Lincoln Electric Holdings Inc (LECO) 2012 Q3 法說會逐字稿

Greetings, and welcome to the Lincoln Electric third quarter 2012 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, the Chief Financial Officer for Lincoln Electric.

Thank you sir, you may begin.

And thank you, Dan, and good morning to all of you joining us today.

Welcome to Lincoln Electric's 2012 third quarter financial results conference call.

We released results for the quarter and the 9 month period this morning prior to the market's open.

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

Also joining the call today is Chris Mapes, Lincoln's Chief Operating Officer.

Chris will have comments on the segments, and after Chris gives his remarks I will review in more detail the numbers.

A slide presentation is part of today's discussion and is available on the Lincoln website under the investor tab as part of today's web cast.

The presentation will also be posted along with a replay of today's web cast on the Company's website later this afternoon.

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 SEC filing on forms 10-K and 10-Q.

Now to let me turn the call over to John Stropki.

John?

Thank you, Vince, and good morning to everyone joining us today.

Lincoln's operating results for the 2012 third quarter were excellent.

We saw significant margin expansion and generated very strong operating cash flows.

This strong operating performance was achieved even as the North American economy experienced slowing growth rates and we witnessed a weak macroeconomic environment in many of our international markets.

Sales on a consolidated basis in the quarter, including a reduction of $21 million caused by FX translations, were down 0.6% to $697 million.

Without FX, sales were up 2.4%.

Operating income increased to 18.5% to $88.7 million, or 12.7% of sales.

And adjusted operating income increased 22.6% to $91.8 million, or 13.2% of sales.

Net income was up 16.6% to $64.8 million, or $0.77 per diluted share, and adjusted income increased 21.5% to $67.5 million, or $0.80 per diluted share.

These results reflect the hard work of our management team and our global work force, and their combined focus to our 2020 long term vision which focuses on global growth and operational improvement strategies.

Before Chris Mapes takes over the results of the Lincoln operating segments, let me provide a quick overview and comments of what we see happening in the industrial segments.

In heavy fabrication, the construction equipment industry worldwide is experiencing a slowdown.

In addition, overproduction during the last quarter of 2011 and into Q1 2012 have resulted in an overstock condition with high inventories, especially in the China market.

Also, falling commodity prices are affecting the mining industry segment, and some manufacturers report that they are starting to see some order cancellations and push backs on the delivery dates for new equipment.

As a result, heavy equipment manufacturers are announcing reduced build scheduled and rolling planned shutdowns in response to lower demand for both earth moving and mining products.

The market has slowly started to reshape its size and is getting aligned to the expected growth rates of the future.

However, we believe that the long-term prospects in this segment continue to look very promising.

In the automotive segment, the global market demand for light vehicles is softening.

The exception being in the US, where sales remain quite strong.

In Asia, China is also slowing, but overall China will still show modest growth this year over last year, and this year-over-year growth trend is likely to continue for many years.

In Europe, the automotive market, like the lingering Euro zone concerns, is deteriorating with demand reaching new lows.

Despite the softer demand of the segment, we continued to expand and improve our automotive customer relationships around the world, and have recently hosted a number of important high level visits for our key automotive customers at our main manufacturing campuses around the world, and at our R&D headquarters here in Cleveland.

In the global offshore segment, investment by the international super majors and the nationalized oil companies continue to grow double digits through Q3 2012.

This activity is led by the emerging economies, like Brazil, who have set off on an aggressive path toward energy independence, and are using local contact requirements to aid their local manufacturing and construction economies.

In these growth areas of the offshore construction market, our subsidiaries like Lincoln Electric Brazil are benefiting from the strong focus in the segment, and we are clearly becoming the preferred offshore shipyard equipment provider with good prospects for excellent consumable leverage.

Today our strategy has measurable success as we have realized significant orders for new equipment and increased requests to qualify our new offshore focus consumable solutions, with a number of leading subcontractors supplying the key exploration and production companies in Brazil and throughout the Latin American region.

In the pipe mill industry segment, we have held a number of training seminars and business with key customers in all regions of the globe, working to help them upgrade their facilities and to provide Lincoln Welding Solutions to meet their needs.

Orders from a number of regional customers are increasing.

In Russia, we received a significant pipe mill order for welding consumables and we are seeing relatively strong activities from the pipe mills in India.

In the Middle East, customer bookings continue to be strong including a large equipment order for Uhrhan & Schwill, our German subsidiary.

The process and power generation industry segment continues to see significant movement in a number of key subsets.

