Lincoln Electric - Earnings Call - Q1 2013
April 23, 2013
Transcript
Speaker 0
Greetings, and welcome to the Lincoln Electric twenty thirteen First Quarter 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. As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Vincent Petrella, Senior Vice President and Chief Financial Officer.
Thank you, sir. You begin.
Speaker 1
Thank you, Rob, and good morning to everyone. Welcome to the Lincoln Electric twenty thirteen first quarter conference call. We released our financial results this morning 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 on the call today are John Stropke, Lincoln's Executive Chairman and Chris Mapes, President and Chief Executive Officer. John will start the discussion this morning and provide an overview of the quarter, while Chris will highlight our top line performance and strategic initiatives.
I will then cover the numbers in some more detail. We are using a slide presentation as part of our webcast today and slides are available on today's webcast, which is accessed on our website under the Company and Investor Relations tab. The presentation will also be posted along with a replay of the call later today. But 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 filings on Forms 10 ks and 10 Q. Additionally, we 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 the reconciliation to U. S.
GAAP in the financial tables that we have included in our earnings release. Now with that, let me turn the call over to John Strotzky. Thank you, Vince, and good morning to everyone joining us on the call. I'm pleased to report that our twenty thirteen first quarter results demonstrate solid profit performance even as we continue to navigate through challenging market conditions. Despite the slowing pace of economic growth regions and the ongoing persistent economic weakness in Europe, we achieved a reported $0.80 earnings per share in the quarter.
As I reported, our earnings were also unfavorably impacted by a $0.12 per share charge from the recent devaluation of the Venezuelan currency. On an adjusted basis, we achieved a very solid 21% increase in our adjusted EPS to $0.92 Our earnings performance reflects our team's solid execution in a number of important areas. These include optimizing our product and customer mix in targeted regions, generating improved profitability from our operational initiatives and our continued focus on growing and building out our automation business. We made good progress in these areas in the quarter, while also successfully integrating our four twenty twelve closed acquisitions. These acquisitions not only contributed positively to our top line performance in the quarter, but were also key growth drivers in achieving our longer term 2020 vision and further enhancing shareholder returns.
So we are pleased to see these efforts progressing well at these early stage. Turning to slide four, which provides a snapshot of the quarter's P and L items. The trend clearly highlights that our business is showing its hallmark resilience and our ongoing efforts are showing good results. Despite a 1% decline in net sales on the challenging market conditions and difficult year over year comparisons, we delivered a solid 120 basis point improvement in our operating margins to 13.8% excluding special items. As I stated earlier, we achieved a 21% increase in earnings demonstrating that we are making very initiatives.
And now, I will ask Chris to walk through our top line performance and strategic initiatives. Thank you, John, and good morning, everyone. Moving on to slide five. Our reported first quarter sales declined 1% to $719,000,000 on a constant dollar basis, which excludes the unfavorable impact of foreign exchange. Our sales held relatively steady on a year over year basis.
We realized looking at the components of our reported sales performance, we realized a 6% increase in sales from the four acquisitions we completed last year. These acquisitions include Tennessee Rand and Wayne Trail, who are leading providers in high growth automation and welding solutions. Additionally, we benefited from ongoing demand for our equipment solutions led by automation solutions, which continued to generate solid double digit percent growth in the quarter. Exports, which predominantly sourced from North America were also higher in the quarter on solid demand from China, Brazil and parts of The Middle East. As John just referenced, our volume performance reflects slowing macroeconomic and industrial production growth rates, weak global crude steel production in many regions and persistent weakness in Europe.
As we commented in our fourth quarter earnings call, we expect year over year volume performance to be weak in the first half of twenty thirteen on challenging year over year comparisons. Persistent weakness in Europe, which we expect to see throughout the year and from our efforts to reshape our businesses in Russia and China. Moving on to slide six. We are focused on maintaining our presence in core sectors and expanding into high growth areas. As you can see by the table, which highlights many of our key sectors, we are operating in a dynamic market.
We are seeing that the transportation sector continues to expand in several key geographies and specifically in automotive. This growth is most pronounced in China, The U. S. And in Mexico. The heavy fabrication sector continues to experience weak demand on challenging year over year comparisons and excess inventory in the supply chain.
These factors have most notably impacted construction in China and mining in Australia. The bright spot remains in the agricultural sector where continue to see steady demand trends. Shipbuilding also remains a challenging sector due to lack of investment in Asia Pacific, although Brazil remains a highlight due to ongoing reinvestment in its shipbuilding and infrastructure sectors. Looking at the energy related markets, which include offshore, pipe mill and pipelines, power generation and processing, we are seeing strong offshore oil and gas investments in the Gulf Of Mexico, Brazil and Asia, which present growth opportunities for us this year and beyond. Pipe mill activity continues to be strong as investments in major global projects continue.
