Lincoln Electric - Earnings Call - Q2 2013
July 29, 2013
Transcript
Speaker 0
Greetings and welcome to the Lincoln Electric twenty thirteen Second 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, SVP and Chief Financial Officer.
Thank you, sir. You may begin.
Speaker 1
Thank you, Brenda, and good morning to everyone. Welcome to the Lincoln Electric twenty thirteen second quarter conference call. We released our financial results for the quarter this morning prior to the markets 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 are John Stropke, Lincoln's Executive Chairman and Chris Mapes, President and Chief Executive Officer. John will start the discussion this morning with an overview of the quarter and Chris will highlight our top line performance and strategic initiatives.
I will then cover the numbers and our uses of cash. We will then take questions following our prepared remarks. We are using a slide presentation as part of today's webcast, 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 ks and 10 Q. Additionally, we will 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. With that, let me turn the call over to John Stropke. Thank you, Vince, good morning to everyone joining us on the call today. We'll begin by reviewing slide three.
We are pleased to report that despite the combination of uneven end market conditions and challenging year over year comparison during the second quarter, we were able to increase our quarterly profit margin by 9%, achieving a record operating income margin of 14.8% in the quarter, up 150 basis points compared with the prior year. Additionally, we achieved double digit earnings growth, up 10% to $0.87 on a reported basis and up 12% to $0.91 on an adjusted basis. We also increased our operating cash flow by 31% with a cash conversion ratio of over 120%. Lastly, we increased our return on invested capital or ROIC ratio by 20 basis points to 18.9% compared with the December 3132 ROIC of 18.7%. Looking at capital allocation, we continue to invest in our business to ensure that we are well positioned to achieve our long term growth goals.
And we also accelerated the return of cash to shareholders, reflecting our confidence in delivering on our 2020 vision objectives. In the second quarter, we returned $73,000,000 to our shareholder through the combination of dividends and increased share repurchases. And just this past Friday, we announced that the Board approved a new 15,000,000 share repurchase program. This program now authorizes total shares for repurchase of approximately 20% of our diluted weighted average shares outstanding. This program will give us the added flexibility to continue our balanced approach of investing for the long term growth and accelerating the return of cash to shareholders.
Now before I pass the call to Chris and looking at the summary of the second quarter income statement on slide four, it is clear that the results demonstrate our ability to drive measurable improvements even in weaker market conditions and even as we are incurring additional overhead expenses to integrate our new acquisitions. We are focused on optimizing our product mix in targeted regions, continuing to invest in our strong improved profitability from our operational initiatives. We are clearly executing on what we feel is a disciplined approach that positions us to meet our long term 2020 vision goals and to continually increase shareholder return. Chris will now walk us through the top line performance and comment on the key end markets as well as update us on specific initiatives. Thank you, John, and good morning, everyone.
Moving to slide five. Our second quarter sales declined 2% to approximately $727,000,000 Looking at the key components of our reported sales performance for the second quarter, we realized a 3% increase from acquisitions we completed last year, two of which have yet to fully anniversary. Caliber and Boerne, which is part of our plasma and shape cutting strategy and Tennessee Rand, is part of our global automation strategy. Price was relatively steady on a consolidated basis, led by a 16% gain in South America, reflecting pricing actions taken to address the devaluation of the Venezuelan currency. These gains were offset by lower pricing in our Harris Products Group from lower pricing on declining raw material costs, most notably in silver and copper.
Volume was lower by five percent despite 8% higher volumes in South America on rising demand for our solutions in the region and 2% higher volumes in Harris Products Group on international expansion. These gains were offset by lower volumes in North America with approximately half of the decline driven by our strategy to reshape part of our business mix towards differentiated and specialty oriented products. Moving to slide six, which highlights specific end sectors. The transportation sector continues to expand in several key geographies, specifically automotive. This growth is most pronounced in The U.
S, China and Mexico, where we've been able to expand our presence in this sector on the strength of our footprint and our differentiated solutions. The heavy fabrication sector where we have a strong presence globally and particularly in North America is experiencing ongoing slow demand for earthmoving, mining and agricultural equipment due largely to excess industry supply and inventory buildups in the last few quarters as well as from weak commodity pricing in a sluggish demand environment. While there is no expectation for this sector to materially improve in 2013, we have been able to expand our presence in targeted areas with our recent introduction of the PowerWave S700, which adds to our already impressive offering for this sector and which has helped to offset the double digit percent industry decline in countries like Australia and China. Construction appears to be in its early stages of recovery led by commercial low rise buildings in The U. S.
