil and gas segment in the Middle East has continued to drive strong demand for our products.

Robust fourth quarter sales into this segment continued into the first quarter of 2012 with year-over-year sales increases of over 60% into the region.

The Middle East and north Africa market remained a positive for equipment and consumable exports from the United States and China.

Sales in the sub Sahara Africa were also strong in the quarter driven by strong sales throughout our soft south American trading company.

This company has continued to grow its market share since it was established in early 2011 which is an endorsement for our strategy to leverage our global product offering through local distribution in key developing markets.

By building local infrastructure we can reach a broader customer base with products from all around the world that are well suited to the local applications as well as global market segments.

Sales for the European segment were up 10% to $126 million which includes contribution from our recently acquired welding consumables business in Russia.

We are continuing to make progress is in consolidating our two Russia businesses into one for better efficiencies.

During the quarter, welding equipment and automation sales were up over 10%.

And our earn on and swill pipeline related business based in Germany continued very strong.

In Asia Pacific results the company made solid progress during the quarter against difficult macro economic background.

Overall sales in the region were up 6% over last year to $93 million.

Exports from the region's factories were up over 14% which helped offset more sluggish demand in some key local markets.

Profitability also showed some important improvement across most of our business units in the region.

Improved sales mix, better pricing discipline and cost control all played a part as market conditions in China, the region's largest unit, continued to get increasingly challenged.

The HSBC Purchasing Manager Index, which tracks manufacturing activity, has signaled contraction for six consecutive months in China.

Our business in China are responding aggressively to these conditions and are making good progress in shifting from a market expansion mode to a market consolidation mode.

The result of which was improved year-over-year for the quarter both year-over-year and sequentially.

Driven by key sectors such as construction equipment and automotive manufacturing we expect that the trading conditions in China will remain soft for the next quarter or two and then return to a more positive trajectory later this year.

Elsewhere in the region our smaller but growing business units in India and southeast Asia showed very positive double digit sales growth while our more mature Australian business continues to benefit from brisk investments in the mining sector and make good strides in improving its market position and profitability.

Looking at south America, year-over-year sales grew by 17% to $40 million led by Venezuela, Brazil and Argentina.

In south America our focus on key industry segments within the region continues to provide the results.

Specifically in Brazil our efforts within the shipyard, offshore and heavy industry segments have generated large equipment orders.

The region faces a serious lack of qualified welders and thus a number of our heavy industry customers have invested in our virtual reality welder training systems.

The region is also seeing significant investments in mining, energy and pipelines and we are providing welding consumables and equipment to large projects in Argentina, Peru and Colombia.

On the economic front, 2012 GDP grew throughout south America with the exception of Brazil is expected to moderate to 4.3% from 6.5% in 2011.

Brazil the largest economy in the world is expected to regain momentum and grow by 3.9% in 2012 from 2.7% in 2011.

Pricing on minerals, energy and agricultural products continue to drive strong investments in these sectors.

In addition, infrastructure buildout remains at elevated levels.

These investments continue to benefit the majority of our industry segments.

We continue to leverage our complete global product portfolio and welding solutions into the region and for our key industry segments.

At the Harris product group sales in the quarter were up 6% year-over-year to $90 million.

Commodity and metal markets have declined year-over-year from prior 2011 levels and will put downward pressure on consumables in Q2 and Q3.

The group's equipment and retail business continues to grow while consumable grazing has continued to trend with the tract of the housing industry.

For WCTA,one of Harris product segment businesses, overall retail sales were up double digits year-over-year driven by increased volumes and new product offerings.

Key drivers affecting the Harris business growth going forward is the moderate growth rate for the US for HVAC replacement market, new housing starts and construction spending for residential and nonresidential products on a global basis.

Those are the market segments highlights.

Turning to the activities in the industrial segments, several welding industry segments continue to show good growth in activity.

Offshore are construction activities continues to grow, particularly in China and southeast Asia where the focus on building high specification rigs and floating production units remain a priority.