We had a successful quarter with the execution of our key projects across the spectrum of the power and process sector.

In spite of the significant head winds in some key markets like wind power in the US, our strong technical representatives in North America and throughout the world, combined with our new products and welding solution offerings, continue to provide Lincoln with a competitive advantage to actively leverage sales at large highly technical projects.

On a global basis, we have achieved increased sales to energy related projects all around the world.

That's a brief look at the industry segments.

Next Chris will report on the operating segments.

Thank you, John.

Let's start in North America.

There continues to be overall uneasiness about the macroeconomic landscape due to the international weaknesses.

However, North America continues to grow despite these head winds.

Third party sales improved 13.1% from the prior year to $390 million.

The positive impact from acquisitions was significant as we continued to execute on our strategy of aggressively pursuing strategic opportunity.

As you know, since 2001, we made five acquisitions in North America.

In 2011, we acquired Arc Products, Techalloy, and Torchmate.

Arc Products, located in San Diego, California, manufactures orbital TIG welding systems.

Techalloy, with operations in Baltimore, Maryland, manufactures nickel, stainless weld wire and electrodes.

Torchmate, located in Reno, Nevada, manufactures cutting tables.

During 2012, we acquired Weartech and Wayne Trail.

Weartech, located in Anaheim, California, and Port Talbot Wales, was acquired in March, and manufactures Cobalt-Based consumable products.

Wayne Trail, located in Fort Laramie, Ohio, was acquired in May of this year and manufactures integrated automated systems.

These two acquisitions made up the majority of the 7.8% sales growth related to acquisitions.

As we have discussed before, we follow a number of economic measurements that affect our industry.

Industrial activity represented in key measures such as industrial production and capacity utilization across factories in the United States are running slightly ahead of last year and flat with second quarter 2012.

Total manufacturing industrial production in the US, excluding the high-tech segment, was trending 2.8% ahead of 2011 as of September 2012, while capacity utilization was running at approximately 77%.

The purchaser's managers index and the export orders index improved slightly in September after several months of slight decline.

Looking ahead at Europe, Russia, Africa and the Middle East, sales in the third quarter were down 9.4% to $116.3 million compared to prior year, excluding FX impacts.

This was primarily driven by reductions in general purpose machine sales, which we believe is reflective of the economic environment in the general fabrication market throughout the European region.

Excluding foreign exchange impacts, our year to date European sales were down 1.3% compared to 2011, with decreases in Spain and Southern Europe being offset by positive year to year date growth in the UK, Africa, and the Middle East.

Year to date regional sales of equipment products remain up over prior year, primarily driven by Lincoln's inverter-based power supplies, including the Power Wave technology products that continue to be in high demand for their ability to optimize the arc welding process.

In Q3, our sales of consumable products in the quarter were ahead of prior year as a result of demand for our European alloy consumables.

The consolidation of our Russian manufacturing operations is on schedule and expected to be completed by early next year.

Significant cost reductions, product optimizations, and efficiency improvements will result, which we are confident will provide because strong and sustainable platform from which to continue to leverage our global product offering to the Russian welding market.

Demand for our products remains strong in the Middle East, where sales, volumes and margins are well ahead of prior year.

We expect to be established as a legal entity in Dubai in Q4, and are confident that this will accelerate our double digit growth in this region.

This is another example following our global expansion strategy of leveraging a solid imported product base with infrastructure that enables us to access more local markets in local currencies that are often constrained or even inaccessible from a purely imported approach.

Asia Pacific.

In Lincoln Asia Pacific during the third quarter, results reflected economic head winds prevailing there with Q3 sales posting a decline of 22%.

Ongoing weakness in several key geographies and segments continued to challenge our revenue base.

However, our restructuring and price management efforts resulted in additional progress in improving profitability levels in this tough environment.

In China, the construction equipment and ship building segments, our two largest serve markets, remain very weak, with most major customers reporting production levels well below prior year.

The automotive segment has remained stable but below our expectations, while the energy in offshore segments are still showing strengths.

Throughout the quarter we made important progress in reshaping our manufacturing operations throughout the region and strengthened our commercial platform.

When markets in the region do begin to recover, we believe we are well positioned to see disproportionate improvements in the results of our Asia businesses.

In the South America welding segment, on a year-over-year basis Lincoln sales increased slightly by 0.9% to $44.5 million, with strong growth in Venezuela offsetting some weakness across other geographies in the region.

On a sequential basis, sales for the quarter experienced a sharp increase of 20% from the second quarter of 2012, led by sales in Venezuela and Columbia.

