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Lincoln Electric Holdings, Inc. (NASDAQ:LECO)

Q1 2012 Earnings Call

April 24, 2012 11:00 a.m. ET

Executives

John Stropki - Chairman, President and CEO

Vincent Petrella - SVP, CFO and Treasurer

Analysts

Thomas Hayes - Thompson Research Group

Walter Liptak - Barrington Research

Steve Barger - KeyBanc Capital Markets

Mark Douglass - Longbow Research

Holden Lewis - BB&T Capital Markets

Stanley Elliott - Stifel Nicolaus

Operator

Greetings and welcome to the Lincoln Electric Q1 2012 financial results conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host, Mr. Vince Petrella, CFO for Lincoln Electric. Thank you Mr. Petrella. You may begin.

Vincent Petrella

Thank you, Latania and good morning to all of you joining us today and welcome to the Lincoln Electric 2012 first quarter financial results and conference call.

We released our earnings this morning prior to the market’s open. Additional copies can be obtained on the Lincoln Electric website or by contacting our Investor Relations office.

Lincoln’s Chairman and Chief Executive Officer, John Stropki will start the discussion this morning and provide commentary on the quarter. I will follow up with some additional financial numbers after John’s comments. A PowerPoint presentation is part of today's discussion and is available on the Lincoln website under the Investor tab as part of today’s webcast. The presentation will also be posted along with a replay of today’s webcast on our site later today.

But before we get started, let me remind you that certain statements made during this call and in our discussions may be forward-looking and actual results may differ from our expectations. Actual results may differ materially from such statements due to a variety of factors that could adversely affect the company's operating results. Risks and uncertainties that may affect our results are provided in our press release and in our SEC filings on Form 10-K and Form 10-Q.

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

John Stropki

Thank you, Vice and good morning everyone. Our first quarter results were very positive setting the record for the highest sales quarter in our history. Overall profitability and cash flows also improved significantly. Strong performance in the quarter resulted from improved product mix and better pricing dynamics in all of our segments.

We experienced very strong sales in North America, driven by demand in both the export and domestic markets for our high technology equipment. Recent acquisitions also played a role and had a very positive impact. Sales were up 21.4% to $727 million. Operating income rose 54% to $92 million or 12.6% of sales, and net income increased 37% to $64 million or $0.76 per diluted share. Excellent sales results for the first quarter of 2012 had a great start for the year.

Looking at the segments, our North American operations had a very strong growth in the quarter. Sales rose 36% year over year to $381 million. Export sales increased 43% from the same period a year ago, and export sales to the BRIC countries, including intercompany sales, were up over 21% over the same period.

Consumable sales were strong across the board, giving strong sales in the automotive and transportation segments. We also saw continuing strength in both the construction and ag equipment manufacturing segments. Welding equipment sales grew significantly in the quarter as our customers continued to embrace Lincoln’s waveform technology.

The launch of our new energy efficient FlexTec inverter platform has been one of the best in our long company history. Automation sales continue to accelerate in North America as customers invest in tools that help them reduce their costs and improve quality. Our recent North American acquisitions Torchmate, Techalloy and Arc Products, all performed quite well in the quarter.

Continuing to expand our specialty consumable products offerings, during early March we acquired Weartech, a manufacturer of cobalt-based consumable products with operations in California and Port Talbot, Wales. We’re also quickly integrating Weartech into our broad consumable product portfolio.

The general industrial economic environment in North America remains positive but appears to be moderating. Key industrial metrics that we follow such as industrial production and capacity utilization across factories in the United States are running ahead of last year’s comparables but showing some month to month volatility.

Total manufacturing industrial production in the U.S., excluding high-tech segment, was trending 5 points ahead of 2011 in March of 2012 while capacity utilization was running at approximately 78%. The U.S. purchasing manager index also continues to indicate a growing economy although the measure is softer than the Q1 2011 measurement.

Turning to our Lincoln Europe welding segment, the economic environment continues to present both challenges and opportunities basically along geographical lines and market segments. While Southern Europe remained challenged, we did see improvements in the region coming mainly from the UK, France, Eastern Europe, Russia, the Middle East and Africa.

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

The energy-driven business and particularly the oil and gas segment in the Middle East has continued to drive strong demand for our products. Robust fourth quarter sales into this segment continued into the first quarter of 2012, with year-over-year sales increases of over 60% into the region. The Middle East and North Africa market remained a positive for equipment and consumable exports from the United States and China.