Brazil's offshore market continues rapid expansion in anticipation of future drilling in deep water blocks off the coast and North America continues to lead sub C construction activity for international large-scale projects for sub C systems.

The pipe mill segment continues to expand.

Structural piping and water pipe segments are expected to continue strength for the balance of 2012.

Line pipe demand will be regionally driven for the balance of 2012 with the Middle East, Russia and China continuing to be very strong.

Equipment upgrade interest is very positive across these segments with increased interest in control systems and Lincoln power waves technology.

We continue to grow our share of consumable conversions in the segment at a very strong pace.

Heavy fabrication continues on a steady pace as I mentioned earlier with major equipment manufacturers continuing to expand facilities both internationally, especially in China, India and also here in the United States.

Automotive output continues to expand in many key markets.

And a number of automotive producers have announced plans to expand or increase production in both India and China.

That is a brief look at the industry market segments.

And finally, in the economic metrics.

A number of the economic metrics that we serve are barometers for the arc welding industry and the global steel production is one of the most important ones.

According to the world steel association, global steel production increased 1.9% in February to 120 million tons.

China produced 56 metric million tons, up 3.3% year-over-year and US crude steel production was 7.3 million tons an increase of 8.8% year-over-year.

As mentioned earlier, we are off to an excellent start with robust year-over-year sales growth, especially in equipment and automation.

We remain firmly committed to improving our operations and executing our long-term strategic objectives.

With that let me turn the call over to Vince who will provide more detail to the numbers.

Thank you, John.

As John pointed out our first quarter 2012 financial results reflected a significant quarter over quarter improvement in revenue and operating earnings from the first quarter of 2011.

Consolidated sales were up over 21% and operating income improved to $91.7 million.

Incremental operating profit margins hit the 25% mark in the quarter.

On a consolidated basis and compared with the first quarter of 2011, volume increased reported sales by 12.8%, pricing increased sales by 3.7%, and acquisitions contributed an increase of 5.9%.

During March we closed our first transaction of the year acquiring Wear Tech International specialty alloy consumable producer with over $30 million of annual sales.

Our first quarter gross profit margin increased to 29.6% compared with 26.9% in the comparable prior year period.

The increase in gross margin resulted from leverage from increased volumes, better product mix, and higher pricing around the world.

The company recently announced various price increases during the latter part of the first quarter and the beginning of the second quarter of 2012.

We expect these announced price increases to add approximately 3% to the sales line in the second quarter compared with the first quarter of 2012 on a sequential basis.

SG&A expense for the quarter was $123.6 million or 17% of sales compared with approximately $102 million or 17% of sales in the prior year.

The increase in SG&A expense was primarily driven by higher bonus accruals of $11 million as operating profit increased substantially on a year-over-year are basis.

Operating income for the quarter at $92 million was 12.6% of sales compared with about $60 million in the prior year and 9.9% of sales in the same period.

The prior year's quarter included charges of $357,000 related to rationalization acts in Europe that began in 2009.

Excluding these special items in 2011 operating income was $59.8 million or 10% of sales.

Net income for the first quarter was $64.2 million or $0.76 per diluted share compared with a net income of $46.9 million or $0.55 per diluted share in the 2011 first quarter.

That is a 37% increase in net income.

The prior year's quarter did include after tax rationalization charges of $281,000 and a $4.8 million favorable adjustment for tax audit settlements.

Excluding these special items in the prior year, net income was $42.3 million or $0.50 per diluted share.

That adjusted net income increased 52% over the prior year's quarter.

The effective tax rate for the first quarter was 31% compared with a rate of 22.5% in the prior year.

Excluding the prior year special item the adjusted effective tax rate would have been 30.4%, again in the prior year.

Now, moving to the segments.

North America.

On a year-over-year basis, sales in North America were up 22.5% due to volumes.

Prices increased sales by 3.9%.

And finally acquisitions increased sales by 9.7%.

North America improved its EBIT margin to 16.8% of sales a 200 basis point improvement over the prior year.

