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Lincoln Electric Holdings, Inc. (LECO)

Q2 2012 Earnings Conference Call

July 30, 2012 10:00 AM ET


Vince Petrella, Chief Financial Officer

John Stropki , Chief Executive Officer

Christopher Mapes, Chief Operating Officer


Thomas Hayes – Thompson Research Group

Walter Liptak - Barrington Research

Mark Douglass – Longbow Research

Liam Burke - Janney Capital Markets

Holden Lewis - BB&T Capital Markets

Steve Barger - KeyBanc Capital Markets

Gregory Halter - Great Lakes Review

Stanley Elliott - Stifel Nicolaus



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Greetings and welcome to the Lincoln Electric Q2 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, Chief Financial Officer for Lincoln Electric. Thank you Mr. Petrella. You may begin.

Vincent Petrella

Thank you, Jesse and good morning to you all. Welcome to Lincoln Electric 2012 second quarter financial results conference call.

We released our earnings this morning prior to the market’s open. Additional copies are available 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. Also, joining the call today is Chris Mapes, Lincoln’s Chief Operating Officer. Chris will provide color on the region. After Chris makes his comments I will give you some more detail on the numbers. 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 website later this afternoon.

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

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

John Stropki

Thank you Vince and good morning everyone. We are pleased with the overall financial results for the quarter. Q2 of 2012 marked the second consecutive quarter of record sales and our operating results were very solid especially given the ongoing economic challenges in many of our key markets. The ongoing commitment to our 2020 vision and our long term strategy continues to driver our results and position the company for continued success. The strong contributions of our global workforce resulted in improved operating performance, increased sales, improved overall profitability and strong operating cash flows. We are very pleased with the overall quality of our earnings and results, Vince will cover shortly.

As Vince mentioned at the beginning of our call, Chris Mapes has joined our discussion today. Last Friday, we announced that Chris will succeed me as President and Chief Executive Officer of Lincoln. I will remain as Chairman with a new title of Executive Chairman. This leadership transition will be effective December 31 of this year and it is a direct result of mine and the board’s conscientious focus on developing a deep talented and experienced management team for the company.

We believe, we have the strongest and the best global team in our history as a result of our ongoing commitment to hiring and developing the best people in our industry. As COO and as a Director, Chris has demonstrated outstanding global leadership skills, broad strategic insights and significant operational expertise.

The Board thoroughly evaluated Chris's qualifications as a director candidate before he joined the Board in 2010. Many of the trades that made him an outstanding Board candidate are also the same trades that the Board and I look for in a CEO. I will be working closely with Chris into the next year to ensure a seamless transition for Lincoln shareholders, employees, customers, industry associations and community and government relationships. Chris will cover the regions in a minute, but first let me comment on the general numbers and some of the trends we see going forward.

Sales in the quarter were up 6.4% to $744 million and operating income rose 20% to $96 million or to 12.9% of sales. Net income, increased 16.3% to 66.3 million or $0.79 per diluted share, a very good result.

As we are focused on maintaining the strength of our business and improving our operations as evidenced by the margin improvements in our strong cash flow generation. Even with some of the economic contractions, especially in Europe and the moderating economies in China and India, we see several key areas and end markets where there is good activity and opportunity for us to continue to grow and to achieve our long-term success. Several of our key industrial segments continue to show good growth with the strongest industry segments being energy-related, namely oil and gas from exploration, extraction, to transportation, as well as all types of power generation. In the offshore segment, the market situation and the positive effects of ongoing funding for offshore projects improved with further investments by major international players and large nationalized oil companies. As backlog grows, for a number of large engineering and construction companies, Lincoln is and stands to benefit in the future globally.

Here in North America, business in the Gulf Coast was very positive in both consumables and new equipment orders. The trends for exploration and production including subsea activities remain very strong with significant investment and new contracts announced in the first half. We are having strong interest and ongoing success with our newly introduced high alloy welding consumables around the globe. In the pipeline segment, the first half of year was essentially flat. The global forecast for new pipeline construction is back on the upswing with 2013 and 2014 accepted to be exceptional years for both onshore and offshore projects.

With the strong increase of shale oil and gas production, there has been a slight shift in the construction practices. With fewer miles of pipe being laid, however, there are a greater number of projects which tend to be shorter run of smaller diameter pipe. Most of the shale pipelines are being welded with traditional technologies, such as engine drives and stick electrodes in the U.S., which plays to one of our many strengths. There are also still a great number of global mega projects on the horizon, with most lines intended for long distance transmission of natural gas. With the new abundance of natural gas, which accounts for 75% of the planned U.S. projects, the prospects for the U.S. exporting LNG, there is a movement to lobby for new LNG export terminals and converting existing terminals from input to export capabilities here in the U.S. In the pipe mill segment, demand in the Middle East remains very strong and we are pursuing those opportunities and winning important new business opportunities.

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