Sales into Sub-Sahara Africa were also strong in the quarter, driven by strong sales throughout our South American trading company. This company has continued to grow its market share since it was established in early 2011, which is an endorsement for our strategy to leverage our global product offering through local distribution in key developing markets. By building local infrastructure, we can reach a broader customer base with products from all around the world that are well suited to the local applications as well as global market segments.

Sales for the European segment were up 10% to $126 million, which includes contribution from our recently acquired welding consumables business in Russia. We’re continuing to make progress in consolidating our two Russia businesses into one for better efficiencies. During the quarter, welding equipment and automation sales were up over 10%, and our Uhrhan & Schwill pipe mill related business based in Germany continued very strong.

In Asia-Pacific results, the company made solid progress during the quarter against difficult macro-economic background. Overall sales in the region were up 6% over last year to $93 million. Exports from the region’s factories were up over 14% which helped to offset more sluggish demand in some key local markets.

Profitability also showed some important improvement across most of our business units in the region. Improved sales mix, better pricing discipline and cost control, all played a part as market conditions in China, the region’s largest unit, continued to get increasingly challenged. The HSBC Purchasing Manager Index, which tracks manufacturing activity, has signaled contraction for six consecutive months in China.

Our business in China are responding aggressively to these conditions and are making good progress in shifting from a market expansion mode to a market consolidation mode, the result of which was improved year-over-year for the quarter – both year over year and sequentially. Driven by key sectors such as construction equipment and automotive manufacturing, we expect that the trading conditions in China will remain soft for the next quarter or two and then return to a more positive trajectory later this year.

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

Looking at South America, year-over-year sales grew by 17% to $40 million, led by Venezuela, Brazil and Argentina. In South America, our focus on key industry segments within the region continues to provide good results. Specifically in Brazil, our efforts within the shipyard, offshore and heavy industry segments have generated large equipment orders. The region faces a serious lack of qualified welders and thus a number of our heavy industry customers have invested in our virtual reality welder training systems.

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

On the economic front, 2012 GDP grew throughout South America with the exception of Brazil is expected to moderate to 4.3% from 6.5% in 2011. Brazil, the largest economy in the world, is expected to regain momentum and grow by 3.9% in 2012 from 2.7% in 2011. Pricing on minerals, energy and agricultural products continued to drive strong investments in these sectors. In addition, infrastructure build-out remains at elevated (ph) levels. These investments continue to benefit the majority of our industry segments. We continue to leverage our complete global product portfolio and welding solutions into the region and for our key industry segments.

At the Harris Products Group, sales in the quarter were up 6% year over year to $90 million. Commodity and metal markets have declined year over year from prior 2011 levels and will put downward pressure on consumables in Q2 and Q3. The group’s equipment and retail business continues to grow while consumable brazing has continued to trend with the track of the housing industries.

For WCTA, one of Harris Products segment businesses, overall retail sales were up double digits year over year, driven by increased volumes and new product offerings. Key drivers affecting the Harris business growth going forward is the modest growth rate for the U.S. for HVAC replacement market, new housing starts and construction spending for residential and non-residential products on a global basis. Those are the market segments tied to this.

Turning to the activities in the industrial segments, several welding industry segments continued to show good growth and activity. Offshore construction activities continued to grow, particularly in China and Southeast Asia where the focus on building high specification rigs and floating production units remained a priority.

Brazil’s offshore market continues rapid expansion in anticipation of future drilling in deepwater blocks off their coast, and North America continues to lead subsea construction activity for international large scale projects for subsea systems.

The pipe mill segment continues to expand. Structural piping and water pipe segments are expected to continue to shrink for the balance of 2012. Line pipe demand will be regionally driven for the balance of 2012 with the Middle East, Russia and China continuing to be very strong. Equipment upgrade interest is very positive across these segments with increased interest in control systems and Lincoln Power Wave technology.

We continue to grow our share of consumable conversions in this segment at a very strong pace. Heavy fabrication continues on a steady pace as I mentioned earlier. With major equipment manufacturers continuing to expand facilities both internationally, especially in China, India and also here in the United States.

Automotive output continues to expand in many key markets. And a number of automotive producers have announced plans to expand or increase production in both India and China. That’s a brief look at the industry market segments.

And finally, in the economic metrics, a number of the economic metrics that we serve are barometers for the arch welding industry and the global steel production is one of the most important to us. According to the World Steel Association, global steel production increased 1.9% in February to 120 million tons. China produced 56 million tons, up 3.3% year over year and U.S. crude steel production was 7.3 million tons, an increase of 8.8% year over year.

As mentioned earlier, we were off to an excellent start, with robust year-over-year sales growth, especially in equipment and automation. We remain firmly committed to improving our operations and executing our long term strategic objectives.

