Lincoln Electric Holdings Inc (LECO) 2012 Q4 法說會逐字稿

Greetings, and welcome to the Lincoln Electric 2012 fourth-quarter and full-year 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, Vincent Petrella, CFO.

Thank you, sir, you may begin.

Thank you, Dan, and good morning to all of you.

Welcome to the Lincoln Electric 2012 fourth-quarter conference call.

We released financial results for 2012 fourth quarter and full year this morning, prior to the market open.

Copies are available in the Lincoln Electric website or by contacting our Investor Relations office at 216-383-4893.

Joining me on the call today are John Stropki, Lincoln's Executive Chairman; and Chris Mapes, President and CEO.

John will start the discussion this morning and provide an overview commentary, while Chris will review results for the segments and markets, and then I will cover the numbers in some more detail.

Part of today's call and webcast includes a slide presentation, which is available on the Lincoln website under the Company Investor tab.

The presentation will also be posted along with a replay of the call later today.

Before we start our discussion, please be reminded 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 10-Q.

With that, let me turn the call over to John Stropki.

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

We finished the 2012 fourth quarter and the full year on a very positive note, with annual sales and earnings per share at the highest level in Lincoln's 118-year history.

We also expanded margins, significantly increased return on invested capital, and we generated record cash flow.

During 2012, we also continued to invest in both our innovation and long-term growth objectives.

Equally as important, we have completed a seamless and successful transition in the leadership at the Company.

Chris Mapes has moved from Chief Operating Officer to President and Chief Executive Officer, effective December 31, becoming only the eighth person in Lincoln's long history to assume that position.

Chris is highly qualified and well prepared to guide this great Company for many years and to continue to deliver superior returns to our shareholders.

As CEO, Chris has the full Board's support and confidence, and we feel that he will do a superb job in implementing our 2020 strategy to significantly increase sales, while simultaneously improving profits and generating superior returns on invested capital.

In my new role as Executive Chairman of the Board, I will stay actively involved in working with Chris and the senior management team on achieving these long-term objectives.

It's been a great honor and a privilege to lead Lincoln for these past 10 years, working with an outstanding workforce, serving our shareholders, and providing our end-user customers with the most innovative Welding Solutions and best service in the welding industry.

During 2012, we continued our strong track record of improved profitability and consistent shareholder value creation.

As you can see, the numbers for 2012 full year and the fourth quarter clearly bear this out.

For the full year, sales were up 5.9% to $2.9 billion.

Operating income increased $65.4 million to $362 million, or 12.7% of sales.

Net income increased 18.5% to $257 million, or $3.06 per diluted share.

Adjusted net income was up 25% to $265.8 million, or $3.16 per diluted share.

Now Chris will give you some more color on the quarter and the reporting segments.

Thank you, John.

I look forward to continuing to work with you in your new role and continuing the excellent progress we have achieved through your leadership.

As John said, we ended the year on a positive with record sales and profits.

These results reflect the hard work of our employees and workforce around the world, and is part of our 2020 strategic program -- the successful execution of our ongoing global growth and operational improvement strategies.

We took a number of steps globally to reduce costs and sharpen our operations.

The end results will help us become a stronger and more agile company as we implement our strategy around the world.

Let's take a quick look at our operating segments.

During the fourth quarter, in North America, business conditions remained stable.

Although industrial activity in the United States is running slightly ahead of last year and essentially flat with third quarter 2012, there continues to be uneasiness about the macroeconomic landscape, due to the international weakness.

Third-party sales for North America improved 8.6% from the prior year to $393 million, with a 7.3% favorable impact from acquisitions.

The acquisition impact is significant as we continue to execute on our strategy of aggressively pursuing opportunities.

As you are aware, earlier in 2012 we acquired Weartech, a cobalt-welding consumables business; and Wayne Trail, a welding automation company.

During the 2012 fourth quarter, we acquired Kaliburn, Burny, and CMC, located in Ladson, South Carolina, designers and manufacturers of shape cutting, control systems, and solutions.

The final acquisition in 2012 was Tennessee Rand, located in Chattanooga.

Tennessee Rand designs and manufactures tooling and robotic systems for automated welding applications.

Since Tennessee Rand was acquired on the last day of the year, its sales did not contribute to the sales increase for the quarter.

