Lincoln Electric Holdings Inc (LECO) 2013 Q3 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Greetings and welcome to the Lincoln Electric 2013 third-quarter financial results conference call.

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

  • As a reminder, this call is being recorded.

  • It is now my pleasure to introduce your host, Vincent Petrella, SVP and Chief Financial Officer.

  • Thank you, sir.

  • You may begin.

  • - SVP and CFO

  • Thank you, Jan.

  • Good morning to everyone.

  • Welcome to the Lincoln Electric 2013 third-quarter conference call.

  • We released our financial results for the quarter this morning prior to the market's open and our release is available on the Lincoln Electric website at LincolnElectric.com or by contacting our investor relations office at 216-383-2534.

  • Joining me on the call today are John Stropki, our Executive Chairman; and Chris Mapes our President and Chief Executive Officer.

  • Chris will start the discussion this morning with an overview of the quarter and highlight our progress made on our strategic initiatives.

  • I will then cover the numbers in more detail, as well as our uses of cash.

  • To wrap up, John will make some final comments before we take your questions.

  • As part of the webcast today, we are using a slide presentation, which can be accessed on our website under the Company and Investor Relations tab's.

  • 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.

  • Additionally, we also discussed financial measures that do not conform to US GAAP, and you may find important information on our use of these measures and their reconciliation to US GAAP in the financial tables that we have included in our earnings release.

  • With that, let me turn the call over to Chris Mapes.

  • - President and CEO

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

  • Moving to slide 3, looking at the third-quarter highlights, it is clear that we saw many of the same performance trends that we reported last quarter, as we continue to navigate through uneven market conditions.

  • Despite these lackluster conditions, we were able to generate a record third-quarter operating profit margin of 14.7%, which excludes special items and which is 150 basis point improvement compared with the prior year.

  • Our earnings increased versus prior year up 4% to $0.80 on a reported basis, and approximately 8% to $0.86 excluding special items.

  • Additionally, we are pleased to report that we generated significant cash flow in the quarter, up 88% versus prior year, and our year-to-date cash flow generation is pacing on par to our 2012 record levels.

  • In this environment, we held our return on invested capital, or ROIC ratio relatively steady at 18.5%.

  • And lastly, looking at capital allocation, we continued to invest in our business and returned approximately 39% of cash flow from operations to shareholders through dividends and share repurchases in the quarter.

  • And for the first nine months of the year, returned 61%.

  • As you may have noted in our recent release, our Board of Directors has just approved a 15%, or $0.03 increase in our dividend to now $0.92 per share in 2014.

  • All of these actions reflect our confidence in our ability to drive increased profitability and earnings to achieve our 2020 vision goals.

  • On slide 4, our third-quarter income statement summary highlights our ability to achieve profit and earnings growth on shallow top-line performance, with sales down by approximately 1% to $692 million.

  • Our sales decline reflected a 2.2% increase from acquisitions that have yet to anniversary.

  • This increase was offset by 2.5% lower unit volumes and a slightly unfavorable impact from foreign currency translation.

  • The year over year decline in volumes narrowed in the third quarter compared to the first half of 2013.

  • Pricing held relatively steady on a consolidated basis, as we recognized benefits from pricing actions in several regions.

  • Most notably in South America where we achieved 18% higher price, which was generated to offset inflationary conditions in Venezuela.

  • These pricing benefits were offset by 9% lower pricing in our Harris Products Group on declining raw material cost, largely in silver and copper.

  • Moving to slide 5, which highlights specific end sectors that we serve.

  • We continued to see strength in the transportation and energy- related sectors across most regions worldwide.

  • Light vehicle production continues its unabated expansion and we have been increasing our customer base in this sector by leveraging our core portfolio in automation solutions.

  • The energy sector remains solid as well with oil and gas investments, as well as development of downstream processing facilities, which we expect will continue to present growth opportunities for us.

  • While still in its early stages of a rebound, construction appears to be picking up activity and also offers growth opportunities for us in both commercial and residential applications.

  • The heavy fabrication sector, which includes earth-moving, mining, and agricultural equipment, as well as the shipbuilding sector, remain challenged.

  • We continue to experience persistent weakness in Australia and China and remain cautious about any near-term improvement.

  • During this period, we are focused on innovation and providing value-added applications to the market.

  • Moving to slide 6, we are investing in our business while continuing to optimize our platform and cost structure through this no-to-slow growth period.

  • In the quarter, we largely completed our initial build-out of a new automation facility outside of Sao Paulo, Brazil, and are well-prepared for our November grand opening, and we have begun to take initial orders for automation cells.

  • Additionally, we have been expanding our automation capabilities in Mexico to better serve the growing automotive OEMs and supply chain partners in that area.

  • We will be launching our expanded capabilities mid-fourth quarter.

  • Innovation continues to be a primary driver of our long-term growth, and we have kept our development pipeline full, presenting 29 new solutions at the Essen Germany Welding and Cutting Show in the quarter.