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

Vincent Petrella

Thank you, John. As John pointed out, our first quarter 2012 financial results reflected a significant quarter-over-quarter improvement in revenue and operating earnings from the first quarter of 2011. Consolidated sales were up over 21% and operating income improved to $91.7 million.

Incremental operating profit margins hit the 25% mark in the quarter. On a consolidated basis and compared with the first quarter of 2011, volume increased reported sales by 12.8%, pricing increased sales by 3.7% and acquisitions contributed an increase of 5.9%.

During March, we closed our first transaction of the year acquiring Weartech International, a specialty alloy consumable producer with over $30 million of annual sales. Our first quarter gross profit margins increased to 29.6% compared with 26.9% in the comparable prior year period. The increase in gross margin resulted from leverage from increased volumes, better product mix and higher pricing around the world.

The company recently announced various price increases during the latter part of the first quarter and the beginning of the second quarter of 2012. We expect these announced price increases to add approximately 3% to the sales line in the second quarter compared with the first quarter of 2012 on a sequential basis.

SG&A expense for the quarter was $123.6 million or 17% of sales compared with approximately $102 million or 17% of sales in the prior year. The increase in SG&A expense was primarily driven by higher bonus accruals of $11 million as operating profit increased substantially on a year-over-year basis.

Operating income for the quarter at $92 million was 12.6% of sales compared with about $60 million in the prior year or 9.9% of sales in the same period. The prior year’s quarter included charges of $357,000 related to rationalization actions in Europe that began in 2009. Excluding these special items in 2011, operating income was $59.8 million or 10% of sales.

Net income for the first quarter was $64.2 million or $0.76 per diluted share compared with the net income of $46.9 million or $0.55 per diluted share in the 2011 first quarter. That’s a 37% increase in net income. The prior year’s quarter did include after-tax rationalization charges of $281,000 and a $4.8 million favorable adjustment for tax audit settlements. Excluding these special items in the prior year, net income was $42.3 million or $0.50 per diluted share. That adjusted net income increased 52% over the prior year’s quarter.

Effective tax rate for the first quarter was 31% compared with the rate of 22.5% in the prior year. Excluding the prior year’s special items, the adjusted effective tax rate would have been 30.4% again the prior year.

Now moving to the segments, North America. On a year-over-year basis, sales in North America were up 22.5% due to volumes. Prices increased sales by 3.9% and finally, acquisitions increased sales by 9.7%. North America improved its EBIT margin to 16.8% of sales, a 200 basis point improvement over the prior year. Strong volume leverage drove the margin expansion.

Europe. Sales in Europe were up 3.3% due to volume and our Russian acquisitions added 7.3% to the top line sales. Prices increased over the prior year by 4.7%. Foreign exchange decreased sales by 5.2%. Europe improved its EBIT margin by 480 basis points to 9.8% of sales compared with the 2011 first quarter. The margin improvements were largely attributable to product mix and improved pricing.

On a year-over-year basis, sales in Asia-Pacific were relatively flat due to volumes but prices increased sales by 2.2% and foreign exchange increased sales by 3.1%. The Asia-Pacific EBIT margins increased to 2.7% from a breakeven position in the same quarter in 2011. Year-over-year improvements were experienced in our largest markets in the region, China and Australia.

Sales in South America were up 10.5% due to volumes. Price increases contributed 9% to sales and foreign exchange decreased sales by approximately 2.6%. Price increases in South America are above the group average because of higher inflationary rate. South America improved its EBIT margin by 130 basis points to 7.3% of sales compared with 6% in the first quarter of 2011. Margin improvements were primarily driven by stronger results in Venezuela.

Compared with 2011, sales in Harris Products were up 6.5% due to volume. Price increases contributed about 90 basis points of sales and foreign exchange decreased sales by 1.4%. Volume increases were higher in the equipment product line. Harris Products improved its EBIT margin by 30 basis points to 8%.

Operating activities generated $79 million of cash flows in the first quarter compared with about $17 million in the same period last year. Cash flows for the quarter reflected higher net income and a lesser need for working capital to support the business in 2012 compared with the prior year. We had improvements in year-over-year average operating working capital to 21.4% compared with 22.1% at March 31, 2011.

The company closed the quarter with a cash balance of $300 million, a net cash balance of $275 million and a positive net cash to invested capital ratio of 21.4%. The company invested $12.6 million in capital expenditures in the quarter and our 2012 capital spending plan will likely remain in line with our 2011 spending pattern approximating annual depreciation and amortization expenses.