Strong volume leverage drove the margin expansion.

Europe.

Sales in Europe up 3.3% due to volume and our Russian acquisition added 7.3% to the top line sales.

Prices increased over the prior year by 4.7%.

Foreign exchange decreased sales by 5.2%.

Europe improved its EBIT margin by 480 basis points to 9.8% of sales compared with the 2011 first quarter.

The margin improvements were largely attributable to product mix and improved pricing.

On a year-over-year basis sales in Asia Pacific were relatively flat due to volumes but prices increased sales by 2.2% and foreign exchange increased sales by 3.1%.

The Asia Pacific EBIT margin increased to 2.7% from a break even position in the same quarter in 2011.

Year-over-year improvements were experienced in our largest markets in the region, China, and Australia.

Sales in south America were up 10.5% due to volumes, price increases contributed 9% to sales and foreign exchange decreased sales by approximately 2.6%.

Price increases in south America are above the group average because of higher inflationary rates.

South America improved its EBIT margin by 130 basis points to 7.3% of sales compared with 6% in the first quarter of 2011.

Margin improvements were primarily driven by stronger results in Venezuela.

Compared with 2011 sales in Harris products were up 6.5% due to volume.

Price increases contributed about 90 basis points of sales and foreign exchange decreased sales by 1.4%.

Volume increases were higher in the equipment product line.

Harris products improved its EBIT margin by 30 basis points to 8%.

Operating activities again rated $79 million of cash flows in the first quarter compared with about $17 million in the same period last year.

Cash flows for the quarter reflected higher net income and a lesser need for working capital to support the business in 2012 compared with the prior year.

We had improvements in year-over-year average operating working capital to 21.4% compared with 22.1% at March 31, 2011.

The company closed the quarter with a cash balance of $300 million.

A net cash balance of $275 million.

And a positive net cash to invested capital ratio of 21.4%.

The company invested $12.6 million in capital expenditures in the quarter and our 2012 capital spending plan will likely remain in line with our 2011 spending pattern approximating annual depreciation and amortization expenses.

At this time we estimate a 2012 capital spend of between $60 million and $70 million.

During the quarter we paid cash dividends of $14.2 million, our weighted average shares outstanding for the quarter ending March 31, 2012 were 84,608,000 shares.

And finally we invested $22 million in cash in the acquisition to purchase Wear Tech International.

That is the extent of my prepared comments and with that I would like to open the call for any questions.

Latonya?

Thank you.

(Operator Instructions).

Our first question comes from Thomas Hayes with Thompson Research Group.

Please proceed with your question.

Hi Good morning.

Thanks

Good morning ,

Congratulations on the quarter.

My first question is related to the Asian operating or EBIT margin.

Nice job on that.

It's been a large area of focus for you guys for a while especially with the investments the last couple of years.

Just wondering your thoughts on the sustainability of the margin performance we saw in the first quarter thought this year and what your targets are for a longer term performance in that segment.

You are right, Tom, it has been and will continue to be an area of very significant performance for us.

We remain extremely bullish on the growth opportunities within Asia.

In particular, China and India but with other important segments there and we think that there are some substantial opportunities for us to continue to improve our operating performance in China as well as to continue to grow our sales as the markets stabilize and continue to build.

We have more upside than we have down side but as we have said from time to time we will go through cycles there depending on the market conditions and some will be better cycles than others but over the long-term it will be a very positive investment for our shareholders.

Okay.

And secondly, it sounds like you are seeing good growth from I think you mentioned the equipment upgrade cycle.

Is that end market specific or are you seeing that across all our segments?

I would say it is pretty broad, Tom.

We are seeing pretty significant capital investments in most of the important segments.

Clearly our high technology equipment is driving productivity improvements in many of the key segments around the globe and we are attracting a tremendous amount of interest because of some of the advantages that our equipment has over any competitive offering.

And then the follow-up to that is that our automation participation is increasing with global customers as they deal with either shortages of welders or the need to improve productivity and we are getting more and more attention in that area and again pretty much around the globe even in low cost markets like China and India.