We expect to be able to capitalize on this growth with our extensive portfolio of solutions that target pipe mill applications including our PowerWave ACDC 1000ST complete welding solution. Power generation growth remains solid on the continued strength of The U. S. Oil and gas sectors and the LNG market in Asia. Lastly, in the processing market, which includes chemical processing, we are seeing ongoing market strength with the industry announcing several new projects in North America, bringing the total new project spend in the chemical processing industry up to $80,000,000,000 in the last twelve months.
On a global basis, our end markets continue to signal ongoing investment and positive secular growth, if at a more modest rate, which presents solid intermediate and long term growth opportunities for Lincoln Electric and we are confident that we are well positioned to capitalize on these trends. Moving to slide seven. In the short term, we remain focused on targeting the most attractive investments to ensure long term profitable growth and successfully completing the integration of our recent acquisitions. I am pleased to report that our efforts are going well and our teams are executing on these initiatives. Also last year, we announced several operational initiatives which reorient our manufacturing footprint to capture long term growth in key areas as well as to optimize our cost structure to improve returns.
These efforts are also on track and we now expect to recognize to $10,000,000 of benefit from these actions in 2013. We expect relatively even timing of these benefits over the course of the year. So despite the uneven performance of our end markets and expected challenging first half of the year, we remain confident in our ability to invest in long term growth, stay on track with our 2020 vision and strategy, execute on our operational initiatives and continue to drive measurable improvement in our customers' operations. Keeping Lincoln Electric as their welding and cutting solutions partner of choice. And now I'll pass the call to Vince to cover our financial performance.
Vince? Okay. Thank you, Chris. Now walking through the income statement highlights on slide nine. Consolidated sales were down by 1.2% compared with the first quarter of twenty twelve.
Volume decreased reported sales by 6% and pricing was relatively flat. Foreign exchange had a slight negative impact on sales and acquisitions contributed an increase of 5.5%. We did have two less billing days in the quarter as compared to the prior year, which contributed to the lower sales levels. First quarter gross profit margins increased 190 basis points to 31.5% compared with 29.6 in the comparable prior year period. LIFO charges in the quarter totaled $1,600,000 whereas LIFO charges in the prior year's first quarter were 1,300,000.0 The quarter also included a $1,600,000 charge related to the Venezuelan currency devaluation.
The improved gross margins were primarily attributable to a better sales mix and operational improvements. SG and A expense for the first quarter increased two ten basis points. The increase in SG and A is primarily attributable to incremental SG and A from acquisitions and general increases in SG and A spending. SG and A also included an $8,100,000 charge related to the devaluation of the Venezuelan currency during the quarter. Excluding this charge, SG and A would have been 17.9% of sales, a 90 basis point increase over the prior year.
Operating income for the quarter declined 30 basis points. The quarter included rationalization charges $1,100,000 primarily related to rationalization actions and asset impairments in North America and Asia Pacific. Adjusted operating income before rationalization charges and charges related to the Venezuelan currency devaluation was $99,300,000 or 13.8% of sales, a 120 basis point improvement. The effective tax rate for the first quarter was 26.3% compared with 31% in the prior year. The first quarter tax provision included discrete items related to the reinstatement of the U.
S. R and D tax credit and decreases in valuation allowances. Other factors driving this lower effective tax rate were earnings in lower tax rate jurisdictions and the utilization of foreign tax loss carryforwards. Our twenty thirteen effective tax rate for the remainder of the year should increase to approximately 30% to 31% subject to the mix of earnings by taxing jurisdiction. Diluted earnings per share increased 5.3% for the first quarter compared with the prior year.
Excluding special items, adjusted diluted earnings per share increased 21 over twenty twelve's first quarter. On slide two, we show reportable segment basis and excluding special items that North America Welding improved adjusted EBIT margins by 30 basis points in the first quarter. Good cost control and pricing improvements drove the increase in spite of a slight decline in year over year volumes. Europe Welding's adjusted EBIT margin declined 50 basis points in the quarter. The decline was attributable to a 7.2% reduction in year over year volumes and a softening in pricing.
We experienced better top line results in Germany and The Netherlands and weaker results in Russia, The U. K. And Southern Europe. Rationalization actions helped to offset this macroeconomic weakness. The Asia Pacific segment recorded an adjusted EBIT improvement of 40 basis points from the prior year.