For 2012, the North America Welding segment sales increased 20.7% to $1.58 billion.

Now let's take a look at Europe.

In the Europe Welding segment, which includes Russia, Africa, and the Middle East, sales in the fourth quarter were $107.5 million, down 15.3% from the same quarter last year.

For the 2012 year, sales were $452.2 million, an 11.1% decrease from 2011.

While our business in these markets is challenged by the deteriorating economic environment in Europe, we continued to drive improvements in the Middle East and Africa.

In spite of the lower sales and production volumes, gross profit to sales improved over prior year by 190 basis points.

Excluding foreign exchange, year-to-date sales were down 4.5%.

Margin improvements have been driven by strong price management, productivity, and improved product mix.

Operating profit in the quarter was impacted by restructuring charges associated with our consolidation projects in this region.

As such, the quarter's operating profit declined 54% compared to 2011.

Year-to-date operating profit, excluding restructuring charges, was up 2.9% compared to 2011.

Excluding restructuring charges and foreign exchange impacts, year-to-date operating profit improved by more than 12% over 2011.

We continued to manage in a very challenging environment in the eurozone market.

These challenges are expected to continue in early 2013.

Asia Pacific.

In Asia Pacific, sales in the quarter were $70.2 million, down 20.4%.

For the 12 months, sales were $324.5 million, versus $376.3 million in 2011.

Despite some seasonal weakness in China and Australia, along with softness in certain key end-use market segments, specifically mining and construction equipment, Lincoln Asia Pacific continued to make some important progress reshaping our business throughout Q4.

The sales result was primarily affected by declines in both Australia and China, with roughly 50% of Australia's drop off due to the closure of our Australian manufacturing facility, which resulted in the export base of that unit migrating to factories in other Lincoln regions, primarily Europe and the US.

In China, sales were also off prior year's levels, where the key drivers were a combination of continued weakness in the construction equipment and shipyard sectors and our deliberate action to improve our margin profile and shed certain lower margin businesses in that region.

In all other parts of the region, we continued to show very positive growth, as our commercial programs and expanded infrastructure gained traction.

Although sales were down 13.8% year over year, profitability was up over 260 basis points, as our management team improved cost positions and increased our management of profitability.

Although substantial uncertainty remains in a number of Asia Pacific markets for 2013, we are confident that we are well-positioned to make continued progress in this large and dynamic region, going forward.

South America.

In the South America Welding segment, sales in the fourth quarter were $39.9 million, a 1.8% decline, although mostly FX driven, and a positive 3.1% for the 12 months at $161.5 million.

Strong growth in Venezuela and Brazil offset some weakness across other geographies in the region.

On a sequential basis, sales for the quarter experienced a seasonal decrease of 10.4% from the third quarter of 2012.

Q4 operating profit improved over 50% versus prior year.

The fourth quarter saw accelerated activity in the offshore platform and shipyard industries, especially in Brazil, where we continued to supply our total welding solutions portfolio of products.

Vince will discuss the impacts of the recent currency devaluation in Venezuela during his comments.

The Harris Products Group.

The Harris businesses had net sales for the fourth quarter at $74 million, a decrease of 3.6% across all companies, due to lower volume and FX.

For the year, Harris finished with sales of $334 million, off 2.6%, due to negative FX and metals variability.

Volumes were up 4% on the year.

For the year, operating profit for Harris improved 20.4%.

Cost reductions, global expansion, and new products were catalysts in this improvement.

Volume and sales increases came primarily from the international business.

This consists of export consumable sales from the US, along with equipment sales increases from our international businesses.

That's a review of the operating segments.

Next, Vince will go over the details of the numbers.

Vince?

Thank you, Chris.

We finished the year by continuing to improve the quality of our earnings in the face of a softer global economic environment.

Despite the slight decline in revenue, we expanded our adjusted operating profit by more than 10%.

Our consolidated sales were down 1.4%, compared to the fourth quarter of 2011.

Our volumes decreased reported sales by 5.8%, and pricing increased sales by 1%.

Foreign exchange had a slight negative impact on sales, and acquisitions contributed an increase of about 4%.

Fourth quarter gross profit margins increased to 31.1%, compared with 28% in the comparable prior-year period.

LIFO credits in the quarter totaled $3.7 million.

