LECO

Lincoln Electric Holdings, Inc. (LECO)

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Lincoln Electric Holdings (LECO)

Q3 2013 Earnings Call

October 31, 2013 10:00 am ET

Executives

Vincent K. Petrella - Chief Financial Officer, Principal Accountng Officer, Senior Vice President and Treasurer

Christopher L. Mapes - Chief Executive Officer, President and Director

John M. Stropki - Executive Chairman

Analysts

Thomas L. Hayes - Thompson Research Group, LLC

Christopher Schon Williams - BB&T Capital Markets, Research Division

Mark Douglass - Longbow Research LLC

Joseph Mondillo - Sidoti & Company, LLC

Liam D. Burke - Janney Montgomery Scott LLC, Research Division

Stanley S. Elliott - Stifel, Nicolaus & Co., Inc., Research Division

Gregory W. Halter - LJR Great Lakes Review

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

Presentation

Operator

Greetings, and welcome to the Lincoln Electric 2013 Third Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Vincent Petrella, SVP and Chief Financial Officer. Thank you. Sir, you may begin.

Vincent K. Petrella

Thank you, Jan, and good morning to everyone. Welcome to the Lincoln Electric 2013 Third Quarter Conference Call. We released our financial results for the quarter this morning prior to the market's open, and our release is available on the Lincoln Electric website at lincolnelectric.com or by contacting our Investor Relations office at (216) 383-2534. Joining me today on the call today are John Stropki, our Executive Chairman; and Chris Mapes, our President and Chief Executive Officer. Chris will start the discussion this morning with an overview of the quarter and highlight our progress made on our strategic initiatives. I will then cover the numbers in more detail, as well as our uses of cash. To wrap up, John will make some final comments before we take your questions. As part of the webcast today, we are using a slide presentation, which can be accessed on our website under the Company and Investor Relations tabs. The presentation will also be posted along with a replay of the call later today.

Before we start our discussion, please be reminded 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 Forms 10-K and 10-Q.

Additionally, we'll also discuss financial measures that do not conform to U.S. GAAP, and you may find important information on our use of these measures and their reconciliation to U.S. GAAP in the financial tables that we have included in our earnings release.

And with that, let me turn the call over to Chris Mapes.

Christopher L. Mapes

Thank you, Vince, and good morning to everyone joining us on the call today. Moving to Slide 3. Looking at the third quarter highlights, it is clear that we saw many of the same performance trends that we reported last quarter, as we continue to navigate through uneven end market conditions. Despite these lackluster conditions, we were able to generate a record third quarter operating profit margin of 14.7%, which excludes special items and which is a 150 basis point improvement compared with the prior year. Our earnings increase versus prior year up 4% to $0.80 on a reported basis and approximately 8% to $0.86, excluding special items. Additionally, we are pleased to report that we generated significant cash flow in the quarter, up 88% versus prior year, and our year-to-date cash flow generation is pacing on par to our 2012 record levels. In this environment, we held our return on invested capital, or ROIC, ratio relatively steady at 18.5%. And lastly, looking at capital allocation, we continue to invest in our business and returned approximately 39% of cash flow from operations to shareholders through dividends and share repurchases in the quarter, and for the first 9 months of the year, returned 61%.

As you may have noted in our recent release, our Board of Directors has just approved a 15%, or a $0.03 increase in our dividend, to now $0.92 per share in 2014. All of these actions reflect our confidence and our ability to drive increased profitability and earnings to achieve our 2020 Vision goals.

On Slide 4, our third quarter income statement summary highlights our ability to achieve profit and earnings growth on shallow top line performance. We sailed down by approximately 1% to $692 million. Our sales decline reflected a 2.2% increase from acquisitions that have yet to anniversary. This increase was offset by 2.5% lower unit volumes and a slightly unfavorable impact from foreign currency translation. The year-over-year decline in volumes narrowed in the third quarter compared to the first half of 2013. Pricing held relatively steady on a consolidated basis, as it recognized benefits from pricing actions in several regions, most notably in South America, where we achieved 18% higher price, which was generated to offset inflationary conditions in Venezuela. These pricing benefits were offset by 9% lower pricing in our Harris Products Group on declining raw material costs, largely in silver and copper.

Moving to Slide 5, which highlights specific end sectors that we serve. We continue to see strength in the transportation and energy-related sectors across most regions worldwide. Light vehicle production continues its unabated expansion, and we have been increasing our customer base in this sector by leveraging our core portfolio in automation solutions. The energy sector remains solid as well with oil and gas investments, as well as development of downstream processing facilities, which we expect will continue to present growth opportunities for us. While still in its early stages of a rebound, construction appears to be picking up activity and also offers growth opportunities for us in both commercial and residential applications. The heavy fabrication sector, which includes earthmoving, mining and agricultural equipment, as well as the shipbuilding sector, remained challenged. We continue to experience persistent weakness in Australia and China and remain cautious about any near-term improvement. During this period, we are focused on innovation and providing value-added applications to the market.

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