Weaker global demand continues to impact expectations of 2012 GDP growth for the region.

Brazil, the region's largest economy, is now expected to grow between 1.5% and 1.8% in 2012, down from 2.4% expected just three months ago, and 4% expected earlier in the year.

The rest of the regional economy's expected growth rate remains within 3% to 5%.

As in the previous quarter, we continued to see significant investment in growth in some of our key industrial segments, specifically in the energy segments of oil and gas.

From exploration, extraction to transportation, as well as all types of power generation, the demand for new energy sources continues in this market.

Peru and Colombia have some large pipeline projects that are using our total welding solutions offering for both equipment and consumables.

Though automotive production remains flat in the region, there are a number of new manufacturers entering Brazil, and our global tier part supply partners are following them using our patented Power Wave technology and welding consumables.

Our Harris Products Group.

The Harris businesses had net sales for the quarter at $81.9 million.

This result is 4.9% lower than the previous year sales results, despite the increase in volume in all channels of the business.

Variable metal prices, primarily copper and silver, negatively impacted global consumable sales along with negative impacts from foreign currency translation, which affected our global equipment business.

Consumable volumes were up 7.8%, due to strong international orders, predominantly in the Middle East and Latin America.

The equipment business had volume increases of 6.6% worldwide.

Increases in this segment came primarily from our international sales, which includes new business in South Africa, the Middle East, and the Nordic region in Europe.

The consumable business, which is predominantly brazing and soldering alloys, is manufactured in our Mason, Ohio manufacturing plant.

And this month, the Harris Mason plant was selected as finalist in the best plants program held each year by Industry Week.

This recognition coincides with the recent award, where they received the Lincoln Chairman's award for environmental health and safety excellence, among all of the Lincoln electric facilities globally, and our Company would like to congratulate them on this recent achievement.

That's a round up of the operating segments.

Next, Vince will provide more financial details.

Thank you, Chris.

Our third quarter 2012 financial results reflected a significant quarter over quarter improvement in operating earnings from the third quarter of 2011.

Consolidated sales were down slightly, partially affected by foreign exchange translation decreases of $21 million.

However, operating income improved to $88.7 million, an 18.5% year-over-year increase.

The third quarter did have one less billing day than the prior year, and approximately 1.6% detrimental impact to sales.

The significant increase in operating margins, in spite of flat revenue, is attributable to an improved sales mix as well as our efforts to pair less profitable business, particularly in Europe and Asia.

On a consolidated basis and compared with the third quarter of 2011, volume decreased reported sales by 2.2%, pricing increased sales by 80 basis points, and acquisitions contributed an increase of 3.8%.

Foreign currency effects decreased sales by 3%.

The third quarter gross profit margins increased to 30.6%, compared with 26.4% in the comparable prior year period.

The increase in gross margin resulted from improved pricing and favorable sales mix.

LIFO credits of $2.3 million were recorded in the third quarter, bringing the total LIFO credit for the nine month period to $2.4 million.

SG&A expense for the quarter was $121.6 million, or 17.4% of sales, compared with the $110.6 million, or 15.8% of sales in the prior year's period.

The increase in SG&A expense was driven by higher bonus accruals and increased cost from acquisitions.

Foreign currency translations decreased reported SG&A expenses by $3 million in the quarter.

Operating income for the quarter at $88.7 million was 12.7% of sales, compared with $74.8 million, or 10.7% of sales, in the same year ago quarter, an improvement of 200 basis points.

The quarter included rationalization charges of $3 million, and these charges include actions take in Asia to restructure Australian manufacturing operations, and Europe to combine two Russian manufacturing plants, and to rationalize the plant in Italy, and in North America to consolidate two plant operations.

We expect the rationalization actions to result in $9 million to $10 million of annualized cost savings most of which will be fully realized in 2013.

Excluding these special items, operating income was $91.8 million, or 13.2% of sales.

Net income for the second quarter -- third quarter, that is, was $64.8 million, or $0.77 per diluted share, compared with a net income of $55.5 million, or $0.66 per diluted share, in the 2011 third quarter.

That's a 17% increase in diluted earnings per share.

Excluding special items, net income was $67.5 million, or $0.80 per diluted share in the third quarter, and that's a 21% year-over-year increase.

The effective tax rate for the third quarter was 28.8%, compared with 27% in 2011.

The effective tax rate is higher than the prior year's rate primarily because of the mix of income that was earned in higher tax rate jurisdictions.

The year to date effective tax rate was 30.8% in 2012 for the nine month period.

