Lincoln Electric Holdings, Inc. (LECO) Q3 2013 Earnings Report, Transcript and Summary

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

Thank you, Jan, and good morning to everyone. Welcome to the Lincoln Electric 2013 Third Quarter Conference Call. We released our financial results for the quarter this morning prior to the market's open, and our release is available on the Lincoln Electric website at lincolnelectric.com or by contacting our Investor Relations office at (216) 383-2534. Joining me today on the call today are John Stropki, our Executive Chairman; and Chris Mapes, our President and Chief Executive Officer. Chris will start the discussion this morning with an overview of the quarter and highlight our progress made on our strategic initiatives. I will then cover the numbers in more detail, as well as our uses of cash. To wrap up, John will make some final comments before we take your questions. As part of the webcast today, we are using a slide presentation, which can be accessed on our website under the Company and Investor Relations tabs. The presentation will also be posted along with a replay of the call later today. Before we start our discussion, please be reminded that certain statements made during this call and in our discussions may be forward-looking, and actual results may differ from our expectations. Actual results may differ materially from such statements due to a variety of factors that could adversely affect the company's operating results. Risks and uncertainties that may affect our results are provided in our press release and in our SEC filings on Forms 10-K and 10-Q. Additionally, we'll also discuss financial measures that do not conform to U.S. GAAP, and you may find important information on our use of these measures and their reconciliation to U.S. GAAP in the financial tables that we have included in our earnings release. And with that, let me turn the call over to Chris Mapes.

Thank you, Vince, and good morning to everyone joining us on the call today. Moving to Slide 3. Looking at the third quarter highlights, it is clear that we saw many of the same performance trends that we reported last quarter, as we continue to navigate through uneven end market conditions. Despite these lackluster conditions, we were able to generate a record third quarter operating profit margin of 14.7%, which excludes special items and which is a 150 basis point improvement compared with the prior year. Our earnings increase versus prior year up 4% to $0.80 on a reported basis and approximately 8% to $0.86, excluding special items. Additionally, we are pleased to report that we generated significant cash flow in the quarter, up 88% versus prior year, and our year-to-date cash flow generation is pacing on par to our 2012 record levels. In this environment, we held our return on invested capital, or ROIC, ratio relatively steady at 18.5%. And lastly, looking at capital allocation, we continue to invest in our business and returned approximately 39% of cash flow from operations to shareholders through dividends and share repurchases in the quarter, and for the first 9 months of the year, returned 61%. As you may have noted in our recent release, our Board of Directors has just approved a 15%, or a $0.03 increase in our dividend, to now $0.92 per share in 2014. All of these actions reflect our confidence and our ability to drive increased profitability and earnings to achieve our 2020 Vision goals. On Slide 4, our third quarter income statement summary highlights our ability to achieve profit and earnings growth on shallow top line performance. We sailed down by approximately 1% to $692 million. Our sales decline reflected a 2.2% increase from acquisitions that have yet to anniversary. This increase was offset by 2.5% lower unit volumes and a slightly unfavorable impact from foreign currency translation. The year-over-year decline in volumes narrowed in the third quarter compared to the first half of 2013. Pricing held relatively steady on a consolidated basis, as it recognized benefits from pricing actions in several regions, most notably in South America, where we achieved 18% higher price, which was generated to offset inflationary conditions in Venezuela. These pricing benefits were offset by 9% lower pricing in our Harris Products Group on declining raw material costs, largely in silver and copper. Moving to Slide 5, which highlights specific end sectors that we serve. We continue to see strength in the transportation and energy-related sectors across most regions worldwide. Light vehicle production continues its unabated expansion, and we have been increasing our customer base in this sector by leveraging our core portfolio in automation solutions. The energy sector remains solid as well with oil and gas investments, as well as development of downstream processing facilities, which we expect will continue to present growth opportunities for us. While still in its early stages of a rebound, construction appears to be picking up activity and also offers growth opportunities for us in both commercial and residential applications. The heavy fabrication sector, which includes earthmoving, mining and agricultural equipment, as well as the shipbuilding sector, remained challenged. We continue to experience persistent weakness in Australia and China and remain cautious about any near-term improvement. During this period, we are focused on innovation and providing value-added applications to the market. Moving to Slide 6. We are investing in our business while continuing to optimize our platform and cost structure through this no-to-slow growth period. In the quarter, we largely completed our initial build-out of a new automation facility outside of São Paulo, Brazil and are well prepared for our November grand opening, and we have begun to take initial orders for automation sales. Additionally, we have been expanding our automation capabilities in Mexico to better serve the growing automotive OEMs and supply chain partners in that area. We will be launching our expanded capabilities mid-fourth quarter. Innovation continues to be a primary driver of our long-term growth, and we have kept our development pipeline full. Presenting 29 new solutions at the Essen, Germany Welding and Cutting show in the quarter. These new solutions include a new hot wire Tandem MIG process that leverages our proprietary Power Wave S700 power source. This solution allows users to double their deposition rates, driving up productivity, while reducing heat generation by 40%. This is a great add for the transportation, heavy machinery and energy sectors. Additionally, we presented our new strip cladding fluxes for stainless steel and nickel-based materials, which have the highest productivity and travel speeds in the market today. We have continued to benefit from the various initiatives that we have taken to consolidate our platform, drive efficiencies and increase our margin profile in the portfolio. In 2013, we continued to recognize approximately $2.5 million of benefit on a quarterly basis, and as you saw on our press release earlier today, we recorded a charge of $6.3 million for restructuring activities and related impairment charges initiated in the third quarter in our European and Asian Pacific operations. These actions are part of our broader efforts to reshape our go-to-market strategy in certain regions and better align our capacity to market conditions to improve profitability. We anticipate recognizing pretax benefits of approximately $2 million to $3 million in full year 2014 from these actions, which equates to an estimated $0.03 to $0.04 benefit to EPS. Looking ahead, we expect an additional approximate $1 million charge in the fourth quarter as we conclude these activities. As we look at the balance of the year and into early 2014, we continue to expect sluggish top line performance, given our end market exposure, ongoing economic policy uncertainty and global growth forecast. We will continue to focus on similar initiatives that drive improved profitability and earnings performance on a year-over-year basis. Although we are in a challenging growth cycle, we are pleased at our ability to demonstrate solid execution on our 2020 Vision and our global strategic initiatives. And now I'll pass the call to Vince to cover our segments' financial performance, balance sheet items and uses of cash in more detail. Vince?

