Lincoln Electric Holdings, Inc. (LECO)

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Lincoln Electric Holdings, Inc. (LECO)

Q4 2008 Earnings Call

February 23, 2009 10:00 am ET


Vincent K. Petrella - Sr. VP, CFO and Treasurer

John M. Stropki - Chairman, President and CEO


Mark Douglass - Longbow Research

Walter Liptak - Barrington Research

Tom Hayes - Piper Jaffray

James Bank - Sidoti & Company

Steve Barger - Keybanc Capital Markets

Greg Halter - Great Lakes Review

Holden Lewis - BB&T Capital Markets

Michael Coleman - Sterne, Agree & Leach



Greetings, ladies and gentlemen, and welcome to the Lincoln Electric 2008 fourth quarter and full year earnings release conference call. (Operator Instructions)

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

Vincent K. Petrella

Thank you, [Diego]. Good morning and thank you for joining the Lincoln Electric 2008 fourth quarter and year end conference call. We released results for the 2008 full year and fourth quarter this morning prior to the market's open. You can obtain additional copies available through our Investor Relations Department at 216-383-4893 or on Lincoln's website.

John Stropki, Lincoln's Chairman and Chief Executive Officer, will lead the discussion this morning and will provide commentary on the year in a moment. Before getting to that discussion, let me remind you that certain statements made during this call and 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'd like to turn the call over to John Stropki.

John M. Stropki

Thank you, Vince, and good morning, everyone. Given today's current economic conditions, it's a real testament to the dedication and commitment of our employees and the support of our customers that we are able to report that 2008 was the best financial year in the history of the company. It is our fourth consecutive year of record sales, profit and cash flow generation. However, our fourth quarter results reflect the challenges affecting the world economies and the pessimistic outlook around the world for the year ahead.

Vince will give specific details for the quarter and the year, but to set the stage I'll cover the financial highlights for 2008. First, sales grew 9% to $2.5 billion when compared to 2007. This shows that our global diversification strategy continues to push good results, with over 41% of our sales generated outside of North America. When combined with North America exports of $242 million, which grew by 25% in 2008, more than half of our sales went to destinations outside of North America. Earnings per share excluding rationalization and asset impairment charges would have been $5.36 per diluted share, an increase of 15% compared to 2007.

As I mentioned, financial results for the year were record, but were more driven primarily by the outstanding results through the first nine months and during the fourth quarter we experienced a dramatic turndown in our business as a result of the difficult global economic environment. Sales in the fourth quarter decreased 9.3% to $526 million when compared with the year ago quarter. Sales were down in both the international and North American market; however, excluding FX impacts, international sales by destination increased 3% in the quarter.

The quarter-over-quarter comparison sales does not tell the entire story when it comes to the 2008 fourth quarter. The weakening in the global economies was sudden and dramatic. The sequential decline in sales when compared with 2008 third quarter resulted in a sales reduction of 17%, which we experienced in all regions throughout the world.

Rest assured that Lincoln Electric is prepared to face the global headwinds encountered in the fourth quarter. We have initiated many decisive actions towards aligning our business costs for significantly lower global demand in 2009. Vince will give more color to the numbers in his remarks and explain our cost initiatives, but first let me touch briefly on the activities in the region and the segments.

First, looking at North America, during the fourth quarter, business conditions in North American operations started showing signs of deterioration as the overall economic environment became increasingly challenging. As an example, total manufacturing institutional production, excluding the high tech sector, was trending 12.9% below 2008 in January of 2009, while capacity utilization was running at approximately 68%. In addition, markets impacted by housing, automotive and consumer sectors continued to be more strained. Job losses continue to mount within the entire manufacturing sector and there continues to be mixed reaction to the U.S. government stimulus programs.

Those statistics plus the volatility in the credit market and on Wall Street has led to much uncertainty about the overall business levels moving forward.

In Canada, with steep drops in the price of oil and the ongoing manufacturing slump, the Canadian economy formally slipped into a recession in 2004. Activities in the country's western provinces softened as future energy related projects were delayed. The economic investment package was introduced in Canada during the January 2005 federal budget to provide stimulus through both infrastructure spending and tax cuts; however, any benefit is most likely not to be felt until late 2009.

Although year-over-year sales in North America grew by 4% to $1.57 billion, the region experienced a 9% drop in the fourth quarter over the previous year's quarter comparison and, again, a 17% reduction sequentially from the third quarter of '08. Export sales growth continued to be relatively strong through the end of the year, especially for key infrastructure development projects that prefer Lincoln's more advanced high-end U.S. manufactured products. The outlook for 2009 exports, however, is more pessimistic, as oil and other commodity prices remain at very low levels.

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