At this time, we estimate the 2012 capital spend of between $60 million to $70 million. During the quarter, we paid cash dividends of $14.2 million. Our weighted average shares outstanding for the quarter ending March 31, 2012 were 84,608,000 shares. And finally, we invested $22 million in cash in the acquisition to purchase Weartech International.

That’s the extent of my prepared comments. And with that, I would like to open the call for any questions, Latania?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Thomas Hayes with Thompson Research Group. Please proceed with your question.

Thomas Hayes - Thompson Research Group

Hey congratulations on the quarter. My first question just kind of relates to the Asian operating or EBIT margin, nice job on that. Just it’s been a large area of focus for you guys for a while especially with investments for the last couple of years. Just wondering your thoughts on the sustainability of the margin performance we saw in the first quarter throughout this year and kind of what your targets are for a longer term margin performance in that segment?

John Stropki

Well, you’re exactly right, Tom that it has been and it will continue to be an area of very significant performance for us. We remain extremely bullish on the growth opportunities within Asia, in particular China and India but with other important segments there. And we think that there are some substantial opportunities for us to continue to improve our operating performance in China as well as to continue to grow our sales as the markets stabilize and continue to build.

So we have more upside than we have downside. But as we have said from time to time that we’re going to go through cycles there depending on the market conditions. And some will be better cycles than others but over the long term it will be a very positive investment for our shareholders.

Thomas Hayes - Thompson Research Group

Then just secondly, it sounds like you are seeing good growth from the – I think you mentioned the equipment upgrade cycle. Is that kind of end market specific or are you seeing that across all your segments?

John Stropki

I would say it’s pretty broad, Tom, and we’re seeing pretty significant capital investments in most of the important segments. Clearly our high-technology equipment is driving productivity improvements in many of the key segments around the globe and we are attracting a tremendous amount of interest because of some of the advantageous our equipment has over any competitive offering.

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

Thomas Hayes - Thompson Research Group

Just a last question, you mentioned pricing actions that you implemented late in the quarter, can you provide any more color whether it’s on machines or consumable price increases?

John Stropki

It’s across the board. We raised prices on both equipment and consumables.

Thomas Hayes - Thompson Research Group

On a global basis?

John Stropki

Yes.

Operator

Our next question comes from Walt Liptak with Barrington Research. Please proceed with your question.

Walter Liptak - Barrington Research

On the pricing question, just a follow up, are you taking up prices the same globally? Is that what I just heard you say because you’ve got more or less price increase going on in different parts of the world right now?

John Stropki

Yeah, we have increases going on in all markets, Walt, there the timing is slightly different and the percentages are slightly different. But based on chemical or other raw material cost increases, including some instance of steel, we are increasing prices in all market segments.

Walter Liptak - Barrington Research

Is this a later price increase, I mean, you normally put in place? Typically I think you’ve put in early part of January as part of the year?

John Stropki

Well, the U.S. is actually our second price increase this year. So we did have one early in the year primarily on equipment but now we’ve had a second round, it was a true-up based on cost increases in the various different segments. In the case of other global markets, we don’t have the kind of history that you would be familiar with of a first quarter kind of North American price increases.

Walter Liptak - Barrington Research

Okay, got it. And then maybe it will help to segue to North America where the volume growth was really strong. And I know you made some commentary around there but is there anything that – I mean, there is so much worry out there about industrial production growth moderating and slowing in some end markets. What kind of sequential trends did you see, what sectors are contributing to that volume growth?

John Stropki

Well, we have pretty good performance across most of the sectors. Walt, I would say the heavy growth areas, automotive has been very strong. Our commercial trailer manufacturing has been up, railcar manufacturing, tech and construction equipment have been pretty strong. But I would tend to agree with you and tried to emphasize in my prepared remark is that we are seeing more volatility in the metrics of industrial production purchasing manager’s index. And while the year-over-year numbers have trended quite positively, the sequential kind of numbers again are showing some volatility and some softening.

So we know the comps are going to get more difficult as we transition in the second half of the year, affect the part of our growth and we think our focus is continuing to focus on market share growth. And if we do see softening in the market, we will continue to use that as our primary weapon in improving our results.

Walter Liptak - Barrington Research

Okay. You mentioned that sub-construction markets, you’re hopeful, might come back. Those are still about 20% of revenue.

John Stropki

I was talking specifically about construction equipment – I don’t recall having a conversation about specific construction. But the demand for construction equipment has been very robust and the same thing is true with the high commodity prices. The agricultural equipment is doing exceptionally well.