And in China with new high rise commercial projects still relatively soft. Residential construction, which is an end sector that our Harris Products Group serves has also shown recovery in The U. S. Off of a historically low run rate. Shipbuilding continues to be a challenging sector due to lack of investment in Asia Pacific.
Brazil remains a highlight due to ongoing reinvestments in its shipbuilding and infrastructure sectors and we are seeing increased activity in LNG and other specialty vessels. And finally, energy related markets, which include offshore, pipe mill and pipelines, power generation and processing are showing continued growth globally. We are active in this market and are capturing opportunities leveraging our footprint, especially alloy solutions and our automation solutions. New solutions such as our Lincolnwell 842N submerged arc flux position have also allowed us to accelerate growth in this important sector. Moving to slide seven, we remain focused on investing in our business through this portion of the cycle by aligning our operations and commercial efforts to capitalize on long term profitable growth opportunities and improve shareholder returns.
In the quarter, we began our investment in an automation facility outside of Sao Paulo, Brazil. This facility will allow Lincoln Electric to offer an unparalleled automation service offering in the region and enhance our ability to serve our multinational and regional automotive and OEM manufacturing customers more effectively. We expect this site to be running in late twenty thirteen. Other areas of focus have been our continued investment in a global ERP system to drive improved productivity and profitability. Year to date, we have completed four installations and will complete an additional three by year end, which exceeds our efforts in 2012.
On the commercial front, we continued to expand our market presence launching over 65 new solutions or product enhancements in the quarter and added sector specialists in key regions to support our growth strategy. Finally, we are also rolling out a new mobile CRM tool to our North American sales force, which should enhance our ability to serve and support our customers. Looking to the second half of the year, we expect the top line comparisons will continue to be challenging. While July sales data is still preliminary, trending suggests that demand remains stable on a sequential basis, which reinforces our cautious view. As such, we do not expect any meaningful organic sales improvement in the back half of the year due to customer uncertainty, end market trends and global industrial production rates.
Switching to expectations on profitability and earnings performance, we do expect to see continued improvement in year over year margin and earnings performance as we anticipate that the benefits of favorable mix, our internal initiatives and cost control measures will offset top line headwinds and investments in our global initiatives. Now, I'll pass the call to Vince to cover our segments financial performance, balance sheet items and uses of cash in more detail. Thank you, Chris. Walking through the income statement highlights on slide eight, our consolidated sales were down by 2.2% compared with the prior year's second quarter. Volume decreased reported sales by 4.9% and pricing was relatively flat.
Foreign exchange had a slight negative impact on sales and acquisitions contributed an increase of 3.1%. Second quarter gross profit margins increased two eighty basis points to 33% compared with 30.2% in the comparable prior year period. LIFO charges in the quarter totaled $1,400,000 The prior year had LIFO credits of 1,400,000 The quarter also included a $2,500,000 charge related to the Venezuelan currency devaluation. The improved gross margins were primarily attributable to a better sales mix and improved price cost relationship and operational improvements. SG and A expense for the second quarter increased 140 basis points.
The increase is primarily related to incremental SG and A from acquisitions and general increases in SG and A spending. Operating income for the quarter increased 140 basis points. The quarter included rationalization charges of $850,000 primarily related to factory consolidation in North America and Asia Pacific. Adjusted operating income before rationalization charges and charges related to the Venezuelan currency devaluation was $107,700,000 or 14.8% of sales, a 150 basis point year over year improvement as well as an all time quarterly record. Diluted earnings per share increased 10% for the second quarter compared with the prior year.
Excluding special items, adjusted diluted earnings per share increased 12.4% over twenty twelve second quarter. On a reportable segment basis and excluding special items, North America Welding improved adjusted EBIT margins by 140 basis points in the second quarter. Improved mix and pricing improvements drove the increase despite the decline in year over year volumes. Europe Welding's adjusted EBIT margin declined 80 basis points in the quarter. The decline was attributable to the 4.9% reduction in year over year volumes.
We experienced better top line results in Spain, Poland and The Netherlands and weaker sales in Russia, Germany, The U. K. And Italy. Rationalization actions helped to offset this macroeconomic weakness. The Asia Pacific segment recorded an adjusted EBIT margin of 90 basis points in the quarter.
Sales in Asia Pacific were down 17.8% due to volume and pricing declined 1.2%. 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 a general industrial slowdown in that market. South America Welding adjusted EBIT margin increased to 24.8% because of significant improvements in our Venezuelan, Colombian and Brazilian operations. The price increases were primarily caused by the higher inflationary environment in Venezuela.