There was no significant LIFO effect in the prior year's fourth quarter.

The improved gross margins were primarily attributable to a better sales mix.

SG&A expense for the fourth quarter increased 180 basis points.

The increase in SG&A expenses is primarily attributable to incremental SG&A from acquisitions, higher foreign exchange losses, and general increases in SG&A and R&D spending.

Operating income for the quarter increased 60 basis points.

The quarter included rationalization charges of $5 million, related to actions and asset impairments in North America, Europe, and Asia Pacific.

The most significant rationalization actions relate to plant closures in Australia and Italy.

Operating income before these charges, was $90.7 million, or 13.3% of sales.

The effective tax rate for the fourth quarter was 150 basis points lower than the prior year.

The primary factor driving this lower effective tax rate was higher-than-expected earnings in lower tax rate jurisdictions.

Our 2013 effective tax rate should approximate the full-year 2012 rate, of course subject to the mix of earnings by jurisdiction in 2013.

Diluted earnings per share increased 8.8% for the fourth quarter, compared to the prior year.

Excluding special items, diluted earnings per share increased 16.2% over 2011 fourth quarter.

On a geographical segment basis and excluding special items, North American Welding improved EBIT margins by 20 basis points in the fourth quarter.

Good cost control and pricing improvements drove the increase, in spite of a slight decline in year-over-year volumes.

Europe Welding's EBIT margin declined 230 basis points in the quarter.

The decline was attributable to a reduction in year-over-year volumes and a softening in pricing.

We did experience full-year pricing improvements in our European business during the course of 2012.

The Asia Pacific segment recorded an EBIT loss of 1.9% of sales.

Our sales in Asia Pacific were down about 21%, due to volume, and pricing declined slightly.

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

In addition, Australian volumes declined as a result of lower mining and large scale project activity as well as a general industrial slowdown in that geography.

South America Welding EBIT margin increased 400 basis points compared to 2011, because of strong price increases.

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

As many of you are already aware, on February 8, 2013, the Venezuelan government announced the devaluation of its currency relative to the US dollar.

The exchange rate moved from VEF4.3 to VEF6.3 to $1.

This devaluation of the bolivar is expected to result in a foreign-currency transaction loss of approximately $8.5 million to be recognized in selling, general, and administrative expenses in the first quarter.

In addition, the impact the selling inventories carried at the previous exchange rate is expected to decrease gross profit by another $4 million in the first half of 2013.

These charges will reduce EPS by approximately $0.15 per share during the course of the first quarter of 2013.

We also expect that our Venezuelan subsidiary's earnings will decrease by another, approximately, $0.02 to $0.04 per share during the remainder of 2013, due to the translation impact of the new exchange rate.

The Harris Products Group expanded fourth quarter EBIT margins by 170 basis points.

We had improved product mix and strong equipment volumes, particularly in the international arena, that expanded that margin.

Cash flows from operations increased over $20 million in the quarter, primarily from higher net income and lower working capital needs in the business.

Our net operating working capital to sales fell to 18.8%, compared with 21% at the prior year's end.

The quarter included $10 million of voluntary pension contributions and another $33 million deposit associated with a Canadian income tax assessment.

Full-year operating cash flows increased by $157 million, after contributing $33 million more in pension contributions and the $89 million of a tax deposit.

During the quarter, we paid cash dividends of $30.6 million, which resulted in dividend payments for the full year of $73 million.

The quarter included an additional dividend payment of $16.5 million, which normally would have been paid in January of 2013.

The dividend rate was increased by 17.6% in the fourth quarter of 2012 to $0.20 per share.

Our full-year capital spending decreased to $53 million, with lower large capital project activity.

We are now estimating that our 2013 capital spending plan will approximate about $60 million, primarily associated with significant reinvestment projects in our North American business.

We recorded a good year on the acquisition front, spending approximately $135 million to strengthen our global geographical position and our product portfolio in both consumable and equipment product lines.

Our ROIC for the year increased 180 basis points to 18.7%.

During the quarter, we spent almost $21 million repurchasing about 456,000 shares for treasury.

For the year, we spent $81 million on share repurchases, for a total of 1.798 million shares.

Finally, we ended the year with no net debt and over $286 million of cash on our balance sheet.

We will continue to invest in the Business for the long run, and prudently return cash to our shareholders.