Thank you, Chris. And walking through the income statement highlights on Slide #7, our consolidated sales were down by 80 basis points compared with the third quarter of 2012. As Chris pointed out, our volume decrease reported sales by about 2.5% and our pricing was flat. Our third quarter gross profit margins did increase by 300 basis points to 33.6% compared to 30.6% in the comparable prior year period. We had LIFO credits in the quarter that totaled $600,000 compared with the LIFO credits of $2.3 million in the prior year same quarter. The quarter also included a $2.5 million charge related to the write-down of inventories and a gain of $1.7 million from insurance proceeds in the Asia Pacific segment. The improved gross margins were primarily attributable to a better sales mix and improved price cost relationship and operational improvements. SG&A expense for the third quarter increased 160 basis points. The increase in SG&A is primarily attributable to incremental SG&A from acquisitions, a year-over-year change in legal costs and general increases in SG&A spending. In addition, the once-every-4-year Essen Trade Show costs of approximately $1.5 million were reflected in the third quarter of 2013. Operating income for the quarter increased 110 basis points. The quarter included rationalization and asset impairment charges of $6.3 million, again, primarily related to the factory consolidation and efficiency improvement initiatives in Europe and Asia Pacific. Adjusted operating income before rationalization and asset impairment charges was 14.7% of sales, a 150 basis point year-over-year improvement, as well as a quarterly record. The effective income tax rate in the third quarter increased to 34.3% from 28.8% in the prior year same quarter. The increase was primarily caused by our changing mix of geographical earnings, including some losses with no tax benefit and the provision for deferred taxes on the expected repatriation of foreign earnings. We expect to continue to experience a higher effective tax rate in the fourth quarter of 2013 and into 2014 because of our shifting geographical earnings mix. Diluted earnings per share increased 4% for the third quarter compared to the prior year, and excluding special items, our adjusted diluted earnings per share increased approximately 8% over the 2012 third quarter. On Slide 8, on a reportable segment basis and excluding special items, our North American welding business improved its adjusted EBIT margins by 20 basis points in the third quarter. Improved mix and a better cost price relationship drove the increase. Europe's weldings adjusted EBIT margin declined 30 basis points in the quarter. The decline was attributable to the 8.2% reduction in year-over-year volumes. We did experience better top line results in the U.K., Germany and the Netherlands, but had weaker sales results in Spain, Russia and France. Rationalization actions helped to offset the overall economic weakness. In addition, the bulk of the Essen Trade Show costs were reflected in the European operating segment, reducing their margins in the third quarter of 2013. The Asia Pacific segment recorded an adjusted EBIT loss of 1.4% in the quarter. Our sales in Asia Pacific were down 12.7% due to volume, and pricing declined by 1.3%. The volume decreases, again, were primarily caused by the continuing softness in the construction and related machinery markets in China and lower Australian volumes as a result of declining mining and large-scale project activity. South America welding adjusted EBIT margin increased to 30.7% because of improvements across the portfolio, with the preponderance of the earnings increase coming from our Venezuelan operations. The bulk of the price increases were caused by the highly inflationary environment in Venezuela. The Harris Products Group second quarter EBIT margins declined by 10 basis points. The decline in pricing is attributable to lower metals prices year-over-year, primarily silver. The overall decline in margins is a result of these commodity prices leading to lower margins. We generated $155 million of operating cash flows in the quarter, a quarterly cash flow record. The 9-month cash flow total of $242 million also approximated record levels set last year. Our total pension plan contributions for the 9-month period ending September 30 were approximately $84 million compared with $58 million in the prior year same period. These funding actions, along with rising interest rates and strong asset returns, have resulted in a U.S. pension plan that is currently fully funded. Accordingly, additional funding actions for the remainder of 2013 will likely be insignificant, and we forecast 2014 targeted funding actions totaling approximately $20 million to $30 million based on our current outlook. On the capital allocation, during the quarter, we spent $44 million repurchasing about 710,000 shares. In addition, we paid a dividend of $16 million representing a 16% year-over-year increase in payout. On a year-to-date basis, we have spent $114 million on share repurchases and have paid $33 million in cash dividends. We expect share repurchase activity to continue through the end of fiscal 2013, and we anticipate our 2014 share repurchase spending to continue at levels, at least, approximating 2013 rates. And finally, our Board of Directors approved a dividend increase of $0.03 per share per quarter for the next quarterly dividend payable in January 2014. This dividend rate increase represents a 15% increase over the payout from the current dividend rate. We ended the quarter with no net debt and over $330 million of cash on our balance sheet. This balance sheet position will give us the flexibility to continue to invest in the business for the long run and also continue to prudently return cash to shareholders. With that, I would like to pass the call back to Chris and John for some closing remarks before we open the call for questions.