  • These new solutions include a new hotwire tandem mig process that leverages our proprietary Power Wave S700 power source.

  • This solution allows users to double their deposition rates, driving up productivity, while reducing heat generation by 40%.

  • This is a great add for the transportation, heavy machinery, and energy sectors.

  • Additionally, we presented our new strip clad influxes for stainless steel and nickel-based materials, which have the highest productivity and travel speeds in the market today.

  • We have continued to benefit from the various initiatives that we have taken to consolidate our platform, drive efficiencies, and increase our margin profile in the portfolio.

  • In 2013 we continue to recognize approximately $2.5 million of benefit on a quarterly basis, and as you saw in our press release earlier today, we recorded a charge of $6.3 million for restructuring activities and related impairment charges initiated in the third quarter in our European and Asian-Pacific operations.

  • These actions are part of our broader efforts to reshape our go- to-market strategy in certain regions and better align our capacity to market conditions to improve profitability.

  • We anticipate recognizing pretax benefits of approximately $2 million to $3 million in full-year 2014 from these actions, which equates to an estimated $0.03 to $0.04 benefit to EPS.

  • Looking ahead, we expect an additional approximate $1 million charge in the fourth quarter as we conclude these activities.

  • As we look at the balance of the year and into early 2014, we continue to expect sluggish top-line performance, given our end-market exposure, ongoing economic policy uncertainty, and global growth forecast.

  • We will continue to focus on similar initiatives that drive improved profitability and earnings performance on a year over year basis.

  • Although we are in a challenging growth cycle, we are pleased at our ability to demonstrate solid execution on our 2020 vision and our global strategic initiatives.

  • And now I will pass the call to Vince to cover our segment's financial performance, balance sheet items, and uses of cash in more detail.

  • Vince?

  • - SVP and CFO

  • Thank you, Chris.

  • Walking through the income statement highlights on slide number 7, our consolidated sales were down by 80 basis points compared with the third quarter of 2012.

  • As Chris pointed out, our volume decreased reported sales by about 2.5%, and our pricing was flat.

  • Our third-quarter gross profit margin did increase by 300 basis points to 33.6% compared to 30.6% in the comparable prior-year period.

  • We had LIFO credits in the quarter that totaled $600,000 compared with LIFO credits of $2.3 million in the prior year's same quarter.

  • The quarter also included a $2.5 million charge related to the write-down of inventories and a gain of $1.7 million from insurance proceeds in the Asia-Pacific segment.

  • The improved gross margins were primarily attributable to a better sales mix and improved price-cost relationship and operational improvements.

  • SG&A expenses for the third quarter increased to 160 basis point.

  • The increase in SG&A is primarily attributable to incremental SG&A from acquisitions, a year over year change in legal costs, and general increases in SG&A spending.

  • In addition, the once every 4 year Essen Trade Show costs of approximately $1.5 million were reflected in the third quarter of 2013.

  • ¶ Operating income for the quarter increased 110 basis points.

  • The quarter included rationalization and asset impairment charges of $6.3 million, again primarily related to the factory consolidation and efficiency improvement initiatives in Europe and Asia-Pacific.

  • Adjusted operating income before rationalization and asset impairment charges was 14.7% of sales, a 150 basis point year over year improvement, as well as a quarterly record.

  • The effective income tax rate in the third quarter increased to 34.3% from 28.8% in the prior year's same quarter.

  • The increase was primarily caused by our changing mix of geographical earnings, including some losses with no tax benefit, and a provision for deferred taxes on the expected repatriation of foreign earnings.

  • We expect to continue to experience a higher effective tax rate in the fourth quarter of 2013 and into 2014 because of our shifting geographical earnings mix.

  • Diluted earnings per share increased 4% for the third quarter compared to the prior year, and excluding special items, our adjusted diluted earnings per share increased approximately 8% over the 2012 third quarter.

  • On a slide 8, on a reportable segment basis and excluding special items, our North American welding business improved its adjusted EBIT margins by 20 basis points in the third quarter.

  • Improved mix and a better cost-price relationship drove the increase.

  • Europe's welding's adjusted EBIT margin declined 30 basis points in the quarter.

  • The decline was attributable to the 8.2% reduction in year over year volumes.

  • We did experience better top-line results in the UK, Germany, and the Netherlands but had weaker sales results in Spain, Russia, and France.

  • Rationalization actions helped to offset the overall economic weakness.

  • ¶ In addition, the bulk of the Essen Trade Show costs were reflected in European operating segment, reducing their margins in the third quarter of 2013.

  • The Asia-Pacific segment recorded an adjusted EBIT loss of 1.4% in the quarter.

  • Our sales in Asia-Pacific were down 12.7% due to volume, and pricing declined by 1.3%.

  • The volume decreases, again, were primarily caused by the continuing softness in the construction and related machinery markets in China and lower Australian volumes as a result of declining mining and large scale project activity.