The Harris Products Group second quarter EBIT margins declined by 140 basis points. Volumes improved across the portfolio. However, declines in metal prices primarily silver compressed margin realization in the consumables business. We generated $107,000,000 of operating cash flows in the quarter after contributing an additional $26,000,000 to our pension plans. Our average operating working capital to sales improved to 19.5% at June 30 from 20.9% in the prior year's same period end.
During the quarter, we spent an additional $57,000,000 repurchasing about 1,015,000 shares for treasury. In addition, we paid a dividend of $17,000,000 representing 17% year over year increase in our payout. We ended the quarter with no net debt and over $256,000,000 of cash on our balance sheet. We will continue to invest in the business for the longer term and prudently return cash to our shareholders. And with that, I would like to open up the call for questions.
Brenda?
Speaker 0
Thank you. Our first question comes from the line of Tom Hayes with Thompson Research Group. Please proceed with your question.
Speaker 2
Thank you. Good morning,
Speaker 3
Good morning.
Speaker 2
Chris, I guess one question for you. As we're going through the slides, you had indicated that about half of the decline in North America was related to a program or a strategy. You kind of went over that kind of fast. Could you maybe elaborate on what that is?
Speaker 1
Yeah, absolutely. We really had two anomalies when I think about the business on a year over year basis. The first one is in 2012 there was an opportunity that was created in the aluminum marketplace. There was a casting operation competitive casting operation that had a problem at a facility and we've got an aluminum caster up in Canada. Because of the compression of capacity in the marketplace, participated in the rod market pretty extensively in the second quarter of twenty twelve that we normally don't participate in just to serve that market.
That was the first anomaly. Really the second anomaly was that we've continued to work on our acquisitions. Our large consumable acquisition in the nickel space, we've continued to make improvements in that business. Part of that has been focusing on products and segments. And we actually moved away from a couple of those products end markets in Q2 and versus prior year.
As you've seen the expansion of profitability of our North American business, we're very excited about where that acquisition is as well as the other acquisitions we brought in. But we expected there to be that dynamic in the business for Q2.
Speaker 2
Okay. How much of the North American volume decline then was attributable to export? Or was export up for the quarter?
Speaker 1
Export was actually flattish for the quarter year over year.
Speaker 2
Okay. And then Vince you kind of alluded to the majority of the SG and A increases related to acquisitions. Can you just go a little bit clarity on that? I'm sorry, a little what? I mean, could you kind of maybe ballpark the dollar figure that's kind of driven by acquisition related SG and A increase?
Speaker 1
I think it's between 5,000,000 and $6,000,000 Okay.
Speaker 2
Thanks, guys.
Speaker 4
That's totally went over my head.
Speaker 0
Next question comes from the line of Sean Williams with BB and T Capital Markets. Please proceed with your question.
Speaker 2
Hi. Good morning, Hey, Sean. Good morning. Could you talk a little
Speaker 4
bit about the pricing environment? I actually thought the pricing in North America was somewhat tepid kind of given some of the normal increases that would be going through this time of year. Can you just speak just talk a little bit about kind of price cost environment?
Speaker 1
Well, certainly the pricing environment is relatively stable. We have experienced some improvement in our price cost relationship during the course of the quarter and the year to date. Having said that, I would say that North America is one of our stronger pricing environments on the welding side of our business.
Speaker 4
Would you expect this and you put up 30 basis points of pricing in North America in Q2. Would you expect that to accelerate? Or this is the type of level we should expect kind of through year end? Wouldn't be any additional prices going through either on equipment or consumables in North America?
Speaker 1
Yes. At this point, based on the volume experience that we've had on a segment by segment basis and the level of raw input cost trends, I would expect more of the same for the last half of the year. And at this point, there aren't any broad based anticipated pricing actions in our marketplace.
Speaker 4
Okay. And then as a follow-up if I may. Obviously, the pricing environment in South America is quite robust because of the situation in Venezuela. I mean, help us understand here because I mean, feels like you've been over earning to an extent maybe there for the last couple of quarters certainly putting up very good margins this quarter. I'm just trying to get a sense sustainable is that over the long term?
Is there anything changing in the inflationary environment that would cause that margin to start to come back to historical levels in the near term?
Speaker 1
Well, Sean, South America is a combination of positive influences in the quarter and certainly the half year. Venezuela's margins have expanded as their inflationary environment has accelerated. However, almost equally as important is how robust our turnaround in operational improvements have been in Brazil and Colombia. We're experiencing a very strong environment in Brazil and have had very good results in Colombia. And all of those factors combined have led to a very high operating margin in that segment.