That's the extent of my prepared comments.

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

Ladies and gentlemen, at this time we will be conducting a question-and-answer session.

(Operator Instructions)

Mark Douglass, Longbow Research.

This is Andy White standing in for Mark this morning.

I was hoping you could give us a little better idea of your expectations for the first half of 2013.

You mentioned in your press release that you expect of to see slower year over year growth, but I guess what is that relative to?

Is that relative to what you saw in the first half of this year?

Relative to what you saw in the fourth quarter?

When we talk about 2013, we're first focused on our comps on a year over year basis.

Certainly, as the year of '12 unfolded, we saw those comps falling in terms of the year over year increases in sales and volumes; and in the fourth quarter, we saw a 1.4% decline in overall sales, which was the first overall decline in sales during the course of the year, and then a volume decline of about 5.8% in terms of pure volumes.

We're seeing, in the first quarter of 2013, a better result than the fourth quarter in terms of year over year comps.

We're expecting a moderate -- a slight to moderate increase in sales volumes during the course of the year, with the back half of the year a little bit more optimistic than the front half.

We still are less optimistic about a turnaround in Europe.

We're gaining some confidence that China is starting to pick up.

And probably, most importantly, our North American business, which is our major profit and return driver to our businesses, is forecasted to be up slightly and stable for the course of the first half of 2013.

Okay.

Great.

That's helpful.

Can you give us an idea of what your pricing expectations are for next year, particularly in North America?

As far as North America is concerned, we think any pricing increases will be a slight or moderate.

We are currently looking an equipment price increase that will be in the low single digits, and that will likely be instituted towards the beginning of the April timeframe.

Okay, great.

Thanks very much.

Schon Williams, BB&T Capital Markets.

I wonder if we could talk about North American margins a bit, and maybe how the seasonality in Q4 has changed over time?

I'm wondering -- very modest volume increase, Q4 versus Q3, but 110-basis-point increase in the operating margin.

Can you just help me understand what was driving the strong operating margins, relative to Q3?

It doesn't seem like it was entirely volume driven?

We did have, in my prepared comments, Schon, I mentioned that we had a nice LIFO credit in the fourth quarter in our North American business unit -- that's all North America of about $3.7 million.

So, we did have a lower input cost achievement than what we had expected a little bit earlier in the year.

And that, certainly, aided our margins in the fourth quarter.

And did that affect the -- I'm a little confused by the unallocated corporate expense, looked like it swung with -- traditionally, a $2 million drag, it swung to a $2 million, I guess, profit or aid to operating income.

Can you help me understand what happened there?

We allocate our expenses from corporate out to our operating units, and we make those estimates at the beginning of the year, and we follow an allocation process during the course of the year.

So, there can be some differences as we experience variations in corporate costs versus what actually occurs.

There are some other activities that we conduct in our corporate column, including hedging activities, that aren't pushed out to the operating units until those gains or losses are realized.

So, there are some hedging gains sitting in corporate, now, that will end up, in future quarters, in the operating units when realized.

So, we can have some variations from quarter to quarter based on those two factors.

Okay.

Thank you.

Then, my last question here, in SG&A -- obviously, you talked about the acquisitions pushed that up, employee comp as well -- as we move into 2013 in, again, a fairly slow growth environment, should I expect SG&A to continue to outpace revenue growth or in line?

Can you give me some -- any thoughts there in terms of spending for next year, I guess, in a fairly modest growth environment?

I would look at what our SG&A, as a percentage of sales, finished the year at, and use that as a proxy for what our run rate might be for 2013.

We do not expect significant increases in SG&A during the course of this year.

We're going to be a little bit more cautious, in terms of adding costs in the face of a little bit slower expected growth environment, so I think the best view of the future is how we finished off 2012.

Schon, I would just add that if you go back to 2009, when we had a pretty weak market, we talked about the fact that we have a very long-term strategy in terms of investment in the Business.

We've hired aggressively on our sales and engineering training organization.

We are hiring aggressively for our R&D program, and we have a very strong portfolio of new products that we have in the pipeline, that it's our intention to offset any weaknesses that we see in the markets around the world.

And, we're very optimistic that this product portfolio will capture significant share in those areas where we're targeting.

Thank you.

That's very helpful.

I'll get back in the queue, here.