  • South America welding adjusted EBIT margin increased to 30.7% because of improvements across the portfolio, with a preponderance of the earnings increase coming from our Venezuelan operations.

  • The bulk of the price increases were caused by the highly inflationary environment in Venezuela.

  • The Harris Products Group second quarter EBIT margins declined by 10 basis points.

  • The decline in pricing is attributable to lower metals prices year over year, primarily silver.

  • The overall decline in margins is a result of these commodity prices leading to lower margins.

  • We generated $155 million of operating cash flows in the quarter, a quarterly cash flow record.

  • The nine-month cash flow total of $242 million also approximated record levels set last year.

  • Our total pension plan contribution for the nine-month period ending September 30 were approximately $84 million compared with $58 million in the prior year's same period.

  • These funding actions, along with rising interest rates and strong asset returns, have resulted in a US pension plan that is currently fully funded.

  • Accordingly, additional funding actions for the remainder of 2013 will likely be insignificant, and we forecast 2014 targeted funding actions totaling approximately $20 million to $30 million based on our current outlook.

  • On the capital allocation, during the quarter, we spent $44 million repurchasing about 710,000 shares.

  • In addition, we paid a dividend of $16 million, representing a 16% year over year increase in payout.

  • On a year-to-date basis, we have spent $114 million on share repurchases and have paid $33 million in cash dividends.

  • We expect share repurchase activity to continue through the end of fiscal 2013, and we anticipate our 2014 share repurchase spending to continue at levels at least approximating 2013 rates.

  • And finally, our Board of Directors approved a dividend increase of $0.03 per share per quarter for the next quarterly dividend, payable in January 2014.

  • This dividend rate increase represents a 15% increase over the payout from the current dividend rate.

  • We ended the quarter with no net debt and over $330 million of cash on our balance sheet.

  • This balance sheet position will give us the flexibility to continue to invest in the business for the long run and also continue to prudently return cash to shareholders.

  • With that, I would like to pass the call back to Chris and John for some closing remarks before we open the call for questions.

  • - President and CEO

  • Thank you, Vince.

  • Many of you on the call today may recall that our Executive Chairman, John Stropki, will be retiring at the end of this year, and we wanted to take a moment to thank him for his outstanding leadership and his many contributions he has made to Lincoln Electric, our industry, and our community over his 40-year career, and his 10-year tenure as our President and CEO.

  • As this will be John's last earnings call, we wanted to have John share his views on Lincoln Electric.

  • John?

  • - Executive Chairman

  • Thank you, Chris, and thank you to everyone on the call today.

  • Let me start by saying that I have had a very exciting and rewarding career at Lincoln Electric.

  • Starting out as a summer intern in the late 1960s and retiring later this year as Executive Chairman.

  • I truly appreciate the opportunity provided to me by our Board of Directors and our shareholders to lead this great Company over the past 10 years.

  • Today, Lincoln Electric is the clear global market leader and is truly an international Company.

  • We are in an enviable position to capitalize on whatever we set our sights on.

  • Our 2020 vision will continue to focus our strategies on increasing shareholder value and developing long and strong-term relationships with our broad portfolio of key global customers.

  • We have a leading brand equity, a phenomenal market footprint, the best people in the industry, a solid new product pipeline, and ample fiscal resources to drive our strategic growth plans.

  • We have a superb track record and a history of being a solid performer, growing responsibly profitably, and by following a balanced approach of returning cash to our shareholders.

  • I am excited about Lincoln Electric's future.

  • And I am excited to be a large shareholder.

  • Most of all, I am very proud to have served among the 10,000 Lincoln employees, who I truly believe symbolize the industry's best in welding and cutting.

  • Today Lincoln Electric, under Chris Mapes' leadership and supported by an exceptional strong and experienced global management team, is better positioned than ever.

  • Chris brings a wealth of experience and expertise to continue to grow and steward the Company under the same guiding principles and values that we inherited from John C and James F Lincoln, and which have been embraced by our employees and management for over 100 years.

  • I would like to take this opportunity to thank the Lincoln Electric team for such an outstanding performance and their ongoing dedication.

  • I would also like to thank our shareholders for their continued support of our strategy.

  • And now, operator, I will hand the call over to you for the question-and-answer session.

  • Operator

  • (Operator Instructions) Our first question comes from the line of Tom Hayes with Thompson Research Group.

  • Please proceed with your question.

  • - Analyst

  • Thank you.

  • Good morning and congratulations, John.

  • - Executive Chairman

  • Thank you, Tom.

  • - Analyst

  • Just wondering on some of the pricing initiatives you guys began last year, we saw obviously driving some of the benefits.

  • Have we started to anniversary, or are we getting one quarter away from anniversarying some of those benefits?

  • - SVP and CFO

  • Yes, Tom.

  • Those are fully anniversaried in the third quarter of 2013.

  • - Analyst

  • Okay.

  • Great.

  • And then on the margin sustainability, specifically in South America, we are seeing the nice price benefits this year.