Certainly, a fair amount of the improvement is caused by an accelerating inflationary environment in Venezuela. That the future of the Venezuelan economy and the inflation trends as well as ultimately the devaluations in that currency are at best unpredictable. So at this point, it's difficult for us to be able to say what might happen in the last half of the year and when the next devaluation might occur in that economy.
Speaker 4
All right. Thanks for the color guys. I'll get back in the queue here.
Speaker 1
You're welcome.
Speaker 0
Your next question comes from the line of Mark Douglas with Longbow Research. Please proceed with your question.
Speaker 1
Hi. Good morning, everyone. Hi, Good morning, Mark. So on the heels of that Vince, is the devaluation net benefit then this year in South America? No, the devaluation on its own is not a net benefit, but it's a consequence of highly inflationary economy.
In other words, the more rapidly the rate rises and the higher the inflation in that economy, the more profits we book and then ultimately the more severe the adjustment is after the devaluation occurs. So it's a highly inflationary economy leads to pretty volatile operating results. And so we will be recording higher and higher profits up until the time where we have the devaluation impact that we had in the first half of this year. So even though the devaluation was already announced, it really hasn't impacted the markets yet. So we haven't seen that ratchet down?
Well, it is impacting the markets in terms of the economic growth in the marketplace. But the flip side of the devaluation point is that prices will rise more rapidly and you're seeing that in our 16.2% price increase in the quarter year over year. Okay. I just assumed that was going to come sooner. I think some of us were as well, negative effects.
We've been able to offset those negative effects by raising our prices in line with the inflationary environment there in Venezuela. Right. And then I assume then it's similar to what you've explained before that people are willing to accept those higher prices because they want hard goods. Yes. That certainly is an element of the economic dynamics in a country like Venezuela.
But I will point out Mark that our volumes in the region were the strongest of any of our welding We're operating up over 8% and that's across most of our major operations in South America. So we do have a strong underlying business environment that has accelerated in the second quarter of twenty thirteen. Right. Vince, can you quantify the price cost impact? I mean rough numbers of maybe just basis points whether it's North America segment or business as a whole?
Yes. That isn't something that we've tried to discuss heretofore and I wouldn't want to try to make an estimate at this time on the fact that pricecost. Okay. Can the gross margin improvement then could you say it was mostly pricecost? Or was it pretty evenly distributed across mix price cost and then your operational improvements?
I would say it's more heavily weighted towards mix and price cost and then third operational improvement. Okay. And then just a clarification, Chris, you were talking about the second half. Did I hear you right that sequentially you think that demand is going to be relatively stable, but that's including the are you talking there absolute dollar figures or are you talking about the year over year growth in volume trends, adjusted no meaningful organic growth I believe in the second half or improvement? Yes.
Mark, my comments were really driven towards looking at the business on a full year basis versus what we have been seeing through the first half of twenty thirteen. So we're excited about where we're positioned in the marketplace and some of the new products that we've got coming in, but we just see that globally organic growth is going to be very challenging for us as we move through the rest of 2013. Okay. So you're talking relatively flattish. Of course, the comps are a little easier too in the back half, right?
They would be. Yes. Okay. Thank you.
Speaker 0
Our next question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question.
Speaker 2
Good morning. Chris, just to follow-up on that last question. You said you don't expect much organic growth in the back half. But just to make sure we're thinking correctly about the top line, what do you expect the acquisition contribution is in the back half to revenue?
Speaker 1
Right now we're sitting at 3%. So I wouldn't think it's going to differ a whole lot from that in the last half of the year.
Speaker 2
Okay. And looking at the expected increase in margins, do you expect more from mix or from the cost reductions? And I'm just trying to get a sense for your confidence level by comparing the things that you can control versus what you expect from the market?
Speaker 1
Mix has had a more important impact on our margin expansion than the cost initiatives. We've talked in the previous call and I'll reaffirm in this call that our cost savings initiatives in terms of the rationalization actions are running right around $2,500,000 a quarter and the mix impact is greater than that.
Speaker 2
Okay. Switching gears to the prior acquisitions. When you look at the cutting and automation deals that you've done, is that portfolio pretty much complete? Or are there other specific pieces that you need to add?
Speaker 1
No. I'll tell you from a strategic perspective, we think that not only are there other pieces that we can place into that portfolio, but we view both of those initiatives to be global initiatives. And as we've mentioned the expansion of the automation capabilities in for Latin America outside Sao Paulo in Brazil, we still see opportunities for us to expand that model more significantly than the capabilities we have today both in Europe as well as Asia Pacific.
Speaker 2
Are there a lot of targets out there? Is this the kind of thing where you just have to get your guys on the ground and go figure out the properties?