Sales in Asia Pacific were down 21.8% due to volumes and pricing declined 2.1%. The volume decreases were primarily caused by the continuing softness in the construction and related machinery markets in China. In addition, Australian volumes declined as a result of lower mining and large scale project activity as well as the general industrial slowdown. Improvements in the China business unit results were partially offset by the market weakness Australia. South America Welding adjusted EBIT margin increased six seventy basis points compared to 2012 because of significant improvements Brazilian operations and strong price increases.
The price increases were primarily caused by the higher inflationary environment in South America, particularly Venezuela. The South American segment included million dollars charge related to the devaluation of the Venezuelan currency. The Harris Products Group expanded first quarter EBIT margins by 50 basis points. Improved mix continuing operational improvements drove the margin expansion. On to capital allocation.
So during the quarter, we paid no cash dividend as the fourth quarter included an additional dividend payment of $16,500,000 which normally would have been paid in January of twenty thirteen. Our first quarter capital spending increased to $15,100,000 And our 2013 capital spending plan is still estimated to be about $60,000,000 primarily associated with significant reinvestment projects in our North American business. During the quarter, we spent $12,800,000 repurchasing about 229,000 shares for treasury. Additional share repurchases during April totaled an additional $10,000,000 as of yesterday. The quarter included $50,000,000 of voluntary contributions to our U.
S. Pension plan, an increase of $32,000,000 from the prior year's first quarter. We ended the year with no net debt and over $248,000,000 of cash on the balance sheet. We will continue to invest in our business for the long run and prudently return cash to our shareholders. With that, Rob, I would like to open the call for any questions.
Speaker 0
Ladies and gentlemen, we will be conducting a question and answer session. Thank you. Our first question is from the line of Sean Williams, BB and T Capital Markets. Please proceed with your question.
Speaker 2
Hi, good morning.
Speaker 1
Good morning, I
Speaker 0
wonder if
Speaker 2
you could just talk about maybe the progression of demand through the quarter here. Volumes ended up being maybe slightly weaker than I expected. But could you just talk about the cadence through the quarter? How did we start versus how did we finish?
Speaker 1
Well, I would say Sean that we started relatively strong and we finished relatively strong. And in between there was a bit of choppiness. So we finished off the quarter with an improvement in our order and sales levels. And February wasn't a very good month for us, but I would say that there was a bit of unevenness in the quarter. I'll also add that April has continued to be a relatively stable environment for us and there's no reason to believe that we're going to see at least a downdraft at this point in the quarter.
Okay.
Speaker 2
And maybe if we switch gears just a little bit. Could you readdress maybe restructuring and your goals there in terms of absolute savings? I mean, sounded like at one point last year you guys were talking about 9,000,000 to $10,000,000 Now it sounds like maybe you've lowered the midpoint maybe it's 8,000,000 to 10,000,000 now despite the fact that you've done there was another $1,000,000 of restructuring done in Q1 here. Could you just talk about maybe what are where are we within I guess in terms of actually realizing those savings? Are we still at the are we still in the early innings?
Is most of this going to be back end loaded? And then talk about kind of where you are versus expectations?
Speaker 1
Yes, Sean. First, I'll say that the restructuring charges in the first quarter are not new initiatives. Those are just the follow on charges required from the original plans that were announced last year. So the $1,000,000 is not will not result in additional savings over and above what we had previously disclosed to you. And as far as our range, we do believe we have a similar range to what we disclosed in prior quarters and into last year.
And as far as the attribution of those savings, you can expect to see those pretty equally during the course of 2013. So I would simply divide the savings by four and that's a good proxy for what we will expect to see during the course of the year. And John, I think as importantly as I've mentioned in my comments, the restructuring assets programs that we have whether that's the Australian manufacturing facility, the facility closure that we'd announced in Europe and Italy, we've relocated our burn and tool facility here in The United States as well as the consolidation of the facilities in Russia are both well are all well underway and we're very happy with the execution of those particular projects and the benefits that they'll drive to the business longer term.
Speaker 2
All right. Thanks for
Speaker 3
the color guys. I'll get back in the queue.
Speaker 1
Thank you, Sean.
Speaker 0
Thank you. Our next question is coming from the line of Tom Hayes with Thompson Research Group. Please proceed with your question.
Speaker 4
Thanks. Good morning, gentlemen.
Speaker 1
Good morning. Good morning, Tom.
Speaker 4
I guess two questions. One, the volume declines we saw in the Harris sector this quarter, I was just maybe provide a little bit more color on that. I thought with maybe seasonality we would have seen some positive growth this quarter?