  • Just wondering your expectations for the continuation of that, or maybe a reversal in 2014.

  • - SVP and CFO

  • Well, those pricing increases are predominantly related to the Venezuelan economy.

  • The inflationary environment there is very difficult to predict.

  • What we do know is that we are going to raise our prices in line with what is necessary to drive our margins in that economy, and the ultimate devaluation of the local currency is just not predictable.

  • - Analyst

  • Great.

  • I will get back in the queue.

  • Thank you.

  • Operator

  • Schon Williams, BB&T Capital Markets.

  • - Analyst

  • Hi.

  • Good morning, gentlemen and congratulations, John, on a wonderful career at Lincoln.

  • - Executive Chairman

  • Thank you.

  • - Analyst

  • A little bit of follow-up to that question.

  • Obviously, Venezuela continues to outperform here and drive a significant amount of the year-over-year improvement.

  • Can you guys talk a little bit about ex Venezuela, some of the improvement that you have made in the rest of the region?

  • And I do not know, what is a more sustainable margin in some of those pieces excluding the Venezuela piece?

  • - President and CEO

  • This is Chris.

  • Let me talk about the rest of South America, because I actually think it is a very favorable story for the improvements that we have made in the rest of those markets.

  • So, we have seen a significant improvement in our operations in Brazil in 2013.

  • I certainly believe that the automation facility that we will be launching there in November is going to be a further catalyst for others to penetrate in to many of the large OEMs that are looking for those types of automated welding solutions in that space.

  • So, I see continued opportunities for us in the Brazilian market.

  • And certainly Brazil is a significant driver to the long-term benefits in the way we look at the market in South America.

  • We have also had a more favorable performance outlook in Columbia, Argentina, and Chile.

  • We have actually just committed to put a technical center into Chile to be able to host and provide the markets there with the abilities to see our process solutions, so we will be installing that as we move into 2014.

  • So certainly, the businesses are improving, and we like the direction we are moving in South America outside of Venezuela.

  • But as Vince mentioned, the inflationary market that we are managing there certainly is impacting the overall results that we are reporting for South America.

  • - Analyst

  • Okay.

  • And then as a follow-up, the robotics facility that is going up in Brazil, you said you are seeing some very good trends in terms of initial orders there.

  • Do you want to put -- any numbers you want to put around that?

  • Is this a facility that can support millions of dollars in revenue, tens of millions of dollars in revenue?

  • Is there something you want to frame that for us?

  • - President and CEO

  • Well, I think to frame it is first, I am excited about the way that our customers and partners have welcomed, and not just welcomed but been excited about us developing these process solutions for the industry there in Brazil.

  • And I certainly see it as a long-term catalyst.

  • The automation business is very much a process and technically driven solution for our customers.

  • So bringing up the workforce, bringing up the technical capability will have a ramp-up.

  • We have already received orders for cell solutions, automated solutions for that market.

  • But it will take time.

  • It is certainly, from a facility and infrastructure perspective, is a facility that can handle $10 million to $20 million of potential solutions.

  • So it is certainly very scalable.

  • We will see how efficiently we can ramp up our people and process solutions.

  • And again, I think it is going to be a catalyst for us in that region longer term.

  • - Analyst

  • All right.

  • Thank you guys.

  • I will get back in the queue.

  • Operator

  • Mark Douglass, Longbow research.

  • - Analyst

  • Good morning, gentlemen, and congratulations, John.

  • - SVP and CFO

  • Good morning, Liam.

  • - Analyst

  • Mark.

  • - SVP and CFO

  • Mark.

  • - President and CEO

  • That was the CFO there.

  • - Analyst

  • I know.

  • - SVP and CFO

  • I am looking at numbers.

  • - Analyst

  • Speaking of numbers --

  • - SVP and CFO

  • Sorry Liam.

  • Ask your question.

  • - Analyst

  • Can we just dive in to Venezuela and talk about the mechanics a little more?

  • I think a lot of us have trouble reconciling the relationship between the actual pricing, inventory valuation, translation to currency to final sales and EBIT margin.

  • If they don't devalue in the next couple of quarters,and we are still running at hyper-inflation, would you assume that this run rate is the same, or at least 25% to 30% run rate?

  • And then just, again, the mechanics.

  • - SVP and CFO

  • Yes.

  • Okay.

  • I think that is a good question, and I will run through it as best as I can, again.

  • So in the hyper-inflationary economy like Venezuela, the accounting rules require you to translate the financial results at an official rate.

  • - Analyst

  • Which is pegged, right?

  • - SVP and CFO

  • It's pegged, yes, to the US dollar and it does not move.

  • So there is an unofficial rate that can arise very rapidly to take into account the impact of inflation in the economy, since the official rate is pegged.

  • And so you have to raise your pricing and translate that back at the official rate.

  • And the result of that is a rising sales line, and a result in rising gross margin and profitability line.