Joe Mondillo, Sidoti.

I wanted to ask a question on your Asian business -- that's obviously been a trouble spot, given the activity there and also the competition in pricing and such, and one of your strategies has been, I guess, closing down facilities that have been realizing lower margin or lower pricing.

But, that swung even more negative in the fourth quarter, so just trying to get a little more color on what you're seeing there?

And, going forward, what's that look like?

Yes, this is Chris Mapes -- a couple comments.

First, I think that as we were looking at reshaping our business within China, we were doing that during a pretty challenging economic environment, certainly for our products as construction equipment and shipbuilding -- a couple of key market segments within that space we're probably deteriorating significantly faster than the general markets within China.

As we worked throughout 2012 to make some of the improvements into that business -- we also shared with you that we also had an event in one of our facilities, during that window, where we had a situation with a fire at our Jin Tai facility, and we've been working very quickly to recover from that.

I think the exciting thing for me, as I look at that business moving forward into 2013, is a lot of the heavy lifting involved in making some of the improvements in that business had been completed over the last 12 months.

We've moved into our new facility in Nanjing.

That move occurred throughout two or three quarters of 2012.

That facility is up and operating.

I was there in January with our executive team and very happy with that new facility, there, for us.

Our Jin Tai facility is back up and operating after the event.

And I think, again, that much of the challenging work that we had has been completed and very excited about the management team we have in place for China.

Now, it is always going to continue to be, in our minds, a very challenged market, a very competitive market, but we feel very confident that the strategies we're employing, and the products that we're bringing to that marketplace, will create a value proposition for our customers in those key market segments and think that we'll continue to make improvements in that particular business.

I forgot about the fire.

I think that was in the October time period -- how significant was that to the EBIT at that segment?

Well, we really don't look at the EBIT at that plant level.

I really want to commend our management team there for making the quick and necessary decisions to serve the market while we were recovering from that event.

I visited that facility in January, and certainly, do not see it having an impact in our business as we're moving forward in '13.

I guess I'm just trying to get an idea on margins, going forward, so that negative 2% margin that you saw in the fourth quarter -- I guess, how significant was that event to the fourth quarter?

Just trying to get an idea, going forward, where the margins are?

If you're, Joe, looking for an idea of going forward, I wouldn't focus on one particular quarter, as much as looking at the progress we made during the course of the past full year of 2012.

And if you look at the full year, we did improve our margin profile and profitability in the Asia Pacific segment on quite a bit lower sales levels.

So looking forward, I would use the full year as a better forecast for what we might be running out of the chutes in 2013.

Okay.

Great.

Then, my second question, just regarding the acquisition that you just made of Tennessee Rand.

And, just focusing on the automation welding technology part of the business, how much does that make of your total business now?

And, what growth rates are you seeing in that business?

And on top of that, just additionally, what were your exports in the North America segment?

Okay.

I'll start with the automation part of our business.

We did add Tennessee Rand on December 31, so there is no revenue impact in the quarter.

We would estimate for 2013, that, that will add about 1% to our sales during the course of the year, from a consolidated standpoint.

We now have a fairly significant automation business on a world-wide basis.

We think we're the clear leader in welding automation now, on a world-wide basis.

And, that automation business is, Joe, spread throughout our segments, so we don't report that on a separate-segment basis.

We have a fair amount in North America now, but we also have automation businesses around the world.

I can tell you that it is approaching double digits, though, in terms of the size of that business that's tucked in all of our segments around the world.

From a growth perspective, in this past year, our organic growth from automation was our fastest growing business in our portfolio of companies.

We talked about that growth being more than 20% in previous calls, and we certainly expect the automation businesses, with the addition of Wayne Trails and Tennessee Rand and some of our other initiatives, to continue to grow at a much faster pace than our base business.

So, we have a great deal of optimism surrounding our automation strategy.

I would add to that, also, that we do like the scale that we brought into the business with the recent acquisitions of Wayne Trail and Tennessee Rand.

But, when I look at the global opportunity around welding automation, there certainly is still many markets around the world where we have an opportunity to grow that model.

I think that, as we look throughout 2013, we'll be talking internally into the market, and then sharing with you where some of the other growth opportunities are for us with this product, as we continue to build that strategy out and have that be a key portion of our 2020 vision strategy.