Walter Liptak - Barrington Research

And then I’ve got to ask one about Europe. And the volume growth that you saw there and obviously with debt crisis and some economies going at recession, I thought that volumes would be negative this quarter and the volumes were up 3.5%. What do you attribute that to? Is it market share gains?

Vincent Petrella

It’s a couple of things. It’s strong sales mix towards machines and equipment where we think that we are gaining some share. And also, as we talked about in the past couple of quarters calls, Europe has some weakness in the southern part of Europe and some stronger markets that we participate in, in Africa and Middle East. And so there are parts of Europe that are down, the southern part of Europe but it’s slightly offset by the stronger parts of that region, including product mix that is doing quite well on the machine and equipment side of the business.

Walter Liptak - Barrington Research

Okay. How much is automotive in Europe?

Vincent Petrella

That’s less than 10%.

John Stropki

But it is probably one of the areas where we have had the most success in capturing market share. Our consumable and equipment platforms are very much tailored towards high automation, high productivity, quality demands in the automotive market. And our consumable product lines, both our carbon steel and also aluminum are doing exceptionally well in those areas.

Walter Liptak - Barrington Research

And then your profit, it’s nice to see that profit coming out. That’s the best first quarter profit I have seen in a while. Is it cost out or combination of that and pricing and what kind of a price increase are you taking in Europe?

Vincent Petrella

It’s just a little bit of cost out, it’s pricing improvements and then lastly, it’s product mix. Again, the shift towards higher growth on the machine side of the business aids the overall margin of the business. And I’ll let John comment on any pricing changes in Europe.

John Stropki

Yeah, I think our price increase in the consumable is in the 4% to 5% and that’s in core Europe, it’d be a little bit more in Russia. And that is more than the Middle East and Africa that Vince talked about, those markets are generally serviced out of the North American manufacturing platform with the exception and I think a very positive exception that we are now penetrating some of the mid-market segments in Africa and the Middle East through our Chinese manufacturing platform that gives us a real cost advantage over either local manufacturers or people servicing that market out of Europe.

Walter Liptak - Barrington Research

Okay. And if I could just switch to the acquisition, Weartech, maybe talk at all about accretion or what you expect out of the business over the next 12 months?

John Stropki

It will be very modest, just add a couple of cents a share.

Operator

Our next question comes from Steve Barger with KeyBanc Capital Markets. Please proceed with your question.

Steve Barger - KeyBanc Capital Markets

I want to go back to the mix question. I understand you’re benefitting from an equipment upgrade cycle, but what are you doing specifically to drive that shift to the higher value equipment and the chemistry based consumables? Is it new customers, is it sales force having more success selling the new features? Maybe just flush that out a little.

John Stropki

Well, I think you have to go back to the tremendous effort we put into R&D during the down cycle of 2009. We came out with this very strong portfolio of new equipment right after or even during that deep recession. But there was a lot of behind the scenes activity to substantially upgrade our equipment line that’s continued on and even beyond that. And talk specifically about this FlexTec product line that has been (ph) the most successful launch of new equipment that we’ve had in the history of the company. And that is very broad based equipment and it’s broad based in terms of the market segment that is applicable to because of the range of the product from 300 amp all the way up to 600 amp.

And it’s also very broad based in terms of the market segment. Traditionally inverter machines have not been very well accepted in emerging markets and difficult environments but technology and the robustness of this platform has proven to be a very strong winner and it’s a good cost base with excellent margins associated with it. So we have really focused on these market segments that we thought were strong growth segments that we have designed products that we think fit that sweet spot. And we’ve left many of our competitors in the dust in terms of their product design.

Steve Barger - KeyBanc Capital Markets

So that was the follow-up, do you really have an advantage now over some of your sophisticated competitors? We’ll just forget about the little guys for a minute who maybe didn’t invest in the downturn as much as you did, is that what you are saying?

John Stropki

Yeah, I think that’s proving to be very much the case.

Steve Barger - KeyBanc Capital Markets

So I guess segueing into another European question, you’ve seen on acquisition and some organizational changes at one of your big competitors there. Can you talk about what you are seeing from a competitive standpoint? Are you able to take share there and would that be from the bigger players or is it from the smaller guys in the market over there?

John Stropki

Well, I think it’s sum of all of the above. Yeah we haven’t seen much from the specific competitor that you are talking about. I think that they are still digesting that, taking a look at the changes that they think are appropriate and the opportunities that they want to focus on. But in the meantime we’re very familiar with the market where the opportunities lie and we are ready to advance our game as others are kind of digesting the opportunities that they have.