  • Until such time that there is a devaluation to move that official rate closer to the unofficial rate, which did occur early in this year and --

  • - Analyst

  • It was June?

  • - SVP and CFO

  • It was the beginning of the year, first quarter.

  • It was a 32% devaluation, and we took a total charge -- the bulk of it in the first quarter and then the rest in the second quarter that was about $12 million US dollars.

  • So I would tell you that, as long as there is no devaluation that we will have higher sales and operating profits than has historically been booked in Venezuela and our South American business until such time that there is another devaluation in the currency.

  • - Analyst

  • Great.

  • Very helpful.

  • If I am still Liam, does that mean I still get more questions?

  • - SVP and CFO

  • I will give you one more.

  • - Analyst

  • And I come back is Mark

  • - SVP and CFO

  • For the first time in 10 years, I called somebody by the wrong name.

  • Okay.

  • One more question.

  • - Analyst

  • On the tax rate, I am coming up with an effective tax rate, at least on the adjusted earnings of about -- a little north of 32%.

  • - SVP and CFO

  • That is correct.

  • - Analyst

  • So is that what you are thinking for fourth quarter and 2014?

  • Or is the GAAP 34%?

  • - SVP and CFO

  • I don't think that is a bad proxy for what our rate will be.

  • Somewhere --

  • - Analyst

  • 32%?

  • - SVP and CFO

  • 32%, 33%, somewhere in that range.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Joe Mondillo, Sidoti & Company.

  • - Analyst

  • Good morning, guys.

  • I was just wondering if you can distinguish between the domestic demand and the exported demand that you are seeing in the North America segment?

  • - SVP and CFO

  • We actually, Joe, did have a decline year over year in export demand.

  • So our domestic business was stronger in the US than what we saw in the export markets.

  • - Analyst

  • Okay.

  • And can you give any more color exactly what region in the world?

  • Is that mostly South America and Central America?

  • - SVP and CFO

  • It is all over the world.

  • Most export markets were down.

  • The strongest end market for us in the third quarter was the US and North America.

  • - Analyst

  • Okay.

  • All right.

  • Thank you.

  • That is all I had for you.

  • Thank you.

  • Operator

  • Liam Burke, Janney Montgomery Scott.

  • - Analyst

  • Yes.

  • It is me.

  • - SVP and CFO

  • How are you doing, Mark?

  • - Analyst

  • I am doing okay.

  • Thank you.

  • I have never had this must attention on a call.

  • Anyway, you highlighted two automation facilities, greenfield facilities that are getting traction fairly quickly on the order front.

  • Do you see the need to add to the product line through acquisition, or do you think that you can get most of it done through greenfield?

  • - President and CEO

  • Well, we certainly believe that the automation business is a regionally centric business, and having individuals positioned around the world to serve as global customers is certainly our expectation of building out our automation business on a global front.

  • So obviously, the Brazilian operation is a greenfield.

  • The Mexico operation expansions that we've talked about is we have some capabilities there and facilities there already.

  • We are enhancing those to service the growth that is occurring in that market.

  • So I believe we will continue to build out that global footprint and global capabilities relative to automation, as we build upon that strategy through the end of 2013 and 2014 and 2015.

  • - Analyst

  • Okay.

  • Part of the challenges in China have been unprofitable product line.

  • Are you comfortable now that you have the right product mix in China to compete or at least get margins up?

  • - President and CEO

  • Well, I am not sure that I'm comfortable in saying today that we have the exact product portfolio strategy, because that is more than just product capability.

  • That is also ensuring we have the technical expertise and the capabilities to provide those process solutions to the market.

  • What I am confident in is that we recognize that that is where we are going to drive value with our business in Asia-Pacific, and specifically China.

  • So we have put forward some strategies relative to ensuring that we feel we can drive those solutions, and I think our management team certainly expects that we start to see those improvements over the next two, three quarters as we realign that portfolio and that business towards higher value added solutions and processes for the market there.

  • - Analyst

  • All right.

  • Thank you very much.

  • - SVP and CFO

  • You are welcome.

  • Operator

  • Stanley Elliott, Stifel Nicolaus.

  • - Analyst

  • Good morning, everyone.

  • Thank you for taking my questions, and best wishes to you, John.

  • First, the welding industry, I have always thought of it as a GDP-plus type of an industry, but it is not just Lincoln, but other publicly available data that has come out has been trending softer.

  • Then the flip side, I look at what has historically driven the business, be it PMIs or steel production has very good correlation, and those all tend to point towards positive growth.

  • Could you help me if there is some sort of a disconnect there that I might be missing?

  • - SVP and CFO

  • No.

  • I do not think that you are missing anything, Stanley.

  • We are looking at it as well, and I would agree that over a fairly long period of time, we have had the welding industry and Lincoln Electric have had a high correlation to those metrics.

  • And I wouldn't disagree with your assessment that there is seeming to be a very short timeframe, interim timeframe that we are looking at over the last quarter or two, that there has been a bit of a disconnect.