Now moving to the segments.

On a year-over-year basis sales in North America were up 13.1%, as volume contributed 2.7%, price increases represented 2.7%, and acquisitions added 7.8%.

North America improved its adjusted EBIT margin in 2012 to 16.9% of sales, a 280 basis point improvement over the prior year.

Volume leverage and good cost control drove this margin expansion.

Sales in Europe were down 18.6% and volume decreased sales by 8.9%.

Prices declined slightly over the prior year by 50 basis points.

Foreign exchange decreased sales by 9.2%.

The volume declines were more pronounced in southern Europe and Russia with more stable environments experienced in the UK, Germany, and France.

Foreign exchange impact was caused by a significant year-over-year weakening of the Euro against the dollar.

Excluding special items, Europe achieved in EBIT margin of 7.9% of sales, an improvement of 10 basis points.

The higher margins were the results of improved product mix and better cost price relationship.

In Asia, on a year-over-year basis, sales in Asia Pacific were down 22%, volume contributed 19.4% of this decline.

Prices decreased sales by 1.1%, and foreign exchange decreased sales by another 1.5%.

The volume declines as Chris noted were primarily related to the weakness in ship building and the construction and related markets in China.

Asia Pacific suggested EBIT margin was 2.6% in the quarter, compared with 1.9% in the prior year.

The improvement in EBIT margins was the result of a strong performance in Australia, as well as an improved mix.

Sales in South America were up 90 basis points, though volume reduced sales by 2.8%.

Price increases contributed 11.6% to sales, and foreign exchange decreased sales by 7.9%.

The volume decreases were the result of a softening demand in most markets outside of Venezuela.

Price increases in South America are above the group average because of higher inflation rates primarily, again, in Venezuela.

Excluding special items, South America's EBIT margin increased to 17% of sales, compared with 9.1% in the third quarter of 2011.

A very strong operating result in Venezuela drove this margin improvement.

A future devaluation of the Venezuelan currency will result in foreign exchange losses and lower earnings prospectively.

Compared with 2011, sales in the Harris Products Group were down 4.9%.

However, volume increased sales by 7.5%, price decreases reduced sales by 8.4%, and foreign exchange decreased sales by 4%.

The volume increases were experienced across our product portfolio in both equipment and consumables, particularly in the international market.

Price decreases were largely related to the decrease in metals cost, primarily silver and copper, from the prior year's same period.

The Harris Products Group improved its EBIT margin by 360 basis points to 9.2%.

The strong volume increases in the equipment product line, as well as good SG&A cost control, led to these margin expansions.

Operating activities generated $82.5 million of cash flows in the third quarter compared with $84.8 million in the same period last year.

The quarter's operating cash flows were reduced by a $56 million income tax deposit related to a Canadian tax dispute.

Excluding this deposit, operating cash flows would have been $138 million in the quarter.

Cash flows for the quarter reflected improved year-over-year working capital management, as well as higher earnings.

Year to date operating cash flows totaled $243 million.

The Company closed the quarter with a cash balance of $341 million, and a net cash balance of $320 million.

The Company invested $39.3 million in capital expenditures in the nine month period.

We now estimate a 2012 capital spend of between $50 million and $55 million for the full year.

Through September 30, we have contributed $53 million to our US pension plans, and expect to contribute a total of $62 million for the fiscal 2012 year.

During the quarter, we paid cash dividends of $14.1 million, and $42.5 million for the nine month period.

Our weighted average shares outstanding for the quarter ending September 30, 2012 were 83,916,000 shares.

Finally, we purchased $20 million of treasury stock under our existing share repurchase program in the quarter, and $60.2 million for the full nine month period.

With that, I will like to open the call up to questions.

Dan?

Thank you.

(Operator Instructions) Joe Mondillo, Sidoti and Company.

Hey, you guys, good morning.

First question just regarding the South America segment.

You talked about how the Venezuela margins really brought that segment up.

Could you give a little more color on that, and how big this Venezuela make up of that segment?

And what you expect looking forward?

Well, first, Venezuela is a hyper inflationary economy with a government controlled exchange regime.

So that means there is an official rate and that rate is 4.2%, and then an unofficial rate and that rate is now somewhere north of 12%, 13%.

And so what that means in terms of operating our business is that we operate under the premise that we would price our products more in line with the unofficial rate, and that unofficial rate has moved significantly and has accelerated upward in the past six to nine months.

What that means is that we are raising our prices very rapidly there to try to maintain a very high margin, realizing that eventually there will be a devaluation in the local currency, the bolívar.