Last question.

You mentioned pricing actions that you implemented late in the quarter.

Can you provide any more color whether it is on machine or consumable price increases?

It is across the board.

We raised prices on both equipment and consumables.

On a global basis?

Yes.

Okay.

Great.

Thanks, guys.

Our next question comes from Walt Liptak with Barrington research.

Please proceed with your question.

Thanks.

Congratulations, guys.

You know, on the pricing question just to follow-up, are you taking up prices the same globally?

Is that what I just heard you say because you have got more or less price increase going on in different parts of the world right now.

We have increases going on in all markets, Walt.

The timing is slightly different and the percentages are slightly different but based on chemical or other raw material cost increases including some instances steel we are increasing prices in all market segments.

Okay.

And is this a later price increase than you normally put in place?

Typically I think you -- I think of you putting them in early part of January part of the year.

Well, in the US it is actually our second price increase this year.

So we did have one early in the year primarily on equipment.

But now we have had a second round that was a true-up based on costs increases in the various different segments.

In the case of other global markets we don't have the kind of history that you would be familiar with of a first quarter kind of North American price increase.

Okay, got it.

And then maybe that will h help to segway to North America where the volume growth was really strong and you made some commentary on there but is there anything that -- I mean there is so much worry out there about industrial production growth moderating and slowing in some end markets.

What kind of sequential trend did you see?

What sectors are contributing to that volume growth?

Well, we have pretty good performance across most of the sectors, Walt.

I would say the heavy growth areas, automotive has been very strong.

Commercial trailer manufacturing has been up.

Rail car manufacturing.

AG and construction equipment have been pretty strong.

I would tend to agree with you in trying to emphasize in my prepared remark is that we're seeing more volatility in the metrics of industrial production, Purchasing Managers Index and while the year-over-year numbers have trended quite positively the sequential kind of numbers again are showing volatility and some softening.

We know the comps are going to get more difficult as we transition in the second half of the year.

A big part of our growth and we think our focus is continuing to focus on market share growth and if we do see softening in the market we will continue to use that as our primary weapon in improving our results.

Okay.

You mentioned that some construction markets you are hopeful might come back.

Those are still about 20% of revenue?

I was talking specifically about construction equipment.

I don't --

Okay.

I don't recall having any conversation about specific construction.

But the demand for construction equipment has been very robust and the same thing is true with the high commodity prices, agricultural equipment is doing exceptionally well.

I got to ask about Europe and the volume growth that you saw there obviously with debt crises and some economies going into recession I thought that volumes with be negative this quarter and the volumes were up 3.5%.

What do you attribute that to?

Is it market share gain?

A couple of things.

Strong sales mix towards machines and equipment where we think that we are gaining some share.

And then also as we talked about in the past couple of quarter's calls Europe is -- has some weakness in the southern part of Europe and some stronger markets that we participate in Africa and the Middle East and so there are parts of Europe that are down, the southern part of Europe, but it is slightly offset by the stronger parts of that region including a product mix that is doing quite well on the machine and equipment side of the business.

Okay.

How much is automotive in Europe?

It's less than 10%.

But it is probably one of the areas where we have had the most success in capturing market share.

Our consumable and equipment platforms are very much tailored towards high automation, the high productivity quality demands in the automotive market and our consumable product lines both our carbon steel and also aluminum are doing exceptionally well in those areas.

Okay.

And then the profit, it is nice to see the profit coming out.

That is the best first quarter profit I have seen in awhile.

Is it cost out or combination of that and pricing and what kind of a price increase are you taking in Europe?

It is a little bit of cost down.

It is pricing improvements and then lastly it is product mix.

Again, the shift towards higher growth on the machine side of the business aids the overall margin in the business.

And I'll let John comment on any pricing changes in Europe.

I think our price increase in the consumable area in the 4% to 5% and that is in core Europe.

