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Executives

John Stropki - Chairman, President and Chief Executive Officer

Vincent Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Analysts

Michael Cox - Piper Jaffray

Walt Liptak - Barrington Research.

Mark Douglass - Longbow Research.

Steve Barger - Keybanc Capital Markets

James Bank - Sidoti & Company

Greg Halter - Great Lakes Review

Holden Lewis - BB&T

Lincoln Electric Holdings Inc. (LECO) Q1 2009 Earnings Call April 28, 2009 10:00 AM ET

Operator

Welcome to the Lincoln Electric first quarter 2009 earnings results conference call. At this time all participants are in a listen-only mode. (Operator Instructions)

It is now my pleasure to introduce your host, Mr. Vince Petrella, Senior Vice President and Chief Financial Officer for Lincoln Electric. Thank you, Mr. Petrella. You may begin.

Vincent K. Petrella

Thank you, Luthania and good morning. Thanks for joining the Lincoln Electric 2009 first quarter conference call. We released financial results for the quarter prior to market open, earlier this morning. Copies are available through our Investor Relations Department at 216-383-4893 or on Lincoln’s website.

Lincoln’s Chairman and Chief Executive Officer, John Stropki will lead the discussion this morning and will provide commentary on the quarter and the regional outlook. Before we start that discussion though, let me remind you that certain statements made during this call and during our discussions may be forward-looking and actual results may differ from our expectation. 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.

Now I would like to turn the call over to John Stropki.

John Stropki

Thank you, Vince and good morning everyone. The economic recession which began in the second half of 2008 has been persuasive and clearly accelerated during the first quarter of 2009. Consistent with our preliminary forecast, our first quarter sales were down 33% to $412 million.

Sales decline of this magnitude were experienced in all geographic market segments and most major customer segments. Obviously the significant drop in volumes around the world put pressure on operating profit as we reported our first quarter net income of $3.8 million or $0.09 per diluted share, excluding rationalization charges.

Vince will give the specific details about the numbers in the quarter in a minute, but first an update on what we are doing around the globe to maximize our operating profit in the current economic environment, while at the same time we prepare for the recovery in key markets.

During the first quarter of 2009, we took a pre-tax rationalization charge of $11.7 million due to realigning our cost structure to current business levels. The full impact of these actions is not fully reflected in our first quarter results, but future quarters will benefit from the anticipated $20 million per quarter savings generated by the cost savings measures.

During the quarter, these cost savings actions included: First, a voluntary separation package for the Cleveland-based eligible employees. Approximately 300 accepted the program with the majority working their last day in March. Second; this suspension of a 401(k) match in the U.S. and other compensation savings including a 5% base pay reduction for top management. Third, a reduction in the headcount in hours of our production side of the business around the globe. Fourth, the elimination of contract workers, and finally a global hire increase.

Our global management team continues to assess and implement additional cost savings measures aimed at improving business profitability in each geographic region in all business units. Today, we are announcing further actions which would generate additional annual savings between $20 million and $25 million, with half of those savings to impact 2009 results.

These actions will include, additional compensation adjustments, further head count reductions and factory rationalizations which will require additional charges of $8 million to $10 million. We will continue to explore all options as we focus on building a more effective and highly competitive business model, which will further strengthen our market leadership position.

Now, here’s a review of the business conditions and the strong economic headwinds we face around the world. First, looking at North America. During this past quarter, business conditions for our North American operations continue to be challenging and the recession accelerated. Industrial activity, as measured by industrial production and capacity utilization continue to be substantially below activity of prior years.

Total manufacturing, industrial production excluding the high tech segment was trending 14.6% below 2008 in March, while manufacturing capacity utilization was running at approximately 66.1%, the lowest number since 1948.

Order trends in our traditional U.S. markets continue to be weak in the first quarter with the exception of wind tower, pipe mills and pipeline end markets. With much uncertainty about the overall business level moving forward job losses within the manufacturing sector continues to mount.

As an example, GM reported last week that it will suspend production at 13 assembly plants in the U.S. and Mexico, some up to two months due to high inventory and yesterday, the automaker said it planned to reduce the total number of assembly power trade and staffing plants in the U.S. from 47 in 2008 to 34 by the end of 2010 and 33 by 2012.

The impact of the U.S. stimulus package on industrial companies is still unknown. However we do estimate that approximately 10% of these infrastructure projects will require welding. In Canada, the drop in oil prices and the ongoing manufacturing slump caused the economy to formally slip into recession. With the delay of future energy projects, activity in Canada’s Western Provinces softened.

The Canadian economic investment package introduced in January will provide stimulus for both infrastructure spending and tax cuts. However, the benefits will likely not be felt until late 2009 or early 2010. As a result, North American sales in the first quarter were off by more than 30%.

U.S. export sales decreased by 40% to $37 million as the global recession stalled key infrastructure projects worldwide. However, North America continued to generate a profit even though it’s declined both in dollar terms and as a percentage of sales. The cost savings initiatives mentioned earlier should further enhance profitability in the coming quarters.