And so looking forward, we believe that, certainly in the near term, the Venezuelan government and Chavez will need to revalue that currency and devalue the currency significantly.

Depending upon what that devaluation might be, our earnings will be compressed from that 17% EBIT margin that we achieved in the third quarter.

And then, secondly, we will need to take a relatively significant foreign exchange loss as a result of the devaluation.

There is a great deal of speculation of when that will occur.

Most recently, many of the commentators on the Venzuelan economy have said that once Chavez was reelected that sometime after his election, and perhaps early in the first quarter of next year, 2013, we will see that readjustment in the currency.

Okay.

So is it fair to say that the fourth quarter could be up near this middle teen margin until maybe early next year when we start seeing that trending down to a more normalized 8% to 10% range?

Yes, as long as the currency doesn't devalue, we don't see anything in the Venezuelan economy or, broadly, the South American economy, that will take us off a higher type of EBIT margin in that kind of a range.

Okay, great.

Then second question, and I will get back in queue.

In terms of the Asian market, you saw a pretty big sequential down climb, and you described that as being the ship building and just overall activity in China.

Directionally, how are you looking at that part of the business?

Are we expecting a stabilization around this range, or do you expect further deterioration or how are you looking at that?

That's not an easy question to answer, Joe, but I would say that most of the economists that we follow and most of the commentary that we see coming out of China is probably more positive than negative from the standpoint that they are going through this power transition, and most people believe that they will want the new Premier to get off on the right foot in terms of the economic model that is in place.

But either way, upward or downward, is pretty speculative at this particular point in time.

And I think the best metric to really follow what's happening in China, and even on a global footprint, is what's going on in the steel industry, particularly there.

My view is it that it has stabilized and they seem to be increasing the production schedules slightly.

So we're mildly optimistic that the thing has bottomed out, but as you know, there are a lot of dynamics that go into that market and none of which are within our control.

Okay.

Thank you.

Just add to that, Joe, in terms of the declines in the third quarter on a year-over-year basis, those are relatively consistent with what we saw in the second quarter.

So, our view would be there hasn't been a material continual deterioration, but there has been a trending slightly down third quarter versus that.

And maybe just one follow-up point, Joe, is if -- we have recognized that it's not likely that the ship building industry is going to have a material turnaround in the short order.

So we are really refocusing our sales effort and our marketing efforts, looking at those segments which we think will do better in this softer China economy.

Walt Liptak, Barrington Research.

Hi.

Thanks, good morning, everyone.

Great quarter, guys.

I wonder if we can continue the question throughout that talked about Europe and maybe, maybe not China bottoming out.

What do you think about Europe?

Your volumes year-over-year were the 8.9% volume decline is a little better than last quarter, down 9.1%.

And I wonder if Europe, you think, is bottoming out?

Yes, Walt, this is Chris.

We just recently completed a broad business review in Europe over the last several weeks.

And although, certainly, there is still some caution around various segments across the European community, I do think that we feel confident that we probably have seen the significant portion of compression across the segments that we are participating in then.

We have seen some strength in some of our higher value Power Wave products, and some opportunities, especially in Russia.

So I think it's unfortunate, it's much like John's comments toward Asia.

There are a host of elements that could become more detrimental relative to the European solution for the euro crisis, and couple of other elements there relative to leadership within a couple of those countries.

But I feel that we've probably seen the significant compression in those markets and actually begin to see some stabilization there quarter to quarter.

Okay.

Was there any discernible trend during the quarter, where one month may have been better than another, and how did you end the quarter?

Was it better than how you entered it?

I don't think so.

August is always a very weak month in the quarter in Europe, as you know.

But I wouldn't say that there was discernible trend that would give us a better view of anything other than a stable and slightly declining environment in the fourth quarter.

And just as a follow-up, Walt, if you remember our European segment includes Russia and the Middle East and Africa.

And while the European continent surely has issues that are being addressed, that are likely to be addressed for some time, we have seen some very positive trend lines in the Middle East, some very positive trend lines in Africa, and we're quite pleased with the progress that we are making in consolidating the businesses in Russia that Chris touched on in his prepared remarks.

Very soon, we will be operating one plant instead of two.

That will come with some nice head count reductions, and also a reduction in rent that will help improve the margins in our Russian business.

And we also think we are getting some very good traction in establishing the sales organization there that will look more like a Lincoln sales organization than that that we inherited from the acquisitions that we made.

Okay, alright.

That sounds good.

In your commentary about Europe, I think you were talking about profitability, you mentioned mix and price cost as two of the things that were better this quarter.

