Lincoln Electric Holdings, Inc. (LECO)

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Lincoln Electric Holdings Inc. (LECO)

Q1 2009 Earnings Call

April 28, 2009; 10:00 am ET


John Stropki - Chairman, President and Chief Executive Officer

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


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



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.

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