Clearly the little guys that we have said forever are a bit disadvantaged and with scale and the opportunity to invest heavily in R&D and to make the necessary changes in our product portfolio and to cover a wide range of both geographical and market segments. For the little guys who can’t do that and have relied primarily on personal relationships or specific market niches, I think that consolidation will continue to present a really good opportunity for us and we are looking at that on a regular basis.

Steve Barger - KeyBanc Capital Markets

Okay. Is there any precedent in recent history to a big competitor undergoing a management or ownership change and then seeing them really geared up or pushed towards new product R&D, how long does that typically take to have an effect in the market? Is that a multi-year kind of project?

John Stropki

I would say from our experience I can’t comment on anybody else that developing a core R&D team, getting a good grasp of the market and the technology needs is a multi-year process. I have no knowledge of the core competencies of what our competitors are on that area but if you were to start from scratch, it would be a multi-year investment and a fairly robust investment in terms of people, time and energy.

Steve Barger - KeyBanc Capital Markets

Got it. Okay, switching gears, there has been a lot of talk about pipelines recently. How long does a pipeline typically take from when you may see an announcement of a project to where you or whoever might start seeing equipment and consumables sales in North America?

John Stropki

Well, I would say in North America that’s pretty unpredictable based on the political climate and the volatility that exists and people making long term strategic kind of decisions. As we know from the Keystone XL pipeline that could go from months to years and maybe even decades depending on the election cycle.

Fortunately that delay doesn’t exist in other parts of the world. I had some visitors in yesterday from India, and they were very bullish on the pipeline activity in India and the ability of governments in that part of the world to recognize the need and to move forward with the investments that are necessary. And clearly we see the same type of expediency in places like Russia and China.

That being said, there is going to be a lot of pipeline activity in North America. Some of it’s lot less politically, less sensitive than the Keystone pipeline is. You are seeing alternatives surface to Keystone. There are going to be investments in Canada that are going to hedge their bets about the official or eventual approval of the Keystone pipeline. And most of the pipe mill people that we are talking to are becoming more bullish about the future in terms of both the manufacturing of pipe and then the installation of pipe around the world. Oil gas and shale gas are clearly driving that North America and we’re going to see a lot more of that.

Steve Barger - KeyBanc Capital Markets

I think you’ve put out a revenue per mile number from pipeline construction in the past. Can you remind us of what that is?

John Stropki

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

Steve Barger - KeyBanc Capital Markets

Vince, do you remember?

Vincent Petrella

Yeah, I think it’s $4000.

Steve Barger - KeyBanc Capital Markets

That’s what I thought you said in the past, yeah. Okay.

John Stropki

So it’s probably little bit higher than that because we quoted that back in the 2008 cycle when things were very robust but as you know, fuel prices and consumable prices have gone up. And then again on the equipment side, we are seeing some really good opportunities in that with some of the very large global players.

Steve Barger - KeyBanc Capital Markets

One more and I will get back in line. What percentage of your revenue is from the automotive – I am sorry, automation segment right now?

Vincent Petrella

It’s less than 10%.

Steve Barger - KeyBanc Capital Markets

And is the growth rate significantly higher than the consolidated growth rate, or are you really seeing that penetration?

Vincent Petrella

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

Steve Barger - KeyBanc Capital Markets

And that’s just so I am clear, that is primarily the robotic arms, right?

Vincent Petrella

Well, it includes the integration of those arms, the machinery and the equipment.

John Stropki

Yeah, the one thing it doesn’t include, Steve, that really kind of underestimates the opportunities there is we hold tax (ph) to consumable sales to the automation sales. But I will tell you that we don’t sell a robot or hard automation project. Very, very high percentage of those cases are redrawing the consumable business relationship with that. So the customer has a single source of contact for all of their needs there. But if we were to do that and capture it, it would be much higher percent than we have captured just on the equipment and robot side.

Operator

Our next question comes from Mark Douglass with Longbow Research. Please proceed with your question.

Mark Douglass - Longbow Research

Lot of my questions have been answered. So what is the mix right now on consumables, equipment?

Vincent Petrella

The mix is about two-thirds consumables, one-third equipment, 66:34.

Mark Douglass - Longbow Research

Okay. So not much has changed. Any LIFO effects in the quarter, Vince?

Vincent Petrella

Yeah, we took about $1.3 million of LIFO charges. It’s about half of last year’s first quarter.

Mark Douglass - Longbow Research

Do you think there will be charges throughout the year?

Vincent Petrella

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

Mark Douglass - Longbow Research

Then tax rate, are we looking at closer to 31% now for ’12, is that due in large part to the mix towards more North America?

Vincent Petrella

Yeah, that’s a 31%, that’s our best estimate today based on our mix of earnings geographically and a heavy emphasis on U.S. earnings growth.