Speaker 1
I think Harris didn't really see some of the early seasonality opportunity from the HVAC market. I know we're seeing economic numbers out there that show that it's a little bit more favorable. I do know they've seen some more favorable trending at the end of the quarter as well as into early April. I'd also say that some of the European international business for Harris started out a little more slowly in the quarter, but we're still very happy with where Harris is at and its continued performance improvements.
Speaker 4
Okay. Great. And then just kind of a follow-up. The fourth quarter call you mentioned the you're thinking about a potential price increase on the equipment in the April time frame. I was just wondering that occur?
And then maybe you could talk about if it was just North America or your thoughts on the magnitude of the change?
Speaker 1
Yes. Did occur on April 1. We would estimate and it was announced in North America. It would affect all equipment products manufactured in North America including an export market. So that affects more than 50% proportion of our equipment sales.
I would estimate impact on the top line would be somewhere around 1% to 2% at the top. And we also announced a small increase on the consumable side out of North America that will go into effect on May 1 that will have maybe a 1% or even less impact on the top line. And pricing did not increase in other parts of the world.
Speaker 4
Okay. Just real quick and a lot of follow-up. As far as the strong margin we saw in Europe, I guess just what kind of drove the sequential margin improvement in Europe?
Speaker 1
Well, it's combination of the restructuring activities that are lowering our cost base and pricing and cost discipline.
Speaker 3
Okay. Appreciate it. Thanks.
Speaker 0
Thank you. Our next question is from the line of Steve Barger of KeyBanc Capital Markets. Please proceed with your question.
Speaker 5
Hi. Good morning, everyone.
Speaker 1
Good morning, Steve. Vince, you talked about
Speaker 5
the improved mix and the operational improvements is driving the gross margin and you just commented on for Europe, but how much was mix? And is that mix kind of what you're seeing in April? Or do you view it as sustainable through the next couple of quarters? And maybe you can talk about what some
Speaker 1
of the specific operational improvements were? Yes. Do think it's sustainable. We've made some very real changes in our operational improvements and the restructuring is certainly giving paybacks as those are folded into our operating results during the course of 2013. I would say that mix is certainly an important aspect of our improvements.
If you look at our volume changes in equipment and consumables and those places where we have afforded to us higher margin opportunities on the equipment side and where we have lower margin opportunities on the consumables side, we're adding an improved shift towards higher margin equipment away from lower margin consumables on both the geographic and a product line basis. So I think it's both of those and mix is certainly a very important aspect of that. And I don't see our mix changing dramatically as we look out into 2013.
Speaker 2
Okay. That's
Speaker 5
great. As you think about driving towards those higher margin products, is that as true in North America as it is in other regions? Or is it more pronounced in some of the emerging markets or smaller segments?
Speaker 1
I believe it's true in North America as well as in the non North American regions, not perhaps to the same extent, but there is a benefit to shift change on a global basis.
Speaker 5
Right. And so with both 4Q and 1Q having gross margins north of 31%, we should be thinking that's a sustainable level as we go through the year?
Speaker 1
I don't see any reason why we can't assume that subject to seasonality and any macroeconomic changes that we don't foresee on the table today. Would add Steve that right now the strongest market is I think most people recognize is the North American market. And historically that has been the highest margin market for us. And we expect that trend to continue as well as this drive for automation where people are struggling with the lack of skilled labor and also driving to improve their productivity and turning to the higher value solutions. And that's an area where we've built tremendous strength through acquisitions and the build out of our automation business.
Speaker 5
It's a good segue. Over the past year you've acquired about I think $120,000,000 in revenue related to cutting and automation. I know you had some robotics business before. Can you tell us how big that total subset of the business is now on a run rate?
Speaker 1
It's still less than 10% of our total business.
Speaker 5
And what do you think the market size is for automation in general maybe just in North America or however you think about seeing the growth?
Speaker 1
Well, think you have to be very careful when you talk about market size or try to get the finality relative to market size around automation. I would tell you that there's certainly more than enough runway for us to continue to grow into this industry. But when you look at automation, we're really interested in automation that's all about the arc. It's all about welding or it's all about cutting. So there are lots of other areas of space within automation, but that's the area that we're focused in.
We don't really think about it from a size of the segment yet, but we're enormously confident that there's still a very fragmented market in automation welding solutions out there and that we can significantly grow into this space over the next few years. And Steve, one of the really positive things that's coming out of the Lincoln acquisition of these smaller automation companies is the customer relations side. All of the companies had their own kind of niche of independent customers, some very important ones. But as these larger companies around the world go to automation, recognizing that there's a skilled automation portfolio that has the backing of a company with the strength of Lincoln Electric attached to it is really opening up a lot of new windows of which the smaller companies independently were not able to access.