Speaker 1
Well, there are multitude of targets, but finding the right targets that we're trying to mold into the strategy becomes more challenging. So that's very much an engineering driven centric business. So we've been excited about the businesses we acquired here in The U. S, especially in automation over the last twelve, fifteen months. And we want to make sure that we find the same kinds of opportunities as we're looking at building into that portfolio globally.
Stephen, as you might imagine, I mean this is a very much a regional business. We don't move product from The U. S. To Europe or to Asia. You have to be able to support those regionally.
So the build out in places like Brazil and Mexico and Canada, which have been very successful for us, we think that we can translate those into the other important markets around the world. And the opportunities are regional because they're generally smaller regional businesses.
Speaker 2
Right. And I know you don't break this out specifically, but is the growth rate for the automation products accelerating? And is your sales force fully up to speed in terms of getting in front of customers with those products? Or is that kind of still an ongoing evolution?
Speaker 1
Our automation growth is robust. It's growing at a double digit pace and it is one of the stronger product lines in our portfolio presently.
Speaker 2
And as I recall, it's still it's less than 10 of revenue, right?
Speaker 1
That's correct.
Speaker 2
And when you when your guys are out in field talking to customers about the value proposition here, what is the pushback or kind of what are the limitations that they're seeing in terms of being able to sell the product set?
Speaker 1
I wouldn't probably talk about limitations as much as I would share with you that we're very early in the process in building these capabilities out to our global sales force. So I mentioned in the call that we're developing a CRM tool here. It's we'll be rolling it out in the back half of this year. It's yet another tool to facilitate our people around the world to be able to drive value and provide the value to those customers. So you started the comment with two questions, one about growth and one about at what point we were with our sales teams and our commercial organizations to be able to drive this value.
I would tell you that we're in the very early innings of that game, but very excited about engaging that group to provide those services and products to the global customer base.
Speaker 2
That's good detail. Thank you. Two more and I'll get back in line. First, have you set a buyback target? Or is the increase in the authorization just giving you the flexibility to be opportunistic in a more sizable way?
How are you thinking about that?
Speaker 1
We haven't set a buyback target. And we are using this authorization to increase our flexibility over the next few years to return more cash to shareholders. I think if there is a message the $57,000,000 in the quarter, I believe sends a pretty strong message and the $70,000,000 that we spent for the half year also sends a pretty Last year's 2012 total was $81,000,000 of cash spent on share buybacks, which was double the average of the three or four years before that. So I think that's strong enough messaging as far as I'm concerned.
Speaker 2
And last one. Vince interest rates have been increasing. You made contributions to the pension in the quarter. Are you going to continue to put cash in there? Or will you wait until you see how the rate environment shakes out?
Or what's the logic in terms of putting more money in those interest rates increase?
Speaker 1
I think our posture might be changing slightly as the quarter ended change in interest rates, the ramp up as well as the strong returns in our pension fund has resulted in The U. S. Plan being approximately fully funded. And so the gap has been largely closed through June 30. And based on that current environment of a fully funded plan, I wouldn't anticipate future funding at the levels that we've had in the half year as well as the prior year.
Speaker 2
Got it. That's great. Thanks a lot gentlemen. I'll get back in line.
Speaker 1
Thank you.
Speaker 0
Our next question comes from the line of Walt Liptak with Global Hunter Securities. Please proceed with your question.
Speaker 1
Hi. Thanks. Good morning, guys. Good morning, Walt. I wanted to ask about commodities pricing and maybe if you could break up pricing on consumable versus equipment.
And I think in the comment that you mentioned before that you're not planning on doing any pricing action in the back half of the year, but does that go for both the consumables as well as the equipment? That's correct. No foreseeable pricing action on both sides of the business. Okay. And I wanted to ask about the profit initiatives the 8,000,000 to $10,000,000 $2,500,000 per quarter.
Can you provide some more detail about some of the where the costs are coming out and where you're finding manufacturing efficiencies? Well, most of that Walt is in line with the plant rationalization actions that we previously announced. So there are actions in Europe in consolidating an Italian plant. There's actions in Asia Pacific where we shut the remaining manufacturing activities in Australia. We have a combination of factories, plants that are occurring in North America.
And the savings are largely overhead manufacturing and SG and A cost base to bring down our capacities and shift them into more cost competitive environment. Okay. Good. And along those lines, you mentioned the San Paulo Brazil facility. Can we get some details on square footage?
How much revenue you expect to be going through there in 2014, 2015? Square footage isn't something that I have on the top of my head, but Brazil is an important part of our South American segment. Brazil and Venezuela represent the preponderance of our business in that region. Okay. And the new plan, I mean, it going to be large enough that we're going to see revenue increases in 2014?