In Europe, the overall economic trends in the first quarter continue to be depressed. European industrial production declined 16% in January and 18% in February when compared on a year-over-year basis. Lincoln Electric Europe sales decreased 25% and $93 million in the quarter, excluding the impact of foreign exchange and acquisition.

The European welding consumable market continues to be pressured by aggressive pricing and we don’t see signs of that changing in the next few quarters. However we do see signs of some smaller, weaker competitors closing. With the combination of sales volume declines, pricing pressure and liquidation of high price inventory, Europe reported a loss in the quarter.

We continued to implement cost savings actions in Europe and by reducing our overhead costs and realigning manufacturing to lower cost in Eastern European countries. In Asia-Pacific, the slowdown in the region is pronounced. However China’s economy did start showing improvement in March. The economy grew 6% in the first quarter and the Chinese Government is still targeting growth of 8% for the year.

China’s stimulus pack plan, which is focused on substantial dip production projects, including electric and wind generated power is expected to stimulate the economy leading to increases in steel demand in a brighter outlook for many of our end markets such as automotive, heavy machinery and the pipeline industry.

Despite positive economic industrial growth data, steel production declines of 25% in the second half of 2008 continued to affect welding consumable sales through the first quarter of 2009. Sales for Lincoln Electric Asia-Pacific, excluding currency impacts, decreased 29% in the quarter.

This sharp decline combined with our ongoing investments for growth in the region resulted in operating loss during the quarter. However, consistent with steel production recovery starting in the first quarter, our March and April sales volume shows sequential signs of improvement and our focus on streamlining operations and consolidating manufacture should set the foundation for improved performance in the quarters ahead.

In Latin America much of the same challenging economic news, with the region experiencing a sharp deterioration in the first quarter. The two largest economies, Mexico and Brazil, are expected to be in recession this year with GDP contraction of minus 5% for Mexico and 1.5% for Brazil, estimates the deep deteriorating month after month.

In Mexico, the automobile parts manufacturing industry continues its sharp downturn. Compared with last year’s first quarter activity, there are no signs of immediate recovery. For the quarter, Latin America sales were down 18%, excluding currency impact and acquisition and Mexico reported a sales drop of 18%.

Despite these declines the region remained profitable during the quarter and continues to implement cost savings initiative based on projected lower market demands. That’s an overview of the regions. From an overall perspective, although the global market conditions remain weak, we continue to focus on our current financial performance and on executing our strategy of building our position as a global leader in the arc welding industry.

We are confident that we will emerge from the global recession with a more efficient and highly competitive business model, one which will further strengthen our market leadership position, accelerate our global growth and improve our overall profitability.

As part of our global growth strategy during the quarter, our Lincoln Electric Asian subsidiary signed a definitive agreement to acquire 100% ownership of Jinzhou Jin Tai Welding and Metal Company, a welding wire business in Jinzhou, China. This acquisition will greatly expand our customer base and bring significant cost competitive, solid wire manufacturing capacity under Lincoln’s control. The transaction is scheduled to close near the end of the third quarter.

Staying ahead in the technology area is also part of our strategy, and it’s even more critical to achieving success in the current market environment. During the quarter, we introduced several new products aimed at improving productivity, especially in the energy and pipeline end markets. We are also establishing a Lincoln green initiative highlighting our new line of engine drives that are more energy efficient and are three years ahead of the EPA mandated deadline for emission standards.

With new products, improvements in processes and improved welding solutions as the market conditions turn positive, we are poised to lead the industry on the growth cycle issues.

Now Vince will cover the financial results in more detail.

Vincent Petrella

Thank you, John. The first quarter of 2009 reflects the challenging global economic environment that we are currently facing. As John mentioned, the quarter’s consolidated sales was down 33.6%, with North American sales decreasing 33.5% and sales reported outside of North America decreasing 33.7%.

Foreign currency effects decreased reported sales by 6.2%, volume decreases reduced sales dollars in the quarter by 33.6%, pricing contributed an increase of 4.6% in sales dollars year-over-year and finally acquisitions increased sales about 1.5%.

On a product line basis, machine sales decreased 42% and consumable sales decreased 28%, excluding acquisitions consumable sales decreased approximately 30%. The percentage of gross profits in the quarter was 21.9% of sales compared with 28.6% of sales in the prior year. The decrease in gross margins as a percentage of sales was recorded across all geographies. Reduced factory efficiencies associated with the 33% volume decline and the liquidation of higher cost inventories contributed to the compressed gross margins.

SG&A expense was $77.5 million in the quarter or 18.8% of sales. The higher SG&A as a percentage of sales were primarily driven by the de-leveraging associated with the overall sales decline, plus increased pension expense of over $7 million in the quarter. This was offset by a reduction in bonus expense of $23.5 million in the quarter compared to the prior year same quarter.

Foreign currency exchange rates decreased SG&A expanse by $7.9 million in the quarter. We recorded rationalization charges of $11.7 million in the first quarter related to previously announced head count reductions as outlined by John in his comments. These rationalization charges along with other previously discussed cost savings initiatives resulted in cost reduction of $11 million in the first quarter and are expected to reduce cost by an estimated $25 million per quarter for the remainder of 2009.