Okay, great.

Thanks a lot.

Also, you usually share what the exports usually are doing in the North America part.

I was wondering --?

Our export business was down double digits.

It was down approximately 13% in the quarter on a year over year basis, and a lot of that has to do with Asia Pacific slowdown.

Okay, thank you --

Okay -- and, we did have another double-digit growth in our organic base automation business, before acquisitions, in the quarter.

Dan, are there any other questions?

Liam Burke, Janney Capital Markets.

Vince, you talked briefly about the automation and how it is growing.

How does that fit in in the margin mix -- presuming that the automation part would require more purchase of components outside the Company?

Some of the parts of automation have higher margins and some have lower margins.

Those businesses that tend to have pass through of the robotic arms are on the lower side.

The businesses that don't have that are on the higher side.

We think that the margins on the automation business will be as high as, if not higher than, our group margins once we fully integrate all these businesses and gain the synergies that we know are available in our automation strategy.

You talked about step up in CapEx and reinvesting in the North American business -- can you be a little more specific on some of the projects you had in mind?

Yes, Liam, the biggest project is the relocation of our Techalloy business from Baltimore into the Cleveland-based operations, here, in the US.

There will be a significant amount of additional capital and costs associated with gaining further leverage and synergies in moving into the Cleveland operations, and that's our biggest project for 2013.

Great.

Thank you.

Liam, I would add just one point on the automation thing, also -- the equipment side of that business, as Vince said, is very important and represents great margin opportunities, but we're not in that business just for the capital side of it.

It gives us the inside track on the welding consumable side of the business with the large end users, and that's been one of, if not the most, important element of our tremendous success in automation.

Great.

Thank you very much.

Steve Barger, KeyBanc Capital Markets.

This is actually [Tagis] filling in for Steve.

Just a quick question with regards to the pricing sustainability.

I think one of the earlier questions got at this, but could you talk about the strength you're seeing by end market?

If you look at our release, you can see pretty clearly, where we break out price and volume in the fourth quarter and the year, what we experienced.

It's no surprise that in the markets with the weakest volume, or the biggest volume declines, we had the weakest pricing environment.

And, in those markets, other than South America that's highly inflationary, those markets where we had the better volume profile, we have the better pricing type of environment.

So generally, that's one of the more important factors driving pricing.

Then, the second factor is really what's happening to inputs in terms of our cost structure --

If I could, I guess I was looking for more of the like, whether that be construction that's the strength right now, or whatever that may be?

This is Chris.

From an end-market perspective, and recognize that my comments are relative on a global basis, so not just particular to any one region.

We continue to see, on a global basis, the strength in the automotive space.

Automotive's strong, not only in North America, but continues to have strength in other regions around the world.

The agricultural space has stayed relatively strong, on a global basis, and we continue to see some improvements there.

We have had a couple of opportunities in some specific markets, but I wouldn't say that those opportunities are necessarily relative to improvement in that global market.

Shipbuilding continues to be slower on a global basis.

Commercial, flattish.

So, I would say, when I think about strong markets, globally, I still think about energy; I still think about automotive.

And then, that would be the way we would look at those markets, again, on a global basis.

Okay, and you mentioned energy there -- with regard to the pipeline business there in the construction side -- initially, it looked like it was going to be a 2014 event for the Keystone, and now it looks like it shifted to the right.

Can you talk a little about that?

I will tell you when I think about the market segment, I'm not worried about any one contract.

At the end of the day, I feel strongly, and Lincoln feels strongly, that we are on a long-run favorable energy trend, here, in North America.

And, that long-run trend is going to be favorable for our business as we support those industries as they build out that infrastructure.

It's not only infrastructure of the energy, but it's also the infrastructure that's going to be driven from those industries that are served by the energy.

So, what do I mean by that?

I mean the chemical processing facilities that have been announced recently in the Southwest.

They are going to utilize the low natural gas as a value to their input costs.

So, we see that as a long-run trend.

Yes, Keystone may move one way or the other, from a timing perspective, but we're still very confident on the trends that we believe will occur from the energy market, here, in the US.

Okay, that helps a lot.

Now, just, I guess, another segment-related question.

It looks like year over year both Europe and Asia were down, but there's margin expansion in both segments.

Can you talk about what actions were taken, and then if there's additional room for that to expand some more?