It would be a little bit more in Russia in that it is more -- the Middle East and Africa that Vince talked about those markets are generally serviced out of the North American manufacturing platform with the exception and I think a very positive exception that we are now penetrating some of the mid market segments in Africa and the Middle East through our Chinese manufacturing platform that gives us a real cost advantage over either local manufacturers or people servicing that market out of Europe.

Okay, great.

Okay.

And if I could just switch to the acquisition.

Have you talked at all about accretion or what you expect out of the business over the next 12 months?

It will be very modest.

Add a couple cents a share.

Okay.

Thanks very much.

Our next question comes from Steve Barger with KeyBanc Capital markets.

Please proceed with your question.

Good morning, guys.

Hi, Steve.

I want to go back to the mix question.

I understand you are benefiting from an equipment upgrade cycle but what are you doing to drive that shift to the higher value equipment in the chemistry based consumables.

Is it new customers?

Is it sales force having more success selling the new features?

Maybe just flush that out a little.

I think you to go into the tremendous effort we put into R&D during the down cycle of 2009.

We came out with this very strong portfolio of new equipment right after or even during that deep recession but there was a lot of behind the scenes activity to substantially upgrade our equipment line that continued on even beyond that and talk about this Flextec product line that has been the most successful launch of new you equipment that we have had in the history of the company and that is very broad-based equipment and its broad based in terms of the market segments it is applicable to because of the range from a 300 amp all the way up to 600 amp and its also very broad-based in terms of the market segment.

Traditionally inverter machines have not been well accepted in emerging markets and a difficult environments but the technology and robustness of this platform has proven to be a very strong winner and it is a good cost base with excellent margins associated with it.

We have really focused on these market segments that we thought were strong growth segments and designed products that we think hit that sweet spot and we've left many of our competitors in the dust in terms of their product designs.

So that was the follow-up you really have an advantage now over some of your more sophisticated competitors, just forget about the little guys for a minute who maybe didn't invest in the downturn as much as you did.

Is what that what you are saying?

I think that is proving to be pretty much the case.

I guess segwaying into another European question you have seen an acquisition and organizational changes at one of your big competitors is there.

Can you talk about what you are seeing from a competitive standpoint?

Are you able to take share there and would that be from the bigger players or is it from the smaller guys in the market there?

I think it is some of all of the above.

We haven't seen much from the specific competitor that you are talking about.

I think they are still digesting that and taking a look at the changes that they think are appropriate and the opportunities that they want to focus on.

Meantime we are very familiar with the market and where the opportunities lie and were ready to advance our game as others are kind of digesting the opportunities that they have.

Clearly the little guys as we have said forever are a bit disadvantaged and with scale comes the opportunity to invest heavily in R&D and make the necessary changes in our product portfolio.

And to cover a wide range of both geographical and market segments.

For the little guys who can't do that and have relied primarily on personal relationships or specific market niches I think that consolidation will continue to present a good opportunity for us and we are looking at that on a regular basis.

Okay.

Is there any precedent in recent history to a big competitor undergoing a management or ownership change and then seeing them really gear up a push towards new product R&D?

How long does that typically take to have an effect in the market?

Is that a multi year kind of project.

I would say from our experience I can't comment on anybody else's.

Developing the core R&D team, getting a good grasp of the market and the technology needs that is a multi year process.

I have no knowledge of the core competencies of what our competitors are in that area but if you would start from scratch it would be a multi year investment and fairly robust investment in terms of people, time and energy.

Got it, okay.

Switching gears.

There has been a lot of talk about pipelines recently.

How long does a pipeline typically take from when you may see an announcement of a project to when you or whoever might seeing equipment and consumable sales in North America?

I would say in North America that is pretty unpredictable based on the political climate and the volatility that exists in people making long-term strategic kind of decisions.

As we know from the keystone excel pipeline that could go from months and years and maybe even decades depending on the election cycle.

Fortunately, that delay doesn't exist in other parts of the world.