First quarter operating income was 0.3% of sales compared with first quarter 2008 operating income margins of 12.7%. Excluding rationalization charges in the first quarter, operating income was 3.1% of sales. Now moving to geographical segmentations; North America recorded EBIT margins of 7.1% in the first quarter, Europe EBIT margins were negative 6.4%, and the other countries segment recorded a negative 1.2% EBIT margin.

The income tax provision for the first quarter reflected an effective tax rate of negative 78.8% compared with 32.3% in 2008. The negative effect of tax rate was due to foreign operating units reporting pre-tax losses with no associated tax benefit. We invested $13.6 million in capital expenditures in the first three months of the year compared with $12.8 million in the prior year’s period.

Other uses of cash in the quarter included the repayment of $30 million of debt and $11.4 million were paid as dividends to our shareholders. Weighted average diluted shares outstanding decreased to 42,568,000 shares for the first quarter compared with 43,090,000 shares for the first quarter of 2008, a 1.2% decrease. Shares outstanding at March 31, 2009 were 42,513,921.

Our return on invested capital based on a trialing 12-month earnings decreased to 14.5% at March 31, 2009, compared with 18.6% in the prior year period. The company closed the quarter with $300 million of cash on the balance sheet and a net cash position of $191 million.

Now looking to the future. April sales to-date are running at roughly the same levels experienced in March. Although we do not yet see signs of recovery, the rate of decline in sales has moderated. Commodity prices, including steel have continued to fall which will likely result in lower market prices for consumables in the future.

However, we believe the second quarter of 2009 will experience a less significant impact from liquidating higher cost inventories. Provided the sales levels do not deteriorate further, we are optimistic our cost cutting efforts will reflect a better alignment of our cost structure to current sales volumes, resulting in improvement in our profitability profile in the second quarter of 2009. Our strong balance sheet and good cash flow generation will position us well for the challenges of the year to come.

Now at this point, Luthania I’d like to open up the call for any questions.

Question-and-Answer Session

Operator

(Operator Instruction) Your first question comes from Michael Cox - Piper Jaffray.

Michael Cox - Piper Jaffray

My first question is on the restructuring. It seems that the dollar benefit from the restructuring efforts per dollar of rationalization charges, if you will is coming down. Could you describe what the second wave is really targeting and is this as far as you can go in terms of cost cutting at this point?

John Stropki

Well, the second wave is a combination of head count adjustments, compensation reductions and plant rationalization. Plant rationalizations, Michael tend to be particularly in overseas, foreign jurisdictions, more expensive than cost reduction initiatives on the North American continent. So moving to more of a mix plant rationalization from head count reduction.

Vincent Petrella

Yes, Michael just as a follow-up of that is the first quarter actions were primarily related to the U.S. Company and the voluntary separation plan that we had, it was extremely cost efficient. The other activities that we have, will have very good long-term value in terms of the overall cost structure, but outside of the U.S. the costs are substantially different in order to execute that, but we still think it represents very good long-term value of realigning our cost structure around the world.

John Stropki

Michael, the final point I would add is the initial cost reduction initiatives, much of those initiatives that had no associated cost that were traditional Lincoln levers management technique to bring our piece work employees down to lesser than 40 hours work week, and those types of adjustments have really no associated incremental cost to executing them.

Michael Cox - Piper Jaffray

Okay. That’s helpful. You mentioned that the rate of decline has moderated somewhat here and it’s matching more in line with the March trend. I was wonder if you can give a little more color around where March was, I guess by a rate of comparison?

John Stropki

Well, I would say that the March number were reflective as the first quarter. We did really see much change sequentially through the first quarter, and what Vince was commenting on is that we started to see stabilization, if you want call it and clearly if there is any decline around the world it is moderating from what we saw was a very steep curve in the late fourth quarter carryover into the first quarter.

Michael Cox - Piper Jaffray

Okay. That’s helpful, and then my last question is, you took a pretty sizable write-down on your China subsidiary last quarter, and then this quarter you acquired the remaining stake of an operation there. Could you just talk about the decision to do this, I’m assuming that this was previously accounted for as equity income and now it will be fully consolidated?

John Stropki

Yes, Mike I’ll just give you a general view and then Vince will walk you through more of the financial side of it. First off, there are two totally unrelated transactions. We were a minority partner in the Jinzhou business that I spoke about, and we are acquiring that. So the equity write-down in that was not part of that transaction and that equity write-down was part of the other entities that we owned that were currently in the process of re-sizing and Vince, can talk in more detail about that.

Vincent Petrella

Yes, the only thing I would add to that is that the write-downs were taken on majority-owned or wholly-owned businesses under the Lincoln umbrella and the acquisition is being executed, it has been signed on a joint venture deal that we’ve had for a number of years and now we are taking out the rest of the ownership interest to own 100% of the business.

Michael Cox - Piper Jaffray

I guess my question though is that if you were taking a write-down on the other operations, what is different about this one that you would want to employ more capital into?