Mark Douglass - Longbow Research

And then finally, you talked a lot about market share shifts in equipment. Would that also be true in North America, do you think gaining share at least on the equipment side?

Vincent Petrella

We’re doing particularly well in North America on the equipment side of our business.

Operator

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

Holden Lewis - BB&T Capital Markets

Couple of things. First with a very strong revenue leads, on one side, you didn’t see the leverage that was kind of on the SG&A, I think it was closer to flat year over year as a percentage of revenue. Are they new investment programs or just what sort of do you find not getting leveraged on the SG&A line this quarter?

Vincent Petrella

Well, we had a higher bonus mix this year versus last year. That was in my prepared comments, our bonus was up over -- about $11 million year over year. And we had some other items that are incremental spends on a year over year basis in the transaction support area and legal costs. Our pension costs were higher on a year over year basis by about $2.3 million. Now that’s split between cost of sales and SG&A.

But there is a little bit of a lot of different things, Holden. We would expect that we gain a little bit more leverage as we move throughout the year but we did have a heavier accrual particularly on the bonus line in the first quarter.

Holden Lewis - BB&T Capital Markets

Okay. Is there something like on the legal side, or anything like that with somewhat less volatile and predictable that was a negative in the quarter, anything like that?

Vincent Petrella

Yeah, we did have higher legal expenses year over year that ran through SG&A. And we are hoping that, that will diminish as we work our way through the year.

Holden Lewis - BB&T Capital Markets

Then sort of getting back on to the gross margin a little bit. Last quarter you obviously made, that was the first -- in Q4, with the first quarter you made substantial stride on kind of that incremental margin over the past few quarters. And I think then we kind of talked about mix which is kind of unpredictable and maybe you are producing a sort of higher than seasonally normal type of rate. But then obviously you sort of built on that in Q1, are we comfortable that when we talk about kind of close to 10% type margins in Europe, in other words, that’s solidly profitable in Asia. I mean, do we feel comfortable that these levels are, in fact, operating in nature and therefore sustainable going forward more closer than that you were in Q4 or is there still maybe some moving pieces that are very difficult to tag and then maybe these levels are, they may not be sustaining?

Vincent Petrella

Well, there is certainly nothing in the quarter that were one-off items that aided our margins and our incrementals. So from that perspective, we won’t lose that margin capability. It is fair to say that our incrementals were aided by a weaker first quarter 2011 and we had a 9.9% or after adjustments of 10% operating profit, the margin in last year’s first quarter. And those margins did jump up to a higher level in the second and third quarters of 2011. So we did have some easier comps in this quarter.

We fully expect, Holden, to continue to make improvements in our business. We made some nice improvements in our pricing disciplines around our world. We gained some leverage in volumes in most parts of our world. The mix did aid us with a higher mix towards equipment sales and a lesser growth on the consumable side of business. So all of those things certainly did aid our quarter but in the long term we expect to continue to work at improving our business in all parts of our world. And so our expectations are that we will continue to incrementally improve margins in all of our businesses.

Holden Lewis - BB&T Capital Markets

But even in the short term, I mean, is there any reason to think that, that mix how long it’s going to shift at all, were you producing above or its production, looks like production was frankly in line with the growth levels. I mean, it doesn’t look like there is any that would drop off if you will.

Vincent Petrella

Well, I think what might be worth mentioning is that as we came out of the significant downturn in 2009, our consumable sales rebounded much more quickly than our machine side of the business. And as a reminder, we lost about half of our volumes in machines and approximately 20, 25% of our volumes in consumables. Last year our consumable volumes in the base business largely restored themselves to pre-2009 levels whereas equipment machine sales had not.

Those higher growth rates can be attributed to our continuing rebound in the equipment side of the business, and then we would estimate that in the course of 2012 that we will be fully restored to those volume levels that we had achieved in equipment in 2008. So with that we would expect that our growth rates on machine side of the business that are aiding our margin and incrementals will start to moderate as we work our way through the year. So unless we have a reenergizing of our markets, industrial markets around the world, we’ll have some slower growth on machine side as compared to the last few quarters of this year and last year.

Holden Lewis - BB&T Capital Markets

Do you feel like your mix of equipment and consumables now is consistent with where you were in ’08?

Vincent Petrella

We will probably cross that mark sometime this year, probably second and third quarter. We’re not quite there yet but we are getting close.