Speaker 5
Any way you'll frame up what you think the growth rate in that subset of your business could be over the next couple of years as you introduce these new products into your customer base?
Speaker 1
Well, what I will say Steve is that over the course of the past year, it's our most rapidly growing segment. It's achieving double digit growth on both a sequential and a year over year basis. And I'll just reiterate what both Chris and John have said and that is that we're enormously optimistic about the long term opportunities in the automation space. And it's a space that we believe will grow over the longer term faster than our core welding business and we continue to remain optimistic about what we can do in automation.
Speaker 5
Last one, I'll get back in line. Can you talk through margins in that business if not now, but once it's consolidated and integrated? Do you expect subset is accretive to consolidated gross margin or even accretive to North America margin?
Speaker 1
Yes. We believe it will be accretive to our margins in our consolidated business.
Speaker 5
Got it. Thanks so much.
Speaker 0
Our next question is from the line of Mark Douglas with Longbow Research. Please proceed with your question.
Speaker 1
Hi. Good morning, Hi, Mark. Good morning, Mark. So Vince, the one time tax benefits in 1Q, what was the total? Well, would normalize normalization of the tax rate at 30%, I would come up with adjusted pro form a diluted earnings per share of approximately $0.85 If you strip out what we refer to as special items terms of Venezuela and the rationalization charges and then normalize our tax tax rate after that, I think you're closer to about $0.85 per share.
Okay. That's what I thought. Good. Thanks for that. And then on free cash flow, can you talk a little bit about what happened in the quarter?
It looks like receivables increased dramatically. There is something with accrued pension, not a major concern given your balance sheet and your history of free cash flow. But can you just talk a little bit about the puts and takes, the more of the takes I guess in the cash flow in the quarter? Yes. The two biggest drivers were pensions and accounts receivable.
On the pension side, as I noted in my prepared comments, we did put $50,000,000 into The U. S. Pension plan this first quarter compared to $18,000,000 in the prior year, so a $32,000,000 swing. And then on a consolidated basis worldwide, we actually had a $35,000,000 detrimental cash swing on pensions as we contributed more on a worldwide basis, the bulk of that being in our U. S.
Operations. And so that is a $35,000,000 decline in operating cash flows because of pensions. And then the other significant change as you pointed out is in the accounts receivable area. We did have a deterioration in DSO in our business largely due to some bigger customers in North America that held up payment at the end of the quarter. And we are expecting that our DSO will improve in the second quarter and moving through the year.
That cost us close to five days on DSO. Our inventories were in line with the year end and actually the prior year as well as payables. So we did lose a bit of cash flow from accounts receivable management in the quarter. Okay. Did some of those flow through already in April?
Yes. We should see a better result in the second quarter on cash flows than what we experienced in the first quarter. Okay. So not complete deadbeat? I would never say that about our valued customer relationships.
Okay. Thanks. And then finally, again, obviously, a of talk about the margin. So in general, you're thinking the Europe, Asia Pacific, but what about South America? Are you thinking collectively these can within obviously a few points of margin be sustainable barring significant changes in volumes or pricing environment?
Yes. Our South American business Mark did quite well in the quarter. We performed well in both Brazil and Venezuela, two of our most important geographies on the continent. Our Brazilian business had a significant year over year improvement in its operating results. And frankly, we did a much better job than what we had anticipated in Venezuela responding to the significant 32 devaluation of the currency there.
So both of our businesses exceeded the expectations for performance in the light of what faced our Venezuelan management team as well as Brazil. I think that where we sit today there are no significant unusual items We ought to expect a double digit margin going forward in South America borrowing any disruptions in the environment, any further devaluations in the Venezuelan currency. And continued kind of high single digits here in Europe. Yes.
There's no reason why we can't have a similar type of result in Europe as well. Again, caveat being barring any further disruptions in the macro environment there. I guess, let me ask one final question. On Asia Pacific, obviously, volumes are down considerably. What kind of maybe if you're comfortable talking about this, what kind of level do you think you need to get to in volumes in order to see you've talked about long term, I believe trying to get to double digits EBIT margin in Asia Pac.
Are you really pretty seemingly below the sales levels necessary to get there? Or how do you think about that? Yes. Mark, this is Chris. I'd say a couple of things about that.