I wonder if we could get a bit more color on that?

The mix is simply the shedding of some of the business that we had in Russia that was unattractive to us, as well as mix in the product portfolio towards our equipment line as compared with the consumable.

On the price cost side, raw materials are continuing to slide in -- particularly on the steel purchases around our world, and certainly Europe is no exception to that.

And so there is an element of that as well in our improved margin in the face of the 9%-10% decline in volumes.

Okay, thanks.

And then, if you don't mind I'd like to ask one more, about -- is your international businesses look like they are bottoming, and certainly the profitability is improving.

North American volumes decelerated again from earlier in the year.

And are you thinking that this is -- are we bottoming out in North America, too, in terms of that deceleration?

Or how are you thinking about North America?

I think, Walt, there are a lot of people sitting on the sidelines in terms of equipment investments.

I think everybody is concerned over what's going to happen with the election, and the outcome both of the presidential election and the balance of power in the Congress and the Senate and in the House, and what that might mean in terms of how and when the fiscal cliff issue is addressed.

I believe there is pent up demand.

When that demand is released, I think we will depend a lot on what happens in the election.

Clearly these aren't the best of economic times in the US, and it's, I think, evident in a lot of sectors.

But the US is clearly the strongest global economy right now, and we are hopeful that the outcome of the election will allow us to take advantage of that.

Okay.

Did you see any kind of inventory draw down during the quarter in North America from distributors?

I don't think so, no.

I think we've had that question a lot.

Our distributors, I think, run a pretty lean operation, we are very efficient in resupplying them, we have 95% plus same day delivery.

We have a number of warehouses that are strategically located.

So we don't see big inventory builds or down grades based on short term economic models.

Okay.

Got it.

Thank you.

Brian Rayle, Northcoast Research.

Good morning, congratulations on the quarter.

Most of the questions on the sales trends have been answered.

But I was wondering, with the slowdown you see in more outside of the US, if this changes any of your thought processes on acquisitions.

Are people more likely to deal, less likely to deal?

If so, where they are targeted?

Well, I will certainly make sure that we make it clear that it certainly doesn't change our opinion about continuing to be an acquisitive Company as we expand our portfolio and continue to execute on our 20/20 vision that we've shared with all of our employees in the market.

And I'm not sure at this point that necessarily the economic activities that we see out there have significantly changed the market's prospective on acquisitions, or whether we have any more market participants that are interested in potentially entering into discussions.

We are very active globally, we will continue to be very active globally, in identifying and finding those products, those markets, and those other strategic values that we might be able to find from properties or people around the world.

And I certainly would hope that these economic shifts would create more opportunities, but I certainly can't share with you today that I feel that's necessarily the case.

Fair enough.

Thank you very much.

Brian, it just makes valuation that much more difficult.

Most people that are selling their businesses, or companies that are selling their business, like to paint a very pretty picture about what the future is going look like.

But, there has to be some sense of realism in that, and I think that we've demonstrated for many years now that we can be a very patient, and we are a very diligent, acquirer.

We pay fair valuations but we won't outreach the fair valuation for any short term benefit that it might provide.

And that was kind of what I was driving at, was we have seen in some other markets people's expectation of the long term viability, or -- not viability but profitability, of their businesses make the acquisition market a little bit more liquid than where it's been in the past, and I was wondering where that puts you guys.

But, I guess it has really not changed.

Well, we operate businesses all around the globe.

I think we are sensitized as anybody what the economic conditions are, what the short and near term futures look like.

We know how to make money in welding businesses, and we know when we acquire companies what we can do to turn around their model.

And we've demonstrated that with the number of acquisitions that Chris talked about here in North America, and we've demonstrated the number of acquisitions on the global footprint.

And we will stay true to our course and our convictions as we look to acquire companies.

Great.

Thank you very much.

Liam Burke, Janney Capital.

Yes, thank you, good morning.

John, in your earlier comments you spoke about the general outlook on the automotive industry worldwide, particularly Europe being weak.

Not surprising.

But you did mention that your relationships are improving.

Could you give us some sense as to why the automotive customers are coming more towards you, implying that it's at the expensive of competitors?

Yes, Liam, I think there is a major shift in what's happening in the automotive segment.

I was in Europe two or three weeks ago and visited all of the major manufacturers in Germany, and there are very consistent theme or themes.

One is automation is absolute in terms how cars are welded today, and very sophisticated automation.

And we can play exceptionally well in that with our power source technology that most other companies do not have, and more importantly, don't have the service structure behind to support.