We've talked on some previous calls about our efforts to pare some business in those regions of, specifically in Russia and China, that was not attractive to us.

We are also in the process of restructuring both of those segments, from a plant configuration and cost standpoint.

We've combined a couple of factories in Russia, and we're rationalizing some of our manufacturing footprint in Asia, as well as trimming as much of the costs back that we can to resize those businesses for the current volume environment.

So, we're aligning those businesses with our strategy of trying to provide a value-added approach to the market, and we're seeing some nice improvement in incrementals as a result of our repositioning of the businesses.

That makes sense.

Then lastly, before I go, I guess, what have you seen in January, and if you could, just frame it up against 4Q '12?

As I said earlier, our January looks better than what we experienced in the fourth quarter of the year.

We were down 1.4% in the fourth quarter, on a total sales basis, and we've seen a little bit better environment in January and February, so far, this year.

Okay, no, that helps.

Thank you, guys.

Stanley Elliott, Stifel.

You have talked about moderate to slight growth -- was that organic, or was that inclusive of acquisitions?

Our acquisitions finished out the year with about 4%, and I would expect that acquisitions would continue to contribute something around that number, at least into the first half of the year.

Our comments were more surrounding the organic growth in our business, from a volume and price standpoint.

Okay.

Is there any LIFO credit, or anything like that, that we should expect, or is it too hard to say at this point for 2013?

Right now, we're looking at a modest inflationary environment for 2013.

So, we're expecting to take some LIFO charges during the course of, at least, the first quarter and first half of the year, and as always, subject to revision and adjustment as the year unfolds.

But right now, we're looking at a modest inflationary environment in the new year.

Lastly, and I apologize if I missed it, but a number of the machinery equipment guys talked about destocking.

Did you all see any of that?

And, how do you think inventories are in the channel right now?

In terms of our channel, we believe there's not a whole lot of inventory in the channel.

We believe that our industry carries a good part of the inventory through the channel and that we can't say that we've seen a big inventory destocking associated with the welding supply chain.

Great.

Guys, thank you very much, and best of luck this year.

Thank you.

Matthew Dodson, JWest, LLC.

Can you talk a little bit more about the gross margin?

You had this LIFO gain in the fourth quarter, and you're going to take a LIFO credit, so when we think about gross margins for '13, should [back] to that 30% range and not be up at this 31% range -- if that was an anomaly?

Can you help me understand that for building our model?

I don't like to ever focus on one quarter to build a model, so I would urge you to look at the full year in 2012, and look at what the trend lines are, and use that as your best indication of what 2013 might look like.

Maybe if I could ask this question this way -- if you back out the LIFO gain, then the gross margin in the quarter would have been in line with the rest of the year, so should we see that that's more of the trend and you meticulate to get a better -- if you get pricing, like you think, is that what you're trying to say, or --?

LIFO is certainly a reflection of what the current cost environment is.

The only difference between what that credit might have been in the quarter and the full year is how it gets estimated during the course of the year.

So, one could argue that maybe a little bit of that -- more of that should be shaded towards a smaller margin in 2013.

Got it.

Then, for your guys' policy relative to that, I assume you guys are very conservative, so you'd tend to take a charge earlier in the year, and then if it changes, then that's when you reverse and get a credit?

Is that kind of how it works?

We are conservative, but the -- we follow standard LIFO accounting rules, which require you to make your best estimate at the beginning of the year of what you think your input costs are going to do, and we have made that best estimate.

And, our best estimate today is that we're going to see some mild inflationary impact during the course of the year.

Okay.

One last question, if I may -- you said that January and February had started off better for you.

You're going up against a really tough comp in North America just because of the weather -- I think you said in Q2 this last year that you thought there was some pull forward in Q1.

Are you seeing North America be pretty good on that so far this year?

Or, maybe you don't want to get that granular, but I just know it's a tough comparison that you're going against.

Yes, it will be.

What we've said during the course of the call is that we think that North America's going to be stable, if not up, slightly.

Great.

Thank you so much.

(Operator Instructions)

Jason Rodgers, Great Lakes Review.

Looking at Europe, you mentioned you're still seeing weakness.

Is that -- are you still seeing stability, or is there further weakness, now, in that region?