One is I'd say one of the things impacting Asia Pacific in the quarter is we have seen a pretty significant downdraft in the mining activity in Australia, which we absorbed within the quarter and we certainly need to understand more clearly what the next six to nine months will look like for that mining industry in Australia. We certainly believe it's just a slight pause, but it certainly was a negative year over year impact in the business. I'm very excited that our China business showed marked financial improvement for us year over year. I wouldn't say that I've got a targeted revenue number out there for us to achieve the operating profit performance that we expect out of that business long term. But we certainly feel comfortable that the actions that we've taken over the last few quarters are foundationally putting that business on good footing and we intend to continue to drive higher value added products and services through that model.
And certainly China continues to be an opportunity for us moving forward. Okay. Thank you, And Mark, one segment that you didn't address that will have a bit of a downdraft in 2013 is the Harris Products segment. And the declines in commodity values, particularly silver and copper will compress our margin profitability in that business unit as a lot of the pricing is based off of a cost plus model means that when silver declines significantly, we will have less margin opportunity in that business. So that will be going forward a business that will have some downward pressure on margin achievement.
But at the same time with copper falling that should help out your equipment margin? Not by the same extent. No. Okay. Thank you.
You're welcome.
Speaker 0
Our next question is from the line of Joe Mondillo of Sidoti. Please proceed with your question.
Speaker 6
Good morning, guys.
Speaker 1
Good morning,
Speaker 6
Joe. I was wondering, I didn't catch it, but did you quantify the growth in your exports in the North American segment?
Speaker 1
No, I didn't. But U. S. Export growth was in the low single digits.
Speaker 6
Low single digits. Okay. So my question is regarding the North America segment. You've spoken a lot of positive things within the industries and within that region and you're seeing growth in the exports. However, the volume was off one or two points.
So I was just wondering where what am I missing there in terms of the growth there? Are we seeing sequential growth and it's just the year over year just hasn't rebounded back to the positives that we may see later in the year? What's going on there?
Speaker 1
Yes. Joe, my view of North America in the first quarter after considering the number of billing days was a relatively flattish result. If you were to adjust for the two billing days that we lost and look at our billings on an average billing per day, we'd be somewhere flattish, if not up very slightly adjusting for those number of days. So my view is that we're in a flattish type of environment on a year over year basis as far as North America is concerned. Okay.
And then I guess
Speaker 6
just overall picture, a lot of my questions have been answered. But just overall picture, it seems like volume has a huge challenge over the last couple of quarters and it seems like it's continuing to get worse on a year over year perspective. But on a sequential direction, do you guys feel like sort of the bottom here is maybe the first quarter and going forward we see improvement and that's why you're comfortable saying that overall margins within all the segments sort of seem stable and going forward we maybe see improvement?
Speaker 1
Yeah. I don't know about a bottom, but certainly the if you look at the year over year trends that was a weakening in our trends in most non North American markets over the from the fourth quarter. North America held up we think quite well compared to our experience in the fourth quarter. But I believe it's true that the trends from an international perspective, particularly in Asia Pacific and Europe are not improving. But we see a relatively stable environment in our most important end market segment being North America.
And
Speaker 6
we
Speaker 1
believe that the international markets declines moderating at this point in time.
Speaker 6
Okay. And then just last thing. I think you spoke some positive things about your Brazilian exposure down there. Just wondering if you feel or if you've started to hear are you benefiting from any further construction regarding the World Cup and Olympics? Is that starting to take place?
Speaker 1
I was just down at our Brazilian operations a few weeks ago and I do believe that the general economy down there is moving towards more of an upswing versus Q3 and Q4 last year where the GDP in Brazil I believe was very flattish. Just more activity, we've had a lot of very interested large projects who are coming to Lincoln for welding solutions. And I just felt more comfortable leaving that market that quite frankly some of those larger projects and some of the activities around the World Cup and the Olympics are beginning to gain some traction. Certainly excited about our position in that market longer term.
Speaker 6
Okay. And then just lastly, how much does Brazil make how much did Brazil make of the EBIT in the quarter?
Speaker 1
Do you have that or Brazil is not a separate operating segment. So we don't report Brazil on its own.
Speaker 6
Okay. Yes. I was aware. I just was trying to get an idea just with the whole there's lot of moving pieces with the Venezuelan currency. And so just trying to get an idea of how
Speaker 1
big that is. Right. Thank you, Joe.
Speaker 6
Thank you.
Speaker 0
Our next question is from the line of Matthew Johnson with J. West. Please proceed with your question.
Speaker 6
Hey, congratulations on a great quarter. I just have a couple of questions. Last quarter, your gross margins benefited from a LIFO gain. Was there any kind of LIFO gain in this quarter?