I had some visitors in yesterday from India and they were very bullish on the pipeline activity in India and the ability of governments in that part of the world to recognize the need and to move forward with the investments that are necessary and clearly we see the same type expediency in places like Russia and China.

That being said there is going to be a lot of pipeline activity in North America.

Some of it a lot less politically less sensitive than the keystone pipeline is.

You are seeing alternatives surface to keystone.

There are going to be investments in Canada that are going to hedge their bets about the official or eventual approval of keystone pipeline and most of the pipe mill people we are talking to are becoming more bullish about the future in terms of both the manufacturing of pipe and the installation of pipe around the world.

Oil gas and shale gas are clearly driving that in North America and we are going to see a lot more of that.

I think you have put out a revenue per mile number for pipeline construction in the past.

Can you remind us of what that is?

I could remind you when I go back on take a look at my notes on it.

Vince, do you remember?

I think it is $4,000.

That is what I thought you said in the past, yeah.

That is consumables only.

Probably a little higher than that, Steve.

We quoted that back in the 2008 cycle when things were very robust but as you know steel prices and consumable prices have gone up and then again on the equipment side we are seeing some really good opportunities in that with some of the very large global players.

Okay.

That is great.

One more and I will get back in line.

What percentage of our revenue is from the automotive or I'm sorry automation segment right now?

It's less than 10%.

And is the growth rate significantly higher than the consolidated growth rate?

Are you really seeing -- really seeing that penetration?

It is one of our highest identified growth rates of any product category.

And just so I am' clear that is primarily the robotic arms, rite?

Well It includes the integration of those arms with the machinery and equipment.

The one thing it doesn't include, Steve, that really kind of underestimates the opportunity there is we don't attach the consumable sales to the automation sale but I will tell you when we go sell a robot or hard automation project, a very high percentage of those cases are we enjoying the consumable business relationship with that so the customer has a single source of contact for all of their needs there.

So if we were to do that and capture it would be much higher percent than what we attach to than just on the equipment and the robot side.

Got it.

That's great.

Nice job.

Thanks.

Our next question comes from Mark Douglas with long bow research.

Please proceed with the question.

Good morning, gentlemen.

Good morning, Mark.

A lot of my questions is have been answered.

What is the mix is right now of consumables equipment?

The mix is about two thirds consumables, one third equipment.

66/34.

Okay.

So not much has changed.

Any LIFO effects in the quarter, Vince?

We took about a million three of LIFO charges.

About half of last year's first quarter.

Okay.

Do you think there will be charges throughout the year?

Based on our estimates of inflationary impact of inputs primarily -- primarily raw materials, we are estimating that that would be the charge on a quarterly basis for the remainder of the year.

Right.

Okay.

Then tax rate are we looking at closer to 31% now for 2012 and in large part because of the mix towards nor of North America.

31% is our best estimate today based on our mix of earnings geographically in a heavy emphasis on US earnings growth.

Okay.

And finally, you talked a lot about market share shifts and equipment.

Would that also be true in north America do you think, gaining share at least on the equipment side?

We are doing particularly well in north America on the equipment side of our business.

Okay.

Thank you.

You're welcome.

Our next question comes from Holden Lewis with BB&T Capital Markets.

Please proceed with your question.

Thank you, good morning.

Good morning, Holden.

A couple of things.

First it was a very strong revenue leap.

The one place you didn't see the leverage was on SG&A.

It was flat year-over-year compared to revenues.

Are there new investment programs or what so sort of behind not getting leverage on the SG&A line this quarter?

We had a higher bow he us in mix this year versus --that was in my prepared comments.

Our bonus was up about $11 million year-over-year.

We had some other items that are incremental spends on a year-over-year basis in the transaction support area and legal costs.

Our pension costs were higher on a year-over-year basis by about $2.3 million.

That is split between cost of sales and SG&A.

There is a little bit of a lot of different things, Holden.

We would expect that we are gaining a little bit more leverage as we move throughout the year but we did have a heavier accrual particularly bonus line in the first quarter.