Vincent Petrella

Well, this one doesn’t require a write-down based on our analysis of the carrying value and the future of cash flow generation that we expect from the business. We have not closed this transaction yet and is expected to be closed during the third quarter of 2009, and we will at that time continue to evaluate the carrying value of our new wholly-owned investment.

Operator

Your next question comes from Walt Liptak - Barrington Research.

Walter Liptak - Barrington Research

First, Vince I want to ask about the second quarter outlook. How should we think about the second quarter, volumes fell down in the 30% range and similarly cost reduction on the, given some benefits?

John Stropki

Walt, in my prepared comments I addressed my view on the second quarter from the perspective that, to the extent that sales declines moderate and don’t take another step down. We expect based on our cost cutting initiatives that will reach a full maturity rate of $25 million in the second quarter compared with $11 million in the first quarter. There should be an improvement in our profitability.

Walter Liptak - Barrington Research

Then with that said, is it simple as we can take the incremental cost reduction added to this quarter’s profit?

Vincent Petrella

I don’t think it’s that simple, Walt as you know there are a lot of factors that determine the overall profitability of any company, some of which we can see and some of which we can’t see or predict. We believe that these cost savings are real; we believe that we will achieve them, but we don’t know what other factors may impact the quarter, be they positive or negative and I think you should look at it in just a static type of view.

Walter Liptak - Barrington Research

Okay. That’s fine. I mean, you gave better guidance than some companies and there was a little bit of surprise so I though I’d test it. The pricing that you got during the quarter up 4.6% is that sustainable, next quarter throughout the year. In such a bad environment how could you be continuing to get pricing?

John Stropki

Well, you really have to loot at it, Walt from where we were. If you look at the pricing history in 2008, the major roll ups in steel cost in our subsequent price increases took place late second quarter, early third quarter.

So we’re not up against those kind of comparables and we’ve actually seen some softening in pricing that has brought down that pricing comparison down from previous type of quarters and to Vince’s view, with the current view of what steel cost will be moving forward in competitive pricing in the marketplace, we expect to see much of that pricing gain evaporate as we transition through the rest of this year.

Walter Liptak - Barrington Research

Okay. Is the Europe pricing, that’s where you are seeing the type of pricing environment?

Vincent Petrella

Well, I think it’s the tough environment everywhere. I mean, when you have steel consumption down close to 50%, you should assume that welding consumption is down somewhere close to that and obviously that puts a lot of pressure in the marketplace.

I think a lot of companies were in different inventory positions and some of them reacting much quicker, particularly the smaller ones that didn’t have a lot of embedded inventories and that will eventually equalize, and I think in Europe in particular we are starting to see that equalization start to take hold.

Walter Liptak - Barrington Research

Okay. Your inventories came down pretty nice. Are you through the higher cost inventories now or is there still more to go?

John Stropki

Well, I said in my prepared comments, Walter that I thought that the most significant detrimental impact from higher cost inventories has come through the first quarter, as you might recollect some of the biggest declines in steel and commodity prices that occurred in the fourth quarter of last year.

There’s still some additional reductions that have come in the first quarter of this year, but not to the magnitude that we experienced in the prior year’s fourth quarter. So it’s our view that the impact from high cost inventory liquidations will be mitigated and will be much smaller in the second quarter than what we experienced in the first quarter.

Operator

Your next question comes from Mark Douglass - Longbow Research.

Mark Douglass - Longbow Research

Vince, can you go through the sales mix for the different regions volume price?

Vince Petrella

Yes, certainly. North America volumes were down 36.4%, price was up 4.3%, foreign exchange had a detrimental impact of 1.5%. So, total North America year-over-year change was down 33.5%.

Moving to Europe, volumes were down 25.6%, price was flattish, acquisitions contributed 3.6%, and then foreign exchange had a detrimental impact year-over-year of 15.3%. So, total Europe was down 36.7%.

Finally, the other countries segment was down in volumes 34.7%, price was up 11.3%, foreign exchange was detrimental by 10% and acquisitions contributed 4.1% in other countries segment for a total decline year-over-year of 29.4%. Those are all based on third party sales.

Mark Douglass - Longbow Research

So, for the rationalization, would you say one other thing that being focused primarily in Europe and then in other countries, and in particular I’m kind of looking at what is that that necessarily took Europe down this quarter so hard, was it higher fixed cost structure, was it more inability to reduce the work force or cut hours sizably and just on flexibility either in North America, just a little insight particularly into Europe and the rationalization in cost cutting measures?

John Stropki

Yes, Mark let me just first start off again with just some general comments. We announced this past week that we are shutting one of our facilities in Italy and we would be moving that production to hold, and the charges we’ll take in the second quarter. Obviously there are fairly significant costs associated with that because of the legal structure within Italy and it’s very much the same in most countries in Europe when it comes to severance penalties that are associated with that.

Now that being said, when we built our plant in Poland, we always thought that it would represent a big opportunity on the cost side that was fairly competitive side of our industry, and we were committed to taking full advantage of that operation when the time was right to do so.