Holden Lewis - BB&T Capital Markets

Now the combination of that plus what seems to be some incremental pricing coming through, back in ’08 before everything fell off a cliff you were running margins in sort of 29% to 31% range on the growth. If we sort of return to that mix, then the pricing is up but we’re already sort of starting at the 29.5% basically in Q1, is that kind of the type of numbers that you would think would be sustainable?

Vincent Petrella

Yeah our margins on the equipment side of the business are as good as or better than where we were at our peak. So we have improved our business operations both from a cost and a pricing perspective on the equipment side of the business at the current volume levels. So we have had improvements between ’08 and 2012.

John Stropki

The follow up to that, Holden is, and particularly in Europe and Asia is that the consumable factories are not operating at anywhere near full capacity that they were back in 2007-2008. And quite frankly, we don’t expect that to turn around any time soon. But yeah, I don’t think there is anybody who I have heard or read that is very bullish on the turnaround of the European economy. I think most people are kind of surprised it isn’t worse than what it has demonstrated to be.

So it’s going to be a continuous kind of effort there to improve margins but we have made a pretty dramatic shift that we’re not chasing volumes, we are looking at high value customers. And we’ve got a pricing discipline that’s improving our model, and we expect that to continue both there and in Asia.

Holden Lewis - BB&T Capital Markets

Would certain pricing actually uptick the incremental margins going forward?

John Stropki

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

Operator

Our next question comes from Stanley Elliott with Stifel Nicolaus. Please proceed with your question.

Stanley Elliott - Stifel Nicolaus

Just curious really, could you help me or walk me through the thought process of prepaying the debt as opposed to rolling it I guess, you guys could pick up 300 basis points on the interest. And really just more curious and I certainly do appreciate the conservative nature of that capital structure?

Vincent Petrella

Stanley, we didn’t prepay the debt, it was scheduled debt payment, repayment in March of 2012. And it was the final tranche of a private placement that we had put in place decade ago. So it wasn’t a prepayment, it was scheduled.

Stanley Elliott - Stifel Nicolaus

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

Vincent Petrella

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

Operator

Our next question is a follow-up from Walter Liptak with Barrington Research.

Walter Liptak - Barrington Research

I have some more questions on leverage I think Holden covered on, I have some big questions. The 25% operating leverage, you’ve been pretty consistent getting high teens or better leverage the last couple of years. You’d expect that should be sustainable throughout the year given the things we talked about already on the call.

Vincent Petrella

I wouldn’t say that we have been consistent. So certainly when we first came out of the downturn, our incrementals are very high. And then as we worked our way through the recovery from the significant downturn, our incrementals have diminished a bit. They did troughed out a couple of quarters last year in the teens, high teens. But we did in the fourth quarter of 2011 have a 21% incremental. So there is a pattern there of very high incrementals coming out of the downturn, incrementals falling during the course of last year, and now we are working those incrementals back up with improvements in our cost base of better pricing discipline and certainly the mix did aid us in this most recent quarter.

As far as sustainability is concerned, we have a sustainable model of improving our business. We want to drive costs out of our business on a continuous basis. We want to maximize our pricing capabilities. We want to take share or we want to introduce new products. And so we have a business strategy and model that should show long term improvement. It’s not to say that there won’t be a volatility from quarter to quarter but we have a full expectation that over the longer term we’ll continue to improve our margins, expand those margins and get good returns for our shareholders.

Walter Liptak - Barrington Research

Do you have any margin targets or aspirations that you are looking at? I mean, your operating margins are the best I think that they have ever been.

John Stropki

We’re not quite – but we’re getting there Walt, and when we have said in the past that our target is to be 15% plus from an operating profit EBIT margin standpoint on a global basis.

Walter Liptak - Barrington Research

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

John Stropki

I am not prepared to do that at this time.

Operator

Our next question is a follow-up from Mark Douglass with Longbow Research.

Mark Douglass - Longbow Research

Just real quickly, last quarter you talked about initiatives in China. One being, it’s a big plan combining two Flex brands into one reducing the other costs. Are those still just to be had or do they come in this quarter?

John Stropki

They have more work to do. The stick electrode factory is scheduled to open production in July. So we are still in a transitional mode there. And then we do see that as being a very positive step not only to service the domestic market but to give us a higher volume capacity, low cost plant to service other export markets.

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

Operator

There are no further questions in queue at this time. I would like to turn the call back over to Mr. Petrella for closing comments.

Vincent Petrella

And thank you, Latania and thank all of you for joining us on this call. We look very much forward to discussing our second quarter results towards the end of July. And one final announcement, we do have our shareholder meeting this week in Cleveland, Ohio and we’d very much welcome any shareholders that would like to come to our shareholders’ meeting. With that, talk to you in July.

Operator

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

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