Speaker 1
No. Actually there was a LIFO charge of 1,600,000 as compared to you're correct Matthew in the fourth quarter we had a LIFO credit of about $3,700,000 So we've started to see some inflationary input cost increases in our business and that necessitated the requirement to take a LIFO charge in the first quarter of this year.
Speaker 6
Got you.
Speaker 1
The year over year was relatively flat. The prior year's LIFO charge was about $1,300,000 So we're seeing sort of similar start to the year that we saw last year.
Speaker 6
And then you talked about volume being down 2%. You talked about on an average billing day basis it was flat to maybe slightly up. And then you said April has gotten a little stronger or even stable. Is it fair to assume that April so far volumes are up year over year in North America?
Speaker 1
I think that's safe to assume.
Speaker 6
Got you. And then my final question for you is, you've always said your revenue is tied to steel being made and then the price of oil. And with oil getting pounded here recently, are you guys afraid that your orders are going to slow up if orders stays in this 89 to 90 range?
Speaker 1
Hey, Matt, I just returned from a trip to Asia where a lot of the oil and gas activity is taking place. And in the three different countries and regions that I visited, there was very robust activity. These projects are not stop and go kind of projects and I think they have a long term investment theme. And I didn't hear from any of the constituents that I talked to any concern over the minor drops that they've seen in the price of oil. I think they recognize there's a long term need and they're going to continue to build out the infrastructure that's associated with that.
And we've seen that as Chris talked in Brazil with significant investments. We're seeing it in Mexico and in The U. S. With significant investments in the Gulf Of Mexico. We think that the long term trajectory in the energy sector is very, very positive for the company.
Speaker 6
Got you. And sorry, have one more question. Can you talk about your competitive pressure in The U. S. Tied to ESOP coming back in with coal packs?
Speaker 1
I would just say that we feel very confident in our business model in terms of the products that we have for the market and the expertise of our organization and in the strength of our manufacturing and we don't generally look back over our shoulders.
Speaker 6
All right. Perfect. Thank you and congratulations on a great quarter.
Speaker 1
Thanks, Matthew.
Speaker 0
The next question is from the line of Stanley Elliott of Stifel. Please proceed with your question.
Speaker 3
Good morning, guys. Thanks for taking my questions and congratulations as well. A quick question on the SG and A. Is all that increase as we're kind of running closer towards 18% of sales, is all that from the recent acquisitions last year? You also made a comment I believe about higher general spending.
Are there other investments going on? And if so what is that?
Speaker 1
Yes. So we did add over $7,000,000 of SG and A from the new acquisitions. Also, Stanley, have been adding costs and building out some of our strategic initiatives. We've taken in some of the bigger engineering and sales classes from a headcount standpoint over the past couple of years than we've had in our history. So that coupled with decline in the top line certainly doesn't help our ratios at all.
We also have in that line the $8,000,000 $8,100,000 Venezuelan charge that you need to pull out. So if you take out the $8,000,000 and you consider the acquisition increases and some of the additional spending that we're investing in our business from a long term perspective, we think our SG and A line is currently aligned with our business realities of 2013.
Speaker 3
And in regards to the larger headcount within the clad, are you talking about and my numbers may be off, but I vaguely remember like 150 something like that. I mean, you talking now about 200 or any help there would be great?
Speaker 1
No, it's not in the hundreds. It's more like dozens.
Speaker 3
Okay.
Speaker 1
It's a better measure.
Speaker 3
All right. I'll take it all in. On a couple of weeks ago there was a Wall Street Journal article talking about some pipe ruptures in I believe it was Arkansas. And it's not arc welding, but it was electric welding. So kind of certainly not what you all are doing right now.
On those types of projects, I mean, I've always thought about a number of long tail type projects within the energy space, but I hadn't really thought about retrofit in regards to some of these previously electric welded pipes. Is that in the mix for you all as well? Or do those pipes get retrofitted in a different method?
Speaker 1
Well, I think it's not a simple answer, but I will say that in the broad sense, there are significant miles of oil and gas pipelines within The United States that have outlived their design life, many of which as you stated were welded non arc welded, but electric arc welded, which is a very old process used many, many years ago. And I think that the pipe mill industry could answer the question better than we, but they have made significant investments in The U. S. Over the last four or five years with very strong expectation that those pipelines are going to be replaced. Whether it requires these failures as you identified and as The Wall Street Journal talked about to drive that process or not, I don't think we really know.
But we do know that they will be replaced, because the gas companies want to use higher pressures to get better deliveries And the corrosion elements of the pipe that have been in the ground for many, many years is eventually going to rear its head and will require the replacements that I think most people are anticipating is going to happen sooner rather than later.