I would say it's more stability at this point in time, although we're a little bit -- the stability in Europe's a little bit different than the stability in North America.

We don't necessarily, at this point, see a lot of indicators that might make us more optimistic about some more upside in Europe, as compared to, perhaps, North America.

We have seen, during the course of the year, the declines in our year over year volumes moderating; and out of the chute, in 2013, we see that continuing.

So, we expect there to be year over year volume declines, but not necessarily accelerating with little potential upside, in our view, at this point.

Okay.

Then, if you could, comments on the environment for future acquisitions?

We've consistently said that our strategy is to continue to look for those opportunities that further our strategy.

And broadly speaking, that strategy is to grow stronger from a global geographical standpoint and to always look for those product additions to our portfolio that strengthen the broad offering that we have for our end users.

So, we're always on the lookout for that, and I think you'll continue to see us prudently identify and acquire businesses that further that strategy.

Finally, in your automated welding market, what would you say your share -- market share is in that market?

It would be very difficult for us to start talking about share in that space because we're talking about the automation portion that's relative to welding.

For us, it's all about the arc.

It's all about the welding application for this business.

And, you could scope the segment quite a different way.

I think the important thing for us to recognize is that, globally, there's still a lot of space for us to expand into.

As John mentioned earlier, this is not just about the automation.

It's about getting closer to the customer and the opportunities that are available to Lincoln Electric as we expand upon that relationship with the end user.

I'm very confident that we've got a host of expansion opportunities in a multitude of markets with this business model around the world.

I would just reemphasize Vince's point, in terms of the combination of the three automation businesses that we have, here, in North America.

Our traditional Cleveland-based automation business, which really centers around great knowledge of the welding arc and the expertise to help customers use our technology to get the best performance in their welding application.

You add on Wayne Trails, that has significant presence in plasma and high-bred laser type of activity and the full-systems approach, and then Tennessee Rand, who is a globally recognized best-in-class tooling expert, with customers who use that expertise to populate plants all over the world.

That is a real one-two-three punch combination that will be very difficult for any of our traditional welding competitors to replicate and really sets us above the class in the area of corporate capabilities in that area.

Thank you.

Joe Mondillo, Sidoti.

I just had one quick follow-up question.

Regarding the Venezuelan-currency headwind, you said it's about a, I think, a $2-million-a-quarter headwind in the first half of this year, on a gross profit level.

Is that a sequential headwind or a year over year?

No, that's year over year, so that's rolling out inventories at a different exchange rate.

So, our gross margins will be $4 million lower during the course of, at least, the first half of the year, as those inventories are sold off.

Looking at it on an EBIT-margin basis, are we expecting margin to be quite lower than the 8% to 9% that we saw in the first half of last year?

I think what we'll do, Joe, is we'll throw out, as an adjustment, the $12.5 million that I talked about in our conversation.

So, we'll segregate and highlight the one-time, if you will, valuation charges that will go through SG&A and cost of sales, and we'll tease that out for you as we roll through the first and second quarter.

But then, the other $0.02 to $0.04 that I talked about, that will be purely a result of translating those earnings at a different exchange rate.

So we're going to lose, estimated at this point, $0.02 to $0.04 during the course of 2013.

We'll work our best to try to restore that, over the course of the year and into 2014, but the way it stands right now, we're going to have, again, $12.5 million of one times, and then another $0.02 to $0.04, as the earnings of that geography come in at a lower dollar value.

Okay, perfect.

Thank you.

Steve Barger, KeyBanc Capital Markets.

Just a quick follow-up -- this is Tagis, again.

There's been some talk around construction picking up and indicating higher.

Just wondering if you're seeing any of your capacity, at the related equipment guys, pick back up?

When, you're talking about construction, I'm assuming you're referencing residential.

I will tell you that we do think that the residential market in the US is improving.

That's certainly a benefit to our welding business as well as our Harris Products business.

So, we see some improvement in that area, but it's still very early in their season to get too excited about residential housing, here, in the US.

We certainly view it as being improved, but it's still very early.

Okay.

Thank you.

It appears we have no further questions at this time.

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

Thank you, all, for joining the call today and your interest in Lincoln Electric.

We very much look forward to talking to you, again, at the end of April, when we report our first-quarter 2013 results.

Thank you very much.

This concludes today's teleconference.

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