That being where we had a trained workforce, that being when we had volumes that we could transfer and the timing is right to do that, and I think represents a very strong opportunity for us, and we have other actions, not only in Europe, but in other parts of the world that we are deep into the commitment to make the changes that we think are necessary over the long term.

Vince can talk more on the specifics of how the charges were for the details behind that. I think it’s a fairly common occurrence for people that are facing high cost, historic manufacturing operations and transitioning those to better options that they have on the table.

Vincent Petrella

Mark, what I would add in summary to those comments is, generally the flexibility that you have in the U.S. in managing workforce relations including Lincoln’s unique guaranteed employment program gives us much more flexible and rapid ability to right-size, in particular our productive labor force to existing business levels.

Those types of tools are not available, and particularly in Western Europe and other parts of the world. So there are much more limited capabilities for temporary reductions in compensation levels that can be done on the North American continent. So that is the fundamental difference between managing the U.S. business and businesses in other parts of the world is the flexibility that we have with workforce relations.

John Stropki

The one other follow-up comment I would make, Mark is that we are fortunate that through our investment activities over the course of the last several years, we have invested in the infrastructure capabilities that we needed to make these transitions when the timing is right. So we can move fairly swiftly and I think at a very low cost in terms of the production equipments associated with making the move.

Mark Douglass - Longbow Research

Great. Then with that, that will be substantially completed in the second quarter in Italy?

John Stropki

No. That will take a longer period of time than the second quarter. It will certainly be completed by the end of this year, but not in the second quarter.

Mark Douglass - Longbow Research

Okay. So we would see profitability in Europe still challenged for at least second quarter if not till the end of the year.

John Stropki

Yes. Clearly Europe’s profitability will be challenged during the course of this year.

Mark Douglass - Longbow Research

Okay. This might be a difficult question considering what happened last March quarter. What kind of tax rate are we looking at?

John Stropki

I’m not prepared to give any kind of guidance on tax rate.

Mark Douglass - Longbow Research

Okay. Fair enough, and then with the pension expense you said it was $7 million in the March quarter?

John Stropki

Actually it was $7.8 million and for the year it will be up about $37 million, we expect.

Mark Douglass - Longbow Research

$37 million?

John Stropki

Yes.

Mark Douglass - Longbow Research

Okay. Can you give any indication about the amount of capacity, maybe that’s been taken out in your operations or is it kind of check tracking with the volume declines at this point?

Vincent Petrella

I can give you some indication in terms of workforce reductions. We estimate that the actions that we’ve taken so far and we announced that will be completed this year will bring our worldwide workforce down by approximately 20%.

From a factory standpoint, there will be lesser impact from bringing down the productive capacity of our worldwide manufacturing organization. In the expectation that the downturn is temporary, the capacity will be needed from a long-term perspective, but there will be decisions like John discussed on Italy that we view from a long-term perspective of being necessary to align our cost structure and our capacity needs within particular geographies and product lines for the future.

John Stropki

Mark, just to get a follow-up on that. It’s really not our intention to take substantial capacity out of our portfolio. This company is going to grow, welding is going to continue to grow for all the reasons that it had grown in the previous three years and we are going to position the company to have that capacity available to meet those market needs, but it’s going to be a different mix and one of which is going to be much more competitive than we’ve had in the past.

Mark Douglass - Longbow Research

Right. Can you talk about just quickly about the Jin Tai acquisition; we are still looking at July type timeframe?

Vincent Petrella

Yes, beginning of the third quarter.

Mark Douglass - Longbow Research

Have you given any identification as what kind of sales run rate we would be looking at now. At the time I think you said was around $200 million in sales in 2008. Is it similar to the trends we’ve seen, I guess we can just come up with a number?

Vincent Petrella

Yes. We have disclosed that the run rate for 2008 was $200 million and in the numbers that I gave on regional sales levels year-over-year, I would expect China to have similar types of reductions that was disclosed for the other countries segment, perhaps a bit better than that on a year-over-year basis.

John Stropki

Yes, again follow-up on that Mark. I’m much more bullish on the actions that the Chinese government is taking to build up their economy. I mean 6% GDP growth in the first quarter did not meet the 8% number, but it’s also much larger growth in any other region has seen.

I’m quite optimistic they will achieve the 8% growth rate and we are seeing as I mentioned I my remarks, our utilization of our Chinese factories improving substantially from that that we are seeing in other parts of the world.

Now that’s countered by the fact that there is price reduction in that marketplace because steel prices move very rapidly there and obviously the welding consumable component of the steel pricing is critical to that. So we will see volume increases, but we’ll also see price reductions and it will be the balance of that that will determine what sales revenue side looks like, but the utilization numbers are improving and should have continue to improve based on everything that we’re seeing in terms of the investments.

Mark Douglass - Longbow Research

Finally, is the India plant is up and running now?

John Stropki

We’ll have our grand opening on May 9, well the production equipment is fully installed at least to the levels that we expect for this year and we are producing finished product and expect to be in the marketplace very quickly. We are very optimistic of our ability to achieve our objectives in that economy; one because it is still growing; and two, because our penetration is very low in the products that we will be producing in that plant, but that our name is very well known in that country.