Thank you, Vince. Many of you on the call today may recall that our Executive Chairman, John Stropki, will be retiring at the end of this year, and we wanted to take a moment to thank him for his outstanding leadership and his many contributions he has made to Lincoln Electric, our industry and our community over his 40-year career and his 10-year tenure as our President and CEO. As this will be John's last earnings call, we wanted to have John share his views on Lincoln Electric. John?

Thank you, Chris, and thanks to everyone on the call today. Let me start by saying that I've had a very exciting and rewarding career at Lincoln Electric, starting out as a summer intern in the late 1960s and retiring later this year as Executive Chairman. I truly appreciate the opportunity provided to me by our Board of Directors and our shareholders to lead this great company over the past 10 years. Today, Lincoln Electric is the clear global market leader and is truly an international company. We are in an enviable position to capitalize on whatever we set our sights on. Our 2020 Vision will continue to focus our strategies on increasing shareholder value and developing long and strong term relationships with our broad portfolio of key global customers. We have a leading brand equity, a phenomenal market footprint, the best people in the industry, a solid new product pipeline and ample fiscal resources to drive our strategic growth plans. We have a superb track record and a history of being a solid performer, growing responsibly, profitably and by following a balanced approach of returning cash to our shareholders. I am excited about Lincoln Electric's future, and I'm excited to be a large shareholder. Most of all, I'm very proud to have served among the 10,000 Lincoln employees who I truly believe symbolize the industry's best in welding and cutting. Today, Lincoln Electric, under Chris Mapes' leadership and supported by an exceptional strong and experienced global management team, is better positioned than ever. Chris brings a wealth of experience and expertise to continue to grow and steward the company under the same guiding principles and values that we inherited from John C. and James F. Lincoln and which have been embraced by our employees and management for over 100 years. I would like to take this opportunity to thank the Lincoln Electric team for such an outstanding performance and their ongoing dedication. I would also like to thank our shareholders for their continued support of our strategy. And now operator, I will hand the call over to you for the question-and-answer session.

[Operator Instructions] Our first question comes from the line of Tom Hayes with Thompson Research Group.

Congratulations, John.

Thanks, Tom.

Just wondering on the some of the pricing initiatives you guys began last year, we saw obviously driving some of the benefits. Have we started to anniversary or are we getting one quarter away from kind of anniversary-ing some of those benefits?

Yes, Tom, those are fully anniversary-ed in the third quarter of 2013.