There is nothing like on the legal side or anything like that is some what less volatile and predictable that was a negative in the quarter or anything like that?

We did have higher legal expenses year-over-year that ran through SG&A.

And we are hoping that will diminish as we work our way through the year.

Okay.

All right.

Then sort of getting back on to the gross margin a little bit.

Last quarter you obviously made -- Q4 was the first quarter you made substantial strides at kind of that incremental margin over the past few quarters and then I think we talked about mix which a kind of unpredictable and maybe producing at a higher than seasonally normal type of rate.

Obviously you sort of built on that in Q1.

Are we comfortable when we talk about close to 10% peg margin in Europe now, that we are back profitable in Asia, do we feel comfortable with these levels are in fact operating in nature and therefore sustainable going forward?

You know, more so than perhaps we were before?

Or is there still maybe some moving pieces that are very difficult to peg and maybe these levels may not be sustained?

Well, there is certainly nothing in the quarter that were one off items that aided our margins and our incremental.

From that perspective we won't lose that margin capability.

It is fair to say that our incrementals were aided by a weaker first quarter 2011 and we had a 9.9% or after adjustments a 10% operating profit margin in last year's first quarter.

And those margins did jump up to a higher level in the second and third quarters of 2011.

So we did have some easier comps in this quarter.

We fully expect, Holden, to continue to make improvements in our business.

We made some nice improvements in our pricing disciplines around our world.

We he gained some leverage in volumes in most parts of our world.

The mix did aid us with a higher mix towards equipment, sales and a lesser growth on the consumable side of the business.

So all of those things certainly did aid our quarter.

But in the long-term we expect to continue to work at improving our business and all parts of our world and so our expectations are that we will continue the to incrementally improve margins in all of our business.

Even in the short-term I mean is there any reason to think that mix element is going to shift at all, you know, were you producing above or was is production -- it looked like production was in line with sort of the growth levels.

It doesn't look like there is anything that would sort of drop off if you will.

I think what might be worth mentioning is that as we came out of the significant downturn in 2009 our consumable sales rebounded much more quickly than our machine side of the business.

And as a reminder we lost about half of our volumes in machines and approximately 20% to 25% of our volume in consumables.

Last year our consumable volumes in the base business largely restored themselves to pre2009 levels where as equipment machine sales had not.

Now, those higher growth rates can be attributed to our continuing rebound in the equipment side of the business and then we would estimate that in the course of 2012 that we will be fully restored to those volume levels we had achieved in equipment in 2008.

With that we would expect that our growth rates on the machine side of the business that are aiding our margin and incrementals will start to moderate as we work our way through the year.

Unless we have a reenergizing of our -- the industrial markets around the world we have slower growth on the machine side as -- growth on the machine side as compared to the last few quarters of this year and last year.

But do you feel like your mix of equipment and consumables now is kind of where you were are in 2008?

We will cross that mark this year, probably second and third quarter.

We are not quite there yet but we are getting close.

Now The combination of that plus what seems to be some incremental pricing coming through, you know, back in 2008 before everything fell off a cliff you are running margins in sort of 29% to 31% range on the growth.

If you returned to the mix and the pricing it up, and we already starting at 29 basis for Q1 is that kind of the type of numbers that you would think would be sustainable?

Our margins on the equipment side of the business are as good as or better than where we were at our peak.

So we have improved our business operations both from a cost and pricing perspective on the equipment side of the business at the current volume levels.

So we have had improvements between 2008 and 2012.

The follow-up to that Holden is particularly in Europe and Asia is that the consumable factories are not operating at anywhere near full capacity that they were back in 2007 and 2008.

And quite frankly, we don't expect that to turn around any time soon.

I don't think there is anybody who I have heard or read that is bullish on the turnaround of the European economy.

Most people are kind of surprised it isn't worse than what it has demonstrated to be.

It will be a continuous kind of effort there to improve margins but we made a pretty dramatic shift that we are not chasing volumes, were looking at high value customers and have a pricing discipline improving our model and we expect that to continue both there and in Asia.