Operator

Your next question comes from Steve Barger - Keybanc Capital Markets.

Steve Barger - Keybanc Capital Markets

If you normalize the higher cost inventory to current levels, what would gross margin have been or can you just tell us what the impact was in dollars?

John Stropki

There is other variables that would affect what our margins would be. So I’m not prepared to give you an estimate on that.

Steve Barger - Keybanc Capital Markets

Well, I guess trying it in another way, since the higher priced inventory has gone as we look forward into the other quarters, is it reasonable to expect a pretty material improvement in gross margin?

John Stropki

I would necessarily say material, but there should be less of a headwind in our phase on that issue going forward than what we had in the first quarter of 2009.

Steve Barger - Keybanc Capital Markets

Okay. This is tough to quantify I’m sure, but how much more can you take out of inventory in AR in terms of cash generation or I guess more simply, do you expect to see a couple of more quarters of that kind of cash flow performance?

John Stropki

Steve, I would expect that to moderate a bit along the lines of what’s going on with our top line. So we’ve had our most significant declines in sales in the first quarter as compared with the fourth quarter and certainly last year and so to the extent that the top line moderates and declines at a lesser pace perhaps, we should see a lesser harvesting and liquidation of our accounts receivable than inventories going forward.

Steve Barger - Keybanc Capital Markets

Okay. Well, regardless you still have a lot of cash and your balance sheet is in great shape. After you get past the pension payments, are you looking at any further debt pay down or are you seeing private company multiples coming down. How you think about the cash right now?

Vincent Petrella

Well, there won’t be any significant debt pay downs until our private placement of the last tranche comes due in March of 2012. That’s $80 million and that’s the bulk of our outstanding debt. We won’t pay that down until 2012. The remainders of our debt $20 million, $25 million or so is overseas working capital requirements, lines of credit to run our foreign operations and that will likely stay intact into the near future.

In terms of acquisitions, we’re always active in looking at properties that we can bring into the Lincoln hold at the appropriate prices. Negotiations on properties are very difficult in this environment as sellers are hesitant to believe the current earnings generation and so buyers like Lincoln have a difficult time paying for earning streams that were in the past year, or so that we don’t believe are repeatable for the near future.

So there are some in our view and I’m sure you’re hearing this from other companies that you talk to, some disconnects between evaluations of buyers and sellers.

Steve Barger - Keybanc Capital Markets

Yes. So that being said, other than pension is it likely that you’ll put any cash that you generate on the balance sheet for the time being?

John Stropki

Yes, I think so unless we again confine the appropriate acquisitions at the right prices. So I would make any predictions on significant uses of cash at this point in time.

Steve Barger - Keybanc Capital Markets

Switching gears to some of the infrastructure stuff that you talked about. Can you talk about major infrastructure projects of note around the world whether it’s stimulus driven or not and have you seen any existing projects accelerate because of planned future spending relative to the, I think you said 10% of projects that might benefit from welding?

John Stropki

Yes, the 10% that I commented on course fee would relate to the infrastructure stimulus bill in the United States. The terminology that we use there of shovel-ready, I mean that’s pay being of roads in minor road construction, it’s not major infrastructure kind of work that they had originally focused on.

That being said, even the Obama administration is talking about things that it will require substantial amount of welding. The commitment to wind power and green energy, and nuclear those types of activities are huge welding consumable and equipment kind of projects. That is the kind of investment that we’re seeing being made in China and Asia in general today. A lot of wind tower projects, a lot of pipeline projects that are continuing to move forward or will maybe even accelerate.

So it’s a mixed bag depending on what part of the world that you’re talking about, but I would say in general, in most other parts of the world what we’ve seen is a much bigger commitment to infrastructure in the stimulus plans that have been announced and improved, and what we’ve seen to date in the United States project.

Operator

Your next question comes from James Bank - Sidoti & Company.

James Bank - Sidoti & Company

Just I was wondering if you can help me with the variance between what otherwise your more optimistic view point is on top line compared with Newcorp last week in U.S. steel last night, and even in one or two works what we perform regard to their welding division. They are all implying accelerated declines into the second quarter, so I’m just trying to understand what you guys might be seeing or experiencing, that’s different from them?

John Stropki

Well, James I think what we said was that we’ve seen a slowdown in the decline, not acceleration in the decline. I mean that’s our current view and it’s the best view that we could give you.

That’s kind of the overall global aggregate, but we have seen it in certain markets, China in particular where we’ve seen a bit of acceleration in the volume side of it. Now the early read and there is no guarantee that that’s sustainable, but I don’t think that U.S. steel or Newcorp quite frankly has very strong positions in the steel production capacity in China or Asia in particular.

So, the Asian market is showing some improvement and they are not participating in that, then we are only focusing on -- Newcorp is primarily a U.S. based steel producer. U.S. steel has some international components with strong focus on U.S. North America that maybe the difference in terms of their view versus ours.

James Bank - Sidoti & Company

Speaking with Newcorp, they seem to be descrambled with the infrastructure spending that’s planned in this stimulus bill that ultimately might be all sessile in those stakes. Is there anything you might be able to comment on that?