Okay, great. And then, I guess, on the margin sustainability, specifically in South America, we're seeing the nice price benefits this year. Just wondering your expectations for the continuation of that or maybe a reversal in 2014.

Well, those pricing increases are predominantly related to the Venezuelan economy. The inflationary environment there is very difficult to predict. What we do know is that we are going to raise our prices in line with what is necessary to drive our margins in that economy, and the ultimate devaluation of the local currency is just not predictable.

Our next question comes from the line of Schon Williams with BB&T Capital Markets. Christopher Schon Williams - BB&T Capital Markets, Research Division: Congratulations, John, on a wonderful career at Lincoln. I just wanted to -- maybe a little bit of follow-up to that question. I mean, obviously, Venezuela continues to outperform here and drive a significant amount of the year-over-year improvement. I mean, can you guys maybe just talk a little bit about maybe x Venezuela, maybe some of the improvement that you've made in the rest of the region. And I don't know what is a more sustainable margin in some of those pieces, maybe excluding the Venezuela piece.

This is Chris. Let me talk about the rest of South America because I actually think it's a very favorable story for the improvements that we've made in the rest of those markets. So we've seen a significant improvement in our operations in Brazil in 2013. I certainly believe that the automation facility that we'll be launching there in November is going to be a further catalyst for us to penetrate into many of the large OEMs that are looking for those types of automated welding solutions in that space. So I see continued opportunities for us in the Brazilian market. And certainly, Brazil is a significant driver to the long-term benefits in the way we look at the market in South America. We've also had a more favorable performance outlook in Colombia, Argentina and Chile. We've actually just committed to put a technical center into Chile to be able to host and provide the markets there with the ability to see our process solutions. So we'll be installing that as we move into 2014. So certainly, the businesses are improving, and we like the direction we're moving in South America, outside of Venezuela. But as Vince mentioned, the inflationary market that we're managing there, certainly, is impacting the overall results that we're reporting for South America. Christopher Schon Williams - BB&T Capital Markets, Research Division: Okay. And then maybe as a follow-up, the robotics facility that's going up in Brazil, you said you're seeing some very good trends in terms of initial orders there. I mean, do you want to put -- or any numbers you want to put around that? I mean, is this a facility that can sport millions of dollars in revenue, tens of millions of dollars in revenue? Kind of just is there something you want to maybe frame that for us?

Well, I think the frame is, first, I'm excited about the way that our customers and partners have welcomed, and not just welcomed, but been excited about our us developing these process solutions for the industry there in Brazil. And I certainly see it as a long-term catalyst. The automation business is very much a process and technically driven solution for our customers. So bringing up the workforce, bringing up the technical capability, will have a ramp up, that we have already received orders for cell solutions, automated solutions for that market. But it will take time. It certainly, from a facility and infrastructure perspective, is a facility that can handle $10 million to $20 million of potential solutions. So it's certainly very scalable. We'll see how efficiently we can ramp up our people and process solutions, and again, think it's going to be a catalyst for us in that region longer term.

Our next question comes from the line of Mark Douglass with Longbow Research.

Congratulations, John. Speaking of numbers, Vince, can we just dive into Venezuela and talk about the mechanics a little more? I think a lot of us have trouble reconciling relationship between the actual pricing, inventory evaluation, translation of the currency to final sales and EBIT margin. If they don't devalue in the next couple of quarters and we're still running at hyperinflation, would you assume that this run rate is the same or at least kind of 25% to 30% run rate? And then just, again, kind of the mechanics.

Yes, okay. I think that's a good question and I'll run through it as best as I can again. So in a hyperinflationary economy like Venezuela, the accounting rules require you to translate the financial results at an official rate...

Which is pegged, right?

It's pegged, yes, to the U.S. dollar and it does not move. And so there's an unofficial rate that can rise very rapidly to take into account the impact of inflation in the economy since the official rate is pegged. And so you have to raise your pricing and translate that back at the official rate, and the result of that is a rising sales line and a resultant rising gross margin and profitability line. Until such time that there's a devaluation to move that official rate closer to the unofficial rate, which did occur early in this year and...

It was like June?

It was the beginning of the year, first quarter. There was a 32% devaluation. And we took a total charge of the bulk of it in the first quarter and then the rest in the second quarter that was about $12 million. So I would tell you that as long as there's no devaluation, that we will have higher sales and operating profits than has historically been booked in Venezuela and our South American business, until such time that there is another devaluation in the currency.

Great, very helpful. On the tax rate, I'm coming up with an effective tax rate, at least on the adjusted earnings, of about -- little north of 32%. So is that what you're thinking for fourth quarter and 2014 or the GAAP, 34%?