And then secondly, the consistency of our welding consumables fill a demand where you need exceptionally high uptime in order to be successful in these automation endeavors that the companies are going through.

And other, particularly local, small, family run manufacturers of welding consumables can't offer that kind of consistency and global support.

And then the third, which I think is even as if not more significant, we are the only Company from my perspective that can offer a global service and quality consistence product in any location where automotive companies are expanding around the globe.

So we are the preferred supplier for all three of those reasons, and we are gaining significant traction in that segment and at a very profitable pace.

Great.

Thank you.

Stanley Elliott, Stifel Nicolaus.

Good morning, thank you all for taking my call.

Quick question, did you all mention what the exports were in the quarter relative to the rest of the business?

Whether up, down, et cetera?

No.

We didn't.

But they were flattish out of the US on a year-over-year basis.

And when I think about the pricing environment, you talked about the raw materials being a benefit in the quarter to margins.

But as we are looking at expectations through the remainder of the year and into 2013, how difficult do you envision it being able to pass through pricing if you have a raw material, deflationary-type of environment?

Or is this a situation where your margins can continue to benefit from the mix improvement that you have within the Company and also their prior restructuring efforts?

Stanley, I would say that if you look at our sales mix over the past several quarters, you will see sequentially that the welding businesses around our world have narrowed their year over year price improvement profile.

And I believe that will continue going into the fourth quarter and into next year, and will become increasingly more difficult with the macroeconomic backdrop in terms of declining volumes in the international sector, as well as more difficult comps from a North American perspective, for volumes to provide the backdrop for price increases.

So that, coupled with continuing declining important raw inputs, would suggest that as we go forward, that that trend of narrowing price increases in our welding model will continue.

Okay, and as far as energy, how big a piece of that -- of your overall portfolio is that now, about 25%, something like that?

Yes, we would estimate 20% to 25%.

And then finally for me, people have mentioned the significant pipe mill order in Russia.

When will that start to flow through into the numbers?

Well, it's a consumable order for a fairly large project and we are filling those orders right now, will be through the fourth quarter and maybe a little bit into the first quarter.

But the activity in Russia has picked up nicely with the pipe mills and that's positive news for us.

A lot of the pipe laying there takes place in the winter months because they need it to be frozen tundra to get the equipment in and out of there and you would think it would be the summer time, it's really the winter cycle that most fulfilled.

Great, guys.

Thank you very much and best of luck.

(Operator Instructions) Steve Barger, Keybanc Capital Markets.

Hi, good morning, guys.

John, you started the call with a walk through some end market conditions that were cautious for heavy equipment and mining machines.

We've all heard about lower production for the next few quarters.

I'm wondering, are you really proactively adjusting your own plan?

And where, specifically, in some of the regions to get production and inventory in line?

Are you flexing hours or anything like that?

It really doesn't require a major shift for us.

These are mostly consumable issues, and so we will build -- slow down the build schedule on consumables.

But, as we discussed a lot, it's just -- we build the order, almost, on the welding consumable sides of things.

Yes, we would reduce our production levels, and have, in places like China where there's clearly less demand.

Should we be thinking that that drives any margin pressure in the near term?

Or can you adjust your cost schedule in line with that?

It's all a matter of relativity and degrees.

I think we've done a very good job, Steve, during the course of this year, particularly in the international arena, adjusting our productive labor and our costs to align ourselves with existing volumes.

Europe, volume's down 9%-10% margin expansion.

(multiple speakers) I think down 22% margin expansion.

So we are every day tweaking and adjusting our cost structure to align it with the world's capacity requirements.

We are still in a positive situation here in North America, but we have demonstrated in the past, time and time again, that our North American business is probably our most flexible cost relationship of any business in the world.

But there is a time where volume declines can exceed our ability to take out costs and there is a base line fixed overhead that cannot be removed unless you start making bigger decisions on plant consolidations.

But we like what we have done, we think in this environment that we can continue to put positive results on the board, but it depends on much more volume deterioration we have going forward.

Got it, thanks for the color.

So in North America, specifically, volume and price were both positive, but are you seeing -- is the decline in volume that you might be seeing in the North American markets moderate enough that you feel like you are in a good position to be able to stay in front of it?

Or have you seen indications that things could slow more rapidly?

Well, first I'll say there weren't declines in volumes.

We are still growing, it's a deceleration in the rate of growth, but we have solid orders and revenue levels in the third quarter as compared to the second, as well as certainly the prior year.