John Stropki

Well, I don’t know that it’s very popular to comment on things that the Obama administration doesn’t approve us. So I will just tell you that I think there is a lot of disappointment in the steel industry, I don’t think its just Newcorp. I think there is a lot of disappointment in the construction, equipment industry over the lack of focus on infrastructure in the United States versus that that we are seeing in other parts of the world.

That being said, the need here is equal or greater, but there seems to be a redresses on addressing those needs in favor of other activities that seem to be more popular. Whether that changes over time, your guess is as good as mine, but we’re going to react to those opportunities that we see around the world and we are extremely well positioned to take advantage of them on a regional basis and I think we’re well ahead of the curve in doing so.

James Bank - Sidoti & Company

Vince, what’s your CapEx spend for the full year?

Vincent Petrella

What we are saying is it, it would be somewhere between $45 million and $55 million at this point in time.

Operator

Your next question comes from Greg Halter - Great Lakes Review.

Greg Halter - Great Lakes Review

Can you comment on where your cash is located around the world?

Vincent Petrella

Of the $300 million, we have roughly $240 million of it in North America, another $30 million in Europe and the rest of the world has the balance of around $30 million.

Greg Halter - Great Lakes Review

In fact $240 million North America, I presume some would be in Canada. So if you wanted to bring that back, there would be some repatriation tax on that?

Vincent Petrella

Actually all of that’s in the U.S.

Greg Halter - Great Lakes Review

Relative to your debt now, the $100 million or so, what’s the average interest rate that you are paying or paid in the quarter?

Vincent Petrella

Well, the rate on the private placement debt is 4.6% and then the total debt rate is in the high 7% range that’s caused by higher interest rates on borrowings overseas. However going forward we expect the private placement debt caused on the bulk of it, the $80 million to be about 3.8% through maturation, the maturity of the debt in 2012. There’s some different Latin American countries that we borrow locally that have a much higher interest rates than what we are accustomed to in North America.

Greg Halter - Great Lakes Review

The private placement you are talking 3.8% going forward which would then be covered by those other rates in other parts of the world?

Vincent Petrella

Yes, that will drive out significantly. I can’t predict what that might be, but I can tell you that the bulk of the debt is that about 3.8% for the remainder of the term.

Greg Halter - Great Lakes Review

I noticed on the cash flow statement, the share repurchase $343,000. Is that a carryover from ‘08 or is that something you did in ‘09?

Vincent Petrella

Those are share repurchases associated with stock compensation benefit program required to satisfy tax withholdings. So it wasn’t part of our share repurchase program.

Greg Halter - Great Lakes Review

What are your thoughts on share repurchase given the market and where your stock is currently?

Vincent Petrella

Well, as we’ve always said, Greg we look at it not from a systematic standpoint, but from a use of our balance sheet standpoint, what we see in the future in terms of acquisition opportunities, dividend requirements and what the underlying business is doing.

We are being a little bit more cautious here in buying shares until we see some signs of economy turning around and our business improving and so we are in a phase where we are being a little bit more cautious about how we use our balance sheet.

Greg Halter - Great Lakes Review

Relative to the swine flu, I know it’s very early and there is a lot of media hype probably over this, but I wonder if you could comment on anything you’re seeing relative to your Mexican operations and then anything globally as well?

John Stropki

Well, we obviously touch base regularly with our Mexican management, not only from a business perspective but from an employee perspective. The news is that we have at this point is very good, we are not impacted in any negative way.

What we are seeing is school closures in Mexican city where we have the smallest of our three plants, but we are not seeing a major impact on the business community at this point in time. That doesn’t say that it can’t turn, and it is obviously that is something that will keep our eyes on.

It’s surely not something that the global economy needs at this point in time, its another element of surprise or concern, but we’re are quite hopeful that the world bodies will contain this in a way that it won’t have any further negative impact.

Greg Halter - Great Lakes Review

I think you had mentioned that you expect when we come out of this to have a more competitive marketplace, but at the same time you mentioned there is some of maybe smaller or marginal players that maybe going by the way side. Just wondered if you could square up those two lines of thought there?

John Stropki

I think I said two things, let me cover those again. One, we will clearly emerge with a much more competitive cost structure in those markets where we’re making the changes that we’re making and that’s a reason for making those changes.

Two, we do expect that the markets will be fiercely competitive, because people will have been in very difficult situations and they are going to fight hard to get their shelves out of those kind of situations.

Third, not everybody will survive, those companies and I don’t think that’s just true in the welding industry, but companies that were under capitalized and didn’t have the strength to maneuver through this very significant recession, probably won’t be there as competitors in the future. Whether they just seas to exist or whether they are acquired by companies like Lincoln will have the opportunity to change the competitive landscape in certain markets and we will surely take advantage of those opportunities as they are presented.

Greg Halter - Great Lakes Review

One last one, you’ve done a very good job on the receivables and I don’t know if you use this or not, but in terms of invoicing do use see an email or e-fax to get the invoices out to customers like we have been reading about some of the other companies?