  • We are hoping that that alignment or that correlation lines up again here in the future, because we do have a fairly high, by historical terms, and a rising ISM metric in the US, for example.

  • So we are hopeful that that's just some short-term anomalies and we will see a tighter correlation moving forward.

  • But I would agree that there seems to be some disconnect between the welding industry, results maybe the last quarter or two and what we have been seeing historically.

  • - Analyst

  • Okay.

  • Then when I think about with the fully funded pension plan, how long before your pension expense on the P&L starts to trend down?

  • - SVP and CFO

  • Well, it will trend down next year nicely work, based on the funded status that we have.

  • We have an expectation that we will have a significant decline in pension expense in 2014.

  • - Analyst

  • Is there any way to put any numbers around that?

  • - SVP and CFO

  • I would give you a range of -- it is going to be over $10 million, and I would put the top end of that range at maybe $15 million.

  • - Analyst

  • Great.

  • Wonderful.

  • Thank you so much.

  • Operator

  • Greg Halter, Great Lakes Review.

  • - Analyst

  • Good morning, guys.

  • And John, it has been nice working with you over the years, so good luck in your future endeavors.

  • - Executive Chairman

  • Thank you.

  • - Analyst

  • You made a lot of points about the automation and automotive area, and I am just wondering where you think you are in terms of penetration.

  • Is this 10% or 60% or what?

  • What is the opportunity?

  • - President and CEO

  • This is Chris.

  • It is very difficult for us to actually talk about a penetration ratio in the automation space, because I think as we have mentioned on the call before, there is just not very clean market data and automation is not the same around the world.

  • You have people that do automated full lines that would call automation that might be more press transfer actions or other types of assets they would be deploying in automated solutions.

  • What we are focused on is it is all about the arc.

  • It is all about welding, and we are focusing on welding automation cells.

  • And I think until we get our global footprint built out and start to continue the emphasis that we have placed on this space over the last 12, 24 months, we probably won't have a very good indication about relative penetration.

  • But when we do, it certainly will be more regional.

  • And again just a very difficult metric for us to look at.

  • Again, as I have mentioned, the exciting thing about automation is we believe it is a global platform.

  • It is a global process solution, and in our development of that business model within Lincoln Electric, it will all be about the arc in developing that solution as global OEMs continue to look for process efficiencies and reduction of labor costs with the installation of automation.

  • - Analyst

  • Okay.

  • And would you say that automation and the revenues associated with such are greater than 10% of your sales yet at this point?

  • - SVP and CFO

  • No.

  • We have been consistently disclosing that it's less than 10% of our sales.

  • - Analyst

  • Okay.

  • And your CapEx is up this year.

  • Obviously some new plants.

  • Just wondering where you expect that to come out for the full year and any early indications for next year?

  • - SVP and CFO

  • We are adjusting our CapEx view for 2013 up to approximately $75 million.

  • And one of the main drivers for that increase is we did buy our manufacturing facility in Venezuela in the quarter for about just under $12 million.

  • So we do have an additional -- at the beginning of the planned year, unplanned for capital purchase in our South American segments.

  • So we are bumping up our target to about $75 million for this year.

  • And then we would say for next year, something around what our D&A is running, or maybe a $50 million to $60 million type of spend.

  • - Analyst

  • All right.

  • Thank you.

  • Operator

  • Schon Williams, BB&T Capital Markets.

  • - Analyst

  • Hi.

  • Thank you, guys, for taking the follow-up.

  • I wonder if we could maybe talk about -- it is still a difficult macro environment.

  • Based on the previous discussion, obviously, it is trending better here, but could you talk about maybe what you saw trends throughout the quarter and then maybe going into October here?

  • Any impact from the government shutdown at all?

  • - SVP and CFO

  • Yes.

  • What we see early on in the quarter, Schon, is pretty much the same.

  • We are in a flattish, sluggish type of environment.

  • We are not seeing a catalyst that is driving our business one way or another.

  • And so it is relatively stable and I would not be able to comment on any significant impact from the government so-called shutdown, other than maybe the psychological loss of confidence and the uncertainty that that might have created for the future.

  • But I can't say that we can point to that episode to drive our sales down specifically in the quarter or, for that matter, the start of the fourth quarter.

  • - Analyst

  • Okay.

  • And then, could you talk a little bit about pricing, specific in North America?

  • I would have expected the pricing component to actually accelerate Q3 versus Q2, as you got some of the -- get traction from some of your new pricing rounds.

  • You talk about what you expect from pricing the next quarter or two?

  • Does that actually decelerate, or should we see some pick up there?

  • - SVP and CFO

  • We don't really see a whole lot of pricing actions that will be taken from a global welding standpoint.

  • The top line, from a volume standpoint, is sluggish.

  • Raw material prices are flattish, if not slightly down.

  • That is not the kind of environment that an industry will look to to drive additional pricing initiatives.

  • So I would expect, Schon, much of the same that you have seen in the previous two quarters, subject to the vagaries of our participation in the South American market and the Harris business.