So we are not in a contracting situation here in North America, the business is stable and still growing, albeit at a more modest pace.

And certainly, the comps are difficult and will be difficult for the next few quarters.

Yes, I know, I meant for the whole Company.

Obviously, you had good volume and price in North America in the quarter.

Of the $27 million in acquisition revenue contribution in the quarter, can you split that out between Wayne Trail and Weartech?

Well, Wayne Trail is about half of it, and then Weartech is the bulk of the remainder.

We do have Torchmate and Techalloy that are contributing this year that weren't contributing last year, but roughly speaking Harris -- or, Wayne Trails is about half.

And EBIT contribution in general from the acquisitions?

I won't ask you to break it out by individuals.

I don't have that at my fingertips, in terms of EBIT contribution.

But I would tell you that the -- at this time, there is a detrimental impact between the acquisitions and the core business of 40 basis points in the quarter.

So our EBIT margins are 40 basis points lower on a North American basis if you blend in these acquisitions.

Got it, that's great.

Last one from me, is there typically an impact, a positive benefit, from clean up or rebuilding after a big hurricane or storm comes through?

Does that give you a bump, or how should we think about that?

I think it's going to depend what kind of damage.

I would expect construction activity in the East Coast is clearly going to have to pick up.

There have been a lot of destruction of homes and highways, I think a lot yet to be known.

So the construction activity is going to pick up there.

What short-term impact that's going to have is difficult to say.

If you remember the hurricane in the Gulf Coast area, we got a tremendous benefit because there was a lot of destruction of manufacturing assets from a lot of our large coastal customers.

I don't expect that in New Jersey or New York.

There aren't heavy fabrication or manufacturing facilities located there because of the cost elements of it.

But, I would assume there is going to be a lot of contractors who lost the manufacturing assets, and they will be looking to replace those, and clearly the insurance companies will pay for that.

So there should be some moderate benefit, but nothing like what we experienced I think along the Gulf Coast a few years ago.

Got it.

Okay, thanks very much.

Jason Rodgers, Great Lakes Review.

Good morning.

Looking at your opportunities now in Dubai, with the local market presence.

I wonder if you could talk about that, and how large those opportunities might be?

Well, I think the important thing is to recognize the strategy associated with our further development of the products and services that we provide into the broad Middle East marketplace.

Dubai has been known, and is currently, a central hub for commerce for many elements of that region.

By us expanding our presence by placing a legal entity in Dubai, it's also going to allow us to put more feet on the street.

It's going to allow us to expand our presence and our products and services in those key markets.

It's going to allow us to more easily have product there on site for distributors as well as OEMs that have immediate demand.

It has been more challenging for us to meet some of those needs as we have been a market participant in that region for many, many years.

So, this is not -- this is just an acceleration of our strategy and our presence in that marketplace.

I'm certainly not comfortable in trying to estimate what that impact will be.

But we are confident that this will continue our ability to show very significant growth in our business in that region, which we have been experiencing there really for the last several years.

One other positive element of our strategy in the Middle East and headquartered in Dubai is the fact that we have substantially grown our head count there to take advantage of the opportunities that exist in many of the countries in the Middle East and Africa.

But unlike a lot of our international competitors, we have done it with local people who are very accustomed to the local countries of which we are doing business with there.

So they speak the language, they can move around freely and not have some the challenges that ex-Pats, be they European or US, would have.

So we are very confident in what we have been able to do and the great talent that we have been able to acquire in that region that is going to fit our model of value added selling in a very professional and dynamic way.

Okay.

Then looking at the tax rate, assuming there is no significant changes in the international markets, would you expect your tax rate in the fourth quarter to be around the same level as the third?

No, that's why I mentioned what the year to date rate was, at 30.8%.

That would be a better indicator at the end of the third quarter of what the full year and fourth quarter rate might be.

So I would say that a higher rate in the third quarter will likely prevail, something between 30% and 31% would be a good estimate at this point in time.

Okay.

Then looking into 2013, do you have any early estimates for CapEx?

Well, at this point in time we -- we were in the process of completing our operating plan for 2013.

I wouldn't expect us to be in excess of what our depreciation and amortization is for this year.

So it would be somewhere around $55 million to $65 million if I were to give a broad estimate for next year.

Thank you.

It appears we have no further questions at this time.

I would now like to turn the floor back to management for closing comments.

Thank you, Dan, and all for joining us on this third quarter call.

We look very much forward to talking to you in reviewing the fourth quarter and full year sometime towards the end of February 2013.

Thank you very much.

This concludes today's teleconference.

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