Okay.

Actually uptick the incremental margins going forward.

Dependent on the volume levels.

And if the volume levels contract, which many people are predicting that we will see further contraction in Europe, then that will -- pricing level will have a positive impact but I doubt it will offset the volume loss that might happen from an economic slowdown there.

Okay.

Thanks, Ed.

Our next question from Stanley Elliott with Stifel Nicholaus.

You may proceed with your question.

Good morning.

Thank you all for taking my question.

Just curious really, could you walk me through the thought process of prepaying the debt as opposed to rolling it my guess is you guys could pick up 300 basis points on the interest.

And really just more curious I certainly do -- curious, I certainly do appreciate the structure of the capital.

We didn't prepay the debt.

It was scheduled debt payment, repayment in March of 2012 and the final traunch of a private placement we put in place a decade ago.

It wasn't a prepayment, it was schedule.

Okay.

And then as far as the Russian acquisition those will anniversary in the coming quarter?

Our second acquisition in Russia occurred in March of 2011 so those comps will be behind us in the second quarter of this year.

Great.

Thank you very much.

You're welcome.

(Operator Instructions).

Our next question is a follow-up with Walt Liptak from Berrington Research.

I had more questions offer leverage but I think Holden covered them and cut to the big question which is the 25% operating leverage, you know, you have been pretty consistent getting high teens or better leverage the last couple of years.

You would expect that should be sustainable throughout the year given the things we talked about already on the call?

I wouldn't say that would be consistent but certainly when we first came out of the downturn our incrementals were very high and as we worked our way through the recovery from the significant downturn our incrementals have diminished a bit.

They did trough you out a couple of quarters last year in the teens, high teens.

But we did in the fourth quarter of 2011 have a 21% incremental.

So we -- there is a pattern there of very high incrementals coming out of the downturn, incrementals falling during the course of last year are and now we are working those incrementals back up with improvements in our cost base, better pricing discipline and certainly the mix did aid us in this most recent quarter.

As far as sustainability is concerned, we have a sustainable model of improving our business.

We want to drive costs out of our business on a continuous basis.

We want to maximize our pricing capabilities, we want to take share and introduce new products and so we have a business strategy and Model that should show long-term improvement.

Not to say that there won't be volatility from quarter to quarter but we have a full expectation that over the longer term we will continue to improve our margins, expand those margins and get road returns for our shareholders.

Do you have any margin targets or aspirations that you are looking at?

Your operating margins are the best I think that they have ever been.

Not quite.

But we are getting there, Walt.

And we have said in the past that our target is to be 15% plus from an operating profit EBIT margin standpoint on a global basis.

Okay.

And have you put a timeframe on that or a revenue level?

I'm not prepared to do that at this time.

Okay.

Okay.

Thanks, guys.

Our next question is a follow-up from Mark Douglas with long bow he research.

Please proceed with your yes.

Real quickly.

Last quarter you talked about some initiatives in China, one being a plan combining two flex plants into one and reducing some backs office costs.

Are those still yet to be had or did they come in this quarter?

There is still more work to do.

The electrode factory is scheduled to open production in July so we are still in the transitional mode there and we do see that as being a very positive set not only to service the domestic market but to give us the higher volume capacity low cost plant to service other export markets.

Consolidation continues, we should be complete with that sometime in third quarter of this year and then the back office side is fully complete although transitional in terms of moving the customers and getting the full leverage of that but the work that was necessary to do that is complete.

Thank you.

You're welcome Mark.

There are no further questions in the queue at this time.

I would like to turn the call over to Mr.

Petrella for closing comments.

Thank you for joining us on this call.

We look very much forward to discussing our second quarter results towards the end of July and one final announcement we do have our shareholder meeting this week in Cleveland, Ohio and would very much welcome any shareholders that would like to come to our shareholders meeting.

With that talk to you in July.

This concludes today's teleconference.

You may disconnect your lines at this time and thank you for your participation.