  • But from a broad welding and cutting standpoint, more of the same with flattish type of pricing actions.

  • - Analyst

  • Okay.

  • And then when, as we look into 2014, when would you typically look at doing more price action?

  • Is that normally Q2 of next year?

  • - SVP and CFO

  • Traditionally in our industry and led by Lincoln Electric, we look to pricing actions early in the year generally, beginning of February or in the first quarter some time.

  • So we have an annual pricing review that occurs at the first of the year, and then those typically would be rolled out in February, March.

  • - Analyst

  • All right.

  • Thank you.

  • That is helpful, guys.

  • Operator

  • Steve Barger, KeyBanc Capital Markets.

  • - Analyst

  • Hi.

  • Good morning.

  • - SVP and CFO

  • Good morning.

  • - Analyst

  • I got on the call a little bit late.

  • You were talking about the automation facilities.

  • Are those are really a function of leveraging the technology you acquired and the lessons you've learned from Tennessee, ITT Wayne Trail, or is there still a big benefit from revenue synergy yet to come as you build out that footprint?

  • - President and CEO

  • Well, I think there is a little bit of each of those characteristics.

  • Certainly, the value of Tennessee Rand is that they had some presence already down in the Brazilian market, and their experience has assisted us in the successful greenfield of that automation business there.

  • But we also are utilizing the leverage of the automation assets that were within Lincoln Electric.

  • And then leveraging our relationships with our global customers that have facilities there, and we are looking for these types of solutions.

  • So my expectation is that we will actually drive leverage into the portfolio both from the intellectual capital of the people that we have acquired and our own, as well as the relationships of those global customers and our knowledge of driving solutions into those particular markets.

  • - Analyst

  • And you had Tennessee and ITT for about a year now.

  • Are the revenue and recurring margin trends you are seeing from those companies exceeding your initial expectations?

  • - SVP and CFO

  • They are improving, Steve, from what we experienced at the acquisition dates.

  • - Analyst

  • And when you think about those acquisitions, whatever you paid for them, whatever the EBITDA is, is the return on capital starting to approach consolidated return on capital, or are those still a drag?

  • And can they -- if they are below, can they get to consolidated?

  • - SVP and CFO

  • Well, it is early in the acquisition timeframe.

  • And they are, at the present time, lower than our consolidated return on invested capital.

  • But we fully expect those businesses to meet and exceed our consolidated cost of capital averages after a period of five plus years.

  • - Analyst

  • Got it.

  • You just raised the dividend by 15%.

  • I think it has gone up about 10% per year over the past few years.

  • Even with the increase, it is still less than 25% of net income on my current numbers.

  • Is there any updated thought about dividend payout ratio from the Board?

  • - SVP and CFO

  • No.

  • I don't believe there is an updated view of our dividend policy.

  • We will continue to take the opportunity to raise our dividend in a robust fashion as we continue to drive higher and higher earnings and maintain the confidence that we have in the long-term earnings growth potential of our business.

  • Our view of dividend increases is a steady, predictable type of pattern, and so I think you can expect robust dividend increases, I believe, into the future as our earnings grow and we continue to avail ourselves of very strong cash flows.

  • - Analyst

  • So I will just wrap up by saying congratulations, John, and I don't know -- have you been pushing for 100% on the payout?

  • - SVP and CFO

  • John is not allowed to answer that kind of question.

  • - Analyst

  • Thank you a lot.

  • - Executive Chairman

  • Thank you, John.

  • And yes.

  • Operator

  • Walt Liptak with Global Hunter Securities.

  • - Analyst

  • Hi.

  • Thank you.

  • Good morning, everyone.

  • And John, good luck with your retirement and a pleasure working with you.

  • - Executive Chairman

  • Thank you, Walt.

  • - Analyst

  • I got onto the call a little bit late too, so I wanted to just make sure that you addressed the margins in North America.

  • The 100% year-over-year decline and sequential decline, and I would like to hear what the response was on that.

  • - SVP and CFO

  • I am not sure -- we had 100% year-over-year decline in margins in North America.

  • - Analyst

  • 100 basis points.

  • - SVP and CFO

  • I show --

  • - Analyst

  • I am sorry.

  • Okay.

  • I was looking at my model numbers.

  • - SVP and CFO

  • Okay.

  • We are a little sloppy today on this call, Walt.

  • It might be Halloween.

  • - Analyst

  • It could be.

  • Sorry about that one.

  • I wonder if we could talk about North American and just what you saw during the quarter on a monthly basis?

  • If business trended up or down.

  • You had mentioned the ISM's I think when I was getting onto the call.

  • And AirGas and some of the distributors have been talking about potential for some nonres construction projects picking up later in the year.

  • I wonder if you can provide any color like that?

  • - SVP and CFO

  • Yes.

  • We didn't see a strong trend either way, Walt, in terms of our businesses in North America for the quarter.