Yes. It's a separate facility that is that we're populating with equipment and people outside of our base business there. And we do expect to see the contribution of that business really starting in 2014. Well, just as a clarification, I mean, you've been to our automation center here in Cleveland. I mean that facility in Brazil is modeled around that.
Obviously, will be smaller than that because it's just a start up operation, but that's the type of activity that we'll be doing there. So we'll be basically importing high-tech equipment and doing the integration of that work to service local customers in the Brazilian market. So some of that activity will be captured in North America and some will be captured in Latin America. Okay. Got it.
All right. Thank you.
Speaker 3
Thank you, Walt.
Speaker 0
Our next question comes from the line of Liam Burke with Janney Montgomery Scott. Please proceed with your question.
Speaker 2
Yes. Thank you. You talked about China general conditions being weaker, but how much of the was there any amount of the revenue decline related to product rationalization or the elimination of product that was marginally or less profitable?
Speaker 1
Yes. That certainly did continue to occur in the quarter, Liam, as we've now pretty much fully anniversaried our pairing of business in that marketplace that started about a year ago. So there is still a contribution towards the contraction in volumes in China in particular as we've tried to reposition our business towards a more attractive product and customer portfolio.
Speaker 2
Okay. Great. And automation you pointed out Vince that it's one of your fastest growing businesses or your fastest growing business. How are the margins related to the traditional Lincoln product lines? How do they stack up?
Speaker 1
Actually in the quarter, margins in our automation our acquired businesses contributed positively to our consolidated EBIT margin profile.
Speaker 2
Great. Thank you.
Speaker 1
You're welcome.
Speaker 0
Our next question comes from line of Joe Mondillo with Sidoti and Company. Please proceed with your question.
Speaker 3
Hi. Good morning, guys. Just a follow-up on that last question and sort of the whole product mix issue. Is the dynamic between the benefit that you're seeing in the product mix related mostly to automation? Or is there something else going on with your traditional product base?
Speaker 1
The automation acquisitions actually contributed positively to that mix. The exposure to declining and re shifting volumes in our consumable business in Asia Pacific also contributed. So they're both contributing to the improved margin profile, but for obviously different reasons.
Speaker 3
Okay. So is that sort of equally weighted between those?
Speaker 1
I would say a little bit more emphasis on the repositioning of the business towards a more profitable mix profile.
Speaker 3
Okay, great. And then my second question just related to the European business. The margin came down a little bit from the first quarter. Just wondering sort of what your expectations on that market seems like you got a little pricing in the quarter. It seems like maybe things are stabilizing somewhat.
Going forward, what are your sort of expectations on the profitability there?
Speaker 1
We continue to be cautious on Europe. We have seen some of those economies that were hit the hardest, the earliest perhaps if you're optimistic are bottoming out a little bit and improving. But on the other side of that coin, some of the economies or our business at least in those geographies that were a little bit stronger before are entering a weakening phase. So on balance, the European segment is on the softer side and we don't see in the second half of the year that changing significantly.
Speaker 3
Okay. And just a follow-up with that. Is there any seasonal product mix issue throughout the year in the European segment? Just noticing that the margin declined throughout the year last year. Is that something we should expect this year as well?
Or was that just sort of an anomaly just with the dynamics that were going on last year with the European markets?
Speaker 1
No. It isn't necessarily Joe a mix issue as much as the third quarter tends to be a softer quarter in Europe because August is a holiday month. And I would expect our European margins to soften a little bit in that quarter simply because volumes will be down from the shutdowns that inevitably occur every August. Okay, great. Thanks.
You're welcome.
Speaker 0
Our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.
Speaker 2
Good morning, guys. Thanks for taking my call. Most of the questions have been answered. But real quickly on the North American volumes in the quarter, did the fire at the Baltimore facility have impact in your ability to ship and fill orders which would show up in these results?
Speaker 1
Yes. This is Chris. First of all, I'll say I'm very proud of the work that our employees did to mitigate the impact that could have happened to marketplace and our customers during this fire at our Baltimore facility. That's a leased facility for us. We had teams of people that left our Cleveland operations to go and try to support them and get that business up and operating.
And as much as I'm very excited about those actions, it probably did have an impact for us in the quarter where we probably went to some customers and asked them if we could delay some shipments or find ways to mitigate the impact upon them. Very difficult for us to put a measurable amount upon that. But backup and operating and servicing the market and those customers today, but there probably was an impact within the quarter although slight.