John Stropki

Yes, I would say we are extremely efficient of that, particularly in our North American operations where we have very powerful ERP system, SAP and a lot of tools. I think if you look at our collections, DSOs that were well ahead of industrial peers in that area.

Operator

Your final question comes from Holden Lewis - BB&T.

Holden Lewis - BB&T

Can you give a little bit more color, I guess on the trajectory that you are expecting out pricing since you know sort of when [inaudible] anniversary and things like that. Could you give us a sense of, it slips in Q1 from Q4, but it’s still positive as you have the tax pricing becoming true.

Sequentially, are you seeing pricing go negative in any of the territory or is it just going to zero and at one point do you think you kind of hit zero or go negative on the pricing during the course of the year?

John Stropki

I would start Holden, by saying that it’s likely that starting in the second quarter, that pricing impact will flatten out but not go negative. So again, when you are looking at our pricing numbers that are based on a year-over-year comparison and we have some of our biggest price increases that occurred during the second and third quarter of last year. So, just doing the math on last year’s increases versus what’s going on this year and not even taking into account large pricing decline, we should see the pricing impact on the top line diminish starting in the second quarter and deteriorating through the rest of the year.

Vincent Petrella

Holden, I would just add to that. I mean, I think in different regions, we are in different parts of that cycle. As I mentioned to you the decrease in pricing in Europe was already felt in the quarter, but we expected that will stabilize and we want see the further deterioration or significant kind of deterioration. So, it’s depending on the market consolidation and the amount of fragmentation in the market and also the regional steel pricing, you’ll see different models in different parts of the world out there.

Holden Lewis - BB&T

Europe was flat in Q4 and flat in Q1 in terms of pricing. I mean how is that eroded? It looks like that hits base down to zero pricing and you’ve already anniversaries your past increases. How has that gone negative?

Vincent Petrella

Well, I think it’s more specific in terms of the mix areas. We’re not seeing any deterioration, in fact we expect that there maybe some improvement on equipment pricing based on our higher technology platform, but if you look at the specific of MIG wire in the European market, you would have seen some pretty significant deterioration in the average selling prices in that marketplace. Now coupled with that the steel prices are coming down, but when you are sitting with higher cost steel, you get behind the curb of that. Eventually, we’ll get ahead of the curve with that.

Holden Lewis - BB&T

In North America, you have been seeing pretty stable pricing across the Board I think, have you seen any wobble in that or has that remained stable. How do you look at it in North America?

John Stropki

Well, I think that Vince commented on, and I would suspect that we will see some either flatting or deterioration on the price model in the U.S. Markets are soft, steel prices have come down and certain competitors are reacting to that in a more aggressive fashion and we will respond accordingly where we think it’s in our best interest to do so.

Holden Lewis - BB&T

That’s something you haven’t necessarily seen yet, you’re just kind of projecting?

John Stropki

There has been some on the consumer. I have to remind you Holding, that the business is split between consumables, has there important commodity input and equipment that doesn’t necessarily have such a large component of metals in the pricing. So it’s certainly on the consumable side there has been some slight easing on the equipment side.

Holden Lewis - BB&T

Then you have a sense when you look at, sort of corporate wide. Well you said some of these things are in different parts of the cycles. I mean, ultimately what kind of negative number would we expect that’s the worse on pricing? I mean is this like a negative two type of thing or what sort of the expectations in terms of where pricing could go company-wide?

John Stropki

That’s something that wouldn’t ever attempt to try to predict. Obviously the variables that affect that are continuing declines in commodity input prices. Volumes can certainly have an impact on the competitive marketplace.

There is greater volume decline that certainly brings more competitive pressures to the marketplace as the industry or competitors try to sell their production and maintain their market share. So that’s very difficult to try to give a bead on, but I can tell you that the two most important variables are what the commodity input prices do and what the overall industry volumes do for the remainder of the year.

Holden Lewis - BB&T

Just looking at your lines, machinery sounds like it’s still flat up in terms of pricing, whereas consumables are where the problem, that’s kind of breakdown?

John Stropki

I won’t describe it as a problem, but we will describe it as consumables being a little bit more sensitive to significant input cost associated with metal.

Holden Lewis - BB&T

Then I guess lastly, obviously you feel like you’ve gotten your inventory kind of in hand, how do you feel about your channel partners. Do you feel like there is still inventory out there or they’re running recently lean at this point, or --?

Vincent Petrella

I think, we get bad calls about every quarter, but now again it’s my view and I haven’t seen anything that would substantially change my mind as the distributors have always stayed fairly lean on inventory and if there has been any de-stocking, that surely is completed and there is no more room for that.

There’s probably more, any inventory de-stocking that you would have seen would have been probably more at the end users where they watch the production volumes have in some cases and obviously they are going to carry less inventory with that, but again I think the majority of that if there is any is substantially behind us.

Operator

At this time I would like to turn the call back over to Mr. Petrella for closing comments.

Vincent Petrella

Thank you all for joining us on this first quarter conference call. We look forward to talking to you at the end of July to report our second quarter results. Have a nice day.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Lincoln Electric Holdings Inc. Q1 2009 Earnings Call Transcript
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