  • We have talked a bit earlier in some of the prepared remarks, as well as in response to questions, that we see a relatively flattish, sluggish environment and there haven't been a strong directional action either increasing or decreasing our overall revenues.

  • - Analyst

  • Okay.

  • Fair enough.

  • And in Europe, the volumes are still weak.

  • I wonder if you can -- and the margins held up okay.

  • I wonder if you can talk about cost-reduction activities, things you have done to permanently reduce expenses, and what those margins might get to if that volume came back?

  • - President and CEO

  • Well, you saw on our announcement today that we announced a restructuring of some of our assets in Europe.

  • Really doing some realignment of our production capabilities that we think are going to drive further efficiencies and better balance our capabilities for what we see to that market moving forward.

  • We will continue to take those initiatives.

  • I have been very happy with the way our management team has managed through the cycle in Europe over the last 8 to 12 quarters.

  • I think we've mentioned that we have seen some stability in the European market, and we are hoping that stability has a little sounder foundation to it as we move forward into 2014.

  • And there certainly are elements of the European market that I believe could become more of a catalyst for growth as we look out over the next four to six quarters.

  • But the recent actions that we have taken I think will improve our basis and certainly improve our margins, and I think we mentioned that would be accretive to the EPS expectations that we would have for the Company as we move into 2014.

  • - Analyst

  • Okay.

  • Can you get Europe close to where North American margins are over time?

  • - SVP and CFO

  • Well, we are going to continue to make progress there and our objective is to have a continuous improvement environment where we drive our margins up on a sustainable basis.

  • And I think we have made good progress over the years, and we will continue to see those margins climb over the intermediate and longer term.

  • - Analyst

  • Okay.

  • And I wonder if I could ask one on Harris Products, the revenue declines there.

  • I would have thought that with the housing recovery, we would see a little bit of better growth.

  • I wonder if you could address that?

  • - President and CEO

  • Well, part of what we are seeing on the top line, compression at the Harris Products Group is just the year-over-year drop, and material cost specifically, I believe in silver, which compresses the top line.

  • We have actually seen some of the activity in the residential marketplace, although a lot of the residential marketplace has been in a movement in the new home construction, which has been a movement off of an extremely low base, but very far from the historical highs or even the average for new home construction builds for the market.

  • I don't have the data sitting in front of me, but I am very confident in that comment.

  • We have been happy with that business.

  • That business has had a very good movement in improvements in its operations and improvements in its margins.

  • We continue to see it as a business that we can make further improvements, to much like Vince's comments about our European operations.

  • So we weren't surprised by where the revenue numbers came out for Harris for the quarter.

  • Again, a slight margin compression because of some of the way the commercial transactions work as the metals are moving through that portfolio, but certainly excited about the improvements made in that business and the strategies we are executing for future improvements.

  • - Analyst

  • Okay.

  • Great.

  • Okay.

  • Thank you, guys.

  • Operator

  • Tom Hayes, Thompson Research Group.

  • - Analyst

  • Thank you.

  • Just a quick couple quick follow-up question, following up on Walt's, Chris.

  • Could you tell us, did you shut facilities in Europe?

  • - President and CEO

  • We made a major relocation of a product portfolio, consolidating it into another location within Europe.

  • It did not completely shut that location.

  • There are still some operations that are there, but it was a major move in the consolidation of a product line.

  • - Analyst

  • Okay.

  • And I guess to the extent that you could provide it, where are you globally and regionally as far as utilization rates?

  • - President and CEO

  • I think with our portfolio, it is very difficult to talk about a utilization rate.

  • With our equipment portfolio, the various consumable products that we manufacture, versus high alloy products that might be focused in a couple of facilities versus other products in our automation business, I can only give you confidence that if we were to see some volume return back into the marketplace, that we would be able to show some operating leverage from that with the current portfolio.

  • - Analyst

  • Appreciate the color.

  • Thank you.

  • Operator

  • Thank you.

  • Ladies and gentlemen, I would now like to turn the conference over to Mr. Vincent Petrella for any closing comments.

  • - SVP and CFO

  • Thank you, everyone, for joining the call today and for your continued interest in Lincoln Electric.

  • Again, our third-quarter results demonstrate the Company's solid execution in aligning operations for more profitable growth.

  • Longer-term, we remain well-positioned for ongoing profitable growth, with contributions not only from our core businesses, but also from acquisitions, which have expanded our presence in high-growth areas such as energy, transportation, and automation solutions.

  • We will continue to leverage our world-class R&D efforts, our leading application engineering capabilities, and our extensive technical sales force.

  • These competitive advantages will drive ongoing earnings and cash flow growth through the cycle and continue to enhance shareholder returns.

  • Thank you, again, for joining us today on the call and look forward to reporting our next quarter to you.

  • Thank you very much.

  • Operator

  • Thank you.

  • Ladies and gentlemen, this concludes today's teleconference.

  • You may disconnect your lines at this time.

  • Thank you for your participation.