Speaker 3
Absolutely. Lastly, could you guys quantify or care to quantify how much kind of the volume declines in Europe and Asia Pacific were from your conscious decision to kind of exit some less profitable business or how much it is kind of more market driven?
Speaker 1
It's very difficult for us to put a measurement on that. When you're going through that level of activity, you're trying to make improvements across the host of products and various customers. So we're really not providing that guidance relative to how much of that is from the activities that we've had in some of those markets. But again, I would reiterate that we're very, very happy with the improvements that we've made in those particular businesses both in China and in Europe.
Speaker 3
Yes. That's been fantastic. And lastly, expectations for pricing in either of those regions of the world?
Speaker 1
Well, I wouldn't expect a whole lot of pricing improvement on the basis of the soft macroeconomic environment and some softening in commodity prices in those parts of the world. So what you saw in the first quarter is not a bad proxy for what we might see going into the remainder or at least the next quarter or two from a global perspective.
Speaker 3
Perfect. Thank you very much and best of luck.
Speaker 2
Thanks Stanley.
Speaker 0
Thank you. We have just been out of time for questions today. We have time for one final question that is coming from the line of Sean Williams of BB and T. Please proceed with your question.
Speaker 2
Hi, thanks. Just wanted to follow-up and maybe dig in on the shipbuilding business a bit. Can you talk about what you're currently seeing there on a year over year basis? Are we flat, slightly down, down double digits? And then what is the thesis maybe or the strategy for that business going forward?
I mean, least one of the Korean shipbuilders is talking about volumes possibly turning positive by the end of the year. I'm just wondering if are we seeing a bottoming in that business yet? Or are you seeing something different?
Speaker 1
Well, first of all, think it's a challenging market. We certainly have seen very little growth in that space and we've been talking about the challenges in that space. I did not pick up that comment out of Korea from the optimism they might have in the back half of the year. But I do think there are two areas that we are beginning to see some improvement. Certainly one of those is in the LNG area, where quite frankly vessels for that application we continue to see some activity there.
And I know John had just returned from agent also activity specifically with those applications. So we see that portion. We also believe long term this is still going to be a very good space. And although they certainly have been challenged for the last few quarters, long term the investment in this area we see as a very value added sector and we continue to invest in those areas. I would just add Sean that my visits and the things that we're hearing from our people several of the traditional shipyards are in the process of converting those yards into other areas of activities because the similarities between building ships and say offshore activities is really surfacing in Asia, particularly in China and Vietnam.
You're seeing a lot of the shipyards convert to be able to build the offshore structures, which again we're very bullish about. And then the second element, we're seeing some of the European shipyards convert to offshore wind tower production, because there's going to be a big opportunity there as some of European countries move away from the fossil fuels or the nuclear fuel activities and take advantage of the wind tower applications. And we're quite optimistic that Europe is going to be very strong. Down the road, I don't think it's the next six months, but in the next several years there's going to be very large investments in those areas.
Speaker 2
And just I mean would you mind putting in absolute terms? I mean is that business down double digits for you guys right now? Is it flattish? Shipbuilding? Shipbuilding?
Speaker 1
I would say it's pretty flat because it really tanked in 02/2009. Most of the big investment in shipbuilding just disappeared with the financial crisis. And most of what I've read is that there's excess shipping capacity in the world right now. And it's not likely to be major builds other than these specialty activities like LNG that Chris talked about or somebody trying to upgrade to these new Pemex tankers where they can haul more through the expanded activity or the expanded size of the Panama Canal. So we just I think shipbuilding is going to be very much regionally focused and it's not going to be a great growth structure for the near term.
Speaker 2
And can you you can deploy those products or the assets or the resources that are devoted to shipbuilding? I mean you can deploy those to other areas in Asia?
Speaker 1
Yes. Well, I think it's more our customers' ability to deploy it. Mean if you go into a shipyard and you go into an offshore yard, they're very much the same. I mean, they're welding together heavy fabrications and they've got large cranes and they have seaports where they can ship these large vessels. That's so that's where the market is moving right now.
Speaker 3
All right. Thanks for the color guys. That was helpful.
Speaker 1
Thank you, Sean.
Speaker 0
Thank you. I will now turn the floor back to Vincent Petallo for closing comments.
Speaker 1
Thank you, Rob, and thanks for joining us on our first quarter call of 2013. I appreciate your continued interest and we look forward to talking to you and reporting our progress after the second quarter. Goodbye.
Speaker 0
This does conclude today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.