Speaker 2
Okay. Great. And then kind of switching gears to the global ERP system. I guess it's four installed, three by the end of the year. How much more should we expect or how many more platforms or systems whatever you want to call it would trickle into 2014?
Speaker 1
Well, we have as part of our 2020 strategy to continue to deploy our global ERP system and we're in the middle of that implementation in our European operations today. So we have a few sites from Europe that will be implemented in 2014. We also will be implementing the product into those sites that we acquire as we continue to look for and identify acquisition opportunities for us as we move forward. So I see that we're going to have several installations in 2014. And then we handful of other installations around the world in very small locations that we'll be evaluating to determine how we would move forward.
But certainly once we complete the European operations, which are expected to complete in '14, we would have the significant portion of our overall revenue with utilizing the tool.
Speaker 2
So it sounds like on a year over year basis maybe things slow a little bit from an expenditure side in 2014 than really slowed down significantly in 2015. Is that a fair way to think about that?
Speaker 1
I would say that our spending will be fairly consistent and heavy for 2014 and 2015. And Stanley just to summarize ERP journey that we've been on. North America is largely on SAP. Asia Pacific is largely on SAP. South America's most important operations on SAP.
The Harris Products Group is completely on SAP. And so the last rollout is really Europe. And so you can get a sense for we have Europe to go. And then of course if we do any acquisitions, we'll put them on SAP and continue our journey of improving our leverage from that ERP platform. But I would say the bulk of our implementations will be largely in place by the end of twenty fifteen.
And the last segment to be put on will be Europe. We already have a handful of companies in Europe that are on SAP and we'll finish it off in the next couple of years.
Speaker 2
Very good. Thank you very much for your time. I appreciate it. Best of luck.
Speaker 1
Thanks Stanley.
Speaker 0
Our next question comes from the line of Greg Holter with Great Lakes Review. Please proceed with your question.
Speaker 3
Hello and good morning.
Speaker 1
Hi, Greg.
Speaker 2
I just wanted to clarify something. In the press release, you talked about $25,000,000 on the pension for the first for the three months and 75,000,000 year to date. And then on the slides on 14, it's 107,000,000 Is that just a cash timing difference?
Speaker 1
No. The 25,000,000 and 75,000,000 is The U. S. Plan the 26,000,000 and 81,000,000 is simply worldwide. So the bulk of our funding is in The U.
S. Plan and we tend to highlight that. But the 81,000,000 is really the consolidated number.
Speaker 2
Okay. And relative to the new products, the 65 new solutions or products in the quarter, Is that something you envision continuing and at that pace? Or will there be any sort of slowdown?
Speaker 1
I don't think there'll be any slowdown. I mean with our broad portfolio across the global welding and cutting world, we continuing or looking at enhancements as well as new product introductions. I'm very excited about the upcoming Essen Show that we have in Germany where we'll be showcasing some of those technologies to the customer base globally. So I don't expect that that will slow down. Obviously, there may be some quarters where it's slightly more significant than others, but continuing to enhance the product line and create new products is a critical element of our business model.
Speaker 2
And one last one. Any comments you can make on the relationship or partnership or whatever you want to call it with IPG Photonics?
Speaker 1
You know what, they're one of the leaders if not the leader in laser technologies in the marketplace. We have a relationship with them and certainly the implementation and expansion of our automation systems here in North America and globally just enhances that relationship. So you know what some of our customers are looking for that particular solution and we in working with them and through our partnership provide them that solution. Yeah. Just as a follow-up of that and Greg, Chris touched on it, the Wayne Trail and the Tennessee RAN acquisitions gave us a much stronger platform in the laser side of things, particularly in cutting, which was really never part of our focus as it related to lasers.
We were more interested in the welding side of it. But Plain Trail in particular has been very active in cutting solutions in the automotive side of things and had a very strong relationship with IPG as a result of their expertise in that. So as Chris said that enhances, it grows, it broadens and we should be able to also take that into our global platform that Chris talked about in terms of European and Brazilian opportunities for us. All
Speaker 2
right. And one last one for you. Vince, any thoughts on what your capital spending will be for this year?
Speaker 1
I think we've said that we'll spend around $60,000,000 in CapEx for the course of the year.
Speaker 2
All right. And I think you're at about half of that right now.
Speaker 1
Sounds Thanks. You're welcome.
Speaker 0
And our final question comes from the line of Colin O'Connor with J. West. Please proceed with your question.
Speaker 5
Can you just talk a little bit about North America and maybe what you're seeing relative to ESOP? They said on their conference call that they thought they were gaining market share. I'm curious if you guys are seeing that and if you're seeing any pricing competition because of that?
Speaker 1
Well, this is Chris. I won't comment on anything they might have said or alluded to in their particular call. I can share with you though with great confidence that I believe not performing very well, but I think there's a multitude of segments and areas we're actually gaining share in the marketplace. Excited about some of the segments. Certainly, as we mentioned, heavy fabrication is down pretty significantly here in the North American marketplace and we think it will be challenged for a couple more quarters.
Although, I believe that there's been a significant amount of inventory that's been pulled out of that particular supply chain. So we still optimistic that we'll see improvements of that as we move into 2014. But when we look at our business here in North America, we think we're executing very well. We love the expansion into automation and feel very comfortable that we're probably actually gaining pieces of share throughout the various segments in this particular market.
Speaker 5
Great. And then just that's a great segue into my next question. You did a phenomenal job in Q2. Q2. Your sales in North America were basically flat with Q1, but your margins improved 110 basis points sequentially.
Is that the mix shift that you're talking about in automation? Or is that consumables? Could you help us understand that better?
Speaker 1
Well, it's a little bit of all those. Our mix did help us in terms of our margins. We continue to drive costs out of our manufacturing operations. We are looking at all avenues to improve our profitability throughout our operations not only North America. So it's a little bit of all the above.
Speaker 5
Great. So could you give us a sense of just if we assume that you kind of stayed flat in North America into perpetuity, which obviously you won't because you'll be gaining share and growing. How much incremental margin can you gain in North America because of that mix shift or whatever? I mean can you go another 100, another 200 basis points?
Speaker 1
I think we can. I think we've demonstrated pretty clear track record that we have the ability to execute operationally to improve our business models in North America as well as other parts of our world. So we expect our businesses to improve their margins on a year on year basis. We put together our operating plans on that concept of continuous improvement and there's no reason why we can't continue to improve as we move forward on our 2020 vision.
Speaker 5
Great. And then the last question I have for you is you did a phenomenal job in Latin America. You alluded to the price increases, but you basically sequentially from Q1 to Q2 your incremental margin was 73% on a drop through basis. I mean you went from 14% to 24.8%. Is that something that's sustainable?
I mean can you keep Latin America at these high 20s margin or mid-twenty margins?
Speaker 1
Certainly, we've made great progress in all of our operations in South America during the quarter. I will caution you that South America is continues to be a relatively volatile environment, particularly in a place like Venezuela. But it is gratifying to look at the improvements that we've made in our Brazilian and Colombian operations during the course of the half year. And we certainly believe that we can build upon those improvements for future sustained earnings growth. But again Venezuela is an important part of the region and we will continue to exhibit volatile operations because of that operating environment.
Speaker 5
And the last question I have relative to that in Latin America is, can you give us a sense for how big Brazil is? And do you think you've benefited a lot from the World Cup and the build down there for the Olympics? And do you think that business slows down afterwards? Or do you continue to see great visibility in that business as you go into 2014?
Speaker 1
Well, first of all, we're excited about our team operating down in that region, the expansion with the automation business that we'll have up and operating as we've discussed. But I believe that quite frankly this is a long term growing economy in Brazil. You've got energy, you've got offshore implementations, you do have the catalysts of the World Cup and the Olympics. But we see that as a catalyst, certainly not a unique catalyst. And we think our investments in Brazil will be very good for the long term.
And quite frankly, see it as one of those areas the world where we see very long term favorable demand dynamics.
Speaker 5
And are you willing to share with us what Brazil is of Latin America for you or no?
Speaker 1
Well, Brazil and it's not it doesn't rise to the level of being a separate reportable segment. But I will reiterate that Brazil and Venezuela are the preponderance of our business on the continent.
Speaker 5
Okay. Hey, thank you for your time.
Speaker 1
You're certainly welcome.
Speaker 0
It seems we have no further questions at this time. I'd like to turn the floor back over for any closing comments.
Speaker 1
Thank you, Brenda, and thank everyone for joining the call today and for your continued interest in Lincoln Electric. Again, our second quarter results demonstrate the company's solid execution in aligning operations for more profitable growth. Longer term, we remain well positioned for ongoing profitable growth with contributions coming not only from our core business, but also from our acquisitions, which have expanded our presence in higher growth areas such as energy, transportation and automation solutions. We will continue to leverage our world class R and D efforts, our leading application engineering capabilities and our extensive technical sales force. These competitive advantages will drive ongoing earnings and cash flow growth through the cycle and continue to enhance shareholder returns.
Thank you again for your time today and we look forward to talking to you at the end of the third quarter. Brenda?
Speaker 0
Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.