I think it's going to be -- I don't think that's a bad proxy for what our rate will be, somewhere...

32%.

32%, 33%, somewhere like in that range.

Our next question comes from the line of Joe Mondillo with Sidoti & Company. Joseph Mondillo - Sidoti & Company, LLC: I was just wondering if you can distinguish between the domestic demand and the exported demand that you're seeing in the North America segment.

We actually, Joe, did have a decline year-over-year in export demand, so our domestic business was stronger in the U.S. than what we saw in the export markets. Joseph Mondillo - Sidoti & Company, LLC: Okay. And can you give any more color exactly what region in the world that -- is that mostly South America and Central America?

It's all over the world. Most export markets were down. The strongest end market for us in the third quarter was the U.S. and North America.

Our next question comes from the line of Liam Burke with Janney Montgomery Scott.

You highlighted 2 automation facilities, greenfield facilities that are getting traction fairly quickly on the order front. Do you see the need to add to the product line through acquisition? Or do you think that you can get most of it done through greenfield?

Well, we certainly believe that the automation business is a regionally centric business, and having individuals positioned around the world to service global customers is certainly our expectation of building out our automation business on a global front. So obviously, the Brazilian operation is a greenfield. The Mexico operation expansions that we've talked about is we have some capabilities there and facilities there already. We're enhancing those to service the growth that's occurring in that market. So I believe we'll continue to build out that global footprint and global capabilities relative to automation as we build upon that strategy through the end of '13 and '14 and '15.

Okay. Part of the challenges in China have been unprofitable product line. Are you comfortable now that you have the right product mix in China to compete or at least get margins up?

Well, I'm not sure that I'm comfortable in saying today that we have the exact product portfolio strategy because that's more than just product capability. That's also ensuring we have the technical expertise and the capabilities to provide those process solutions to the market. What I am confident in is that we recognize that that's where we're going to drive value with our business in Asia Pacific and specifically China. So we have -- we've put forward some strategies relative to ensuring that we feel we can drive those solutions, and I think our management team certainly expects that we start to see those improvements over the next 2 to 3 quarters as we realign that portfolio and that business towards higher value-added solutions and processes for the market there.

Our next question comes from the line of Stanley Elliott with Stifel, Nicolaus. Stanley S. Elliott - Stifel, Nicolaus & Co., Inc., Research Division: Best wishes to you, John. First, in the welding industry, I've always thought of it as kind of a GDP-plus type of an industry, but it's not just Lincoln, but other publicly available data that's come out and has been kind of trending softer. Then on the flip side, I look at kind of what has historically driven the business, be it PMIs or steel production, has very good correlation, and those all tend to point towards positive growth. Could you help me if there is some sort of a disconnect there that I might be missing?

No, I don't think you're missing anything, Stanley. We're looking at it as well, and I would agree that over a fairly long period of time, we've had a -- the welding industry in Lincoln Electric have had a high correlation to those metrics. And I wouldn't disagree with your assessment that there is seeming to be a very short time frame, interim time frame that we're looking at over the last maybe a quarter or 2 that there has been a bit of a disconnect. We're hoping that, that alignment or that correlation lines up again here in the future because we do have a fairly high, by historical terms, and a rising ISM metric in the U.S., for example. So we're hopeful that there's just some short-term anomalies and we'll see a tighter correlation moving forward. But I would agree that there seems to be some disconnect between the welding industry, so results maybe the last quarter or 2 and what we've been seeing historically. Stanley S. Elliott - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Then when I think about with the fully funded pension plan, how long before your pension expense on the P&L starts to trend down?

Well, it will trend down next year nicely. Based on the funded status that we have, we have an expectation that we'll have a significant decline in pension expense in 2014. Stanley S. Elliott - Stifel, Nicolaus & Co., Inc., Research Division: Is there any way to put any sort of numbers around that?

I'd give you a range of -- it's going to be over $10 million and I put the top end of that range at maybe $15 million.

Our next question comes from the line of Greg Halter with Great Lakes Review.

John, it's been nice working with you over the years so good luck in your future endeavors.

Thank you.

You made a lot of points about the automation and automotive area, and I'm just wondering where you think you are in terms of penetration. Is this 10% or 60% or what? What's the opportunity?

Yes, this is Chris. It's very difficult for us to actually talk about a penetration ratio in the automation space because I think as we've mentioned on the call before, there's just not very clean market data and automation is not the same around the world. You have people to do automated full lines that would call automation but might be more press transfer actions or other types of assets they would be deploying in automated solutions. What we're focused on is it's all about the arc. It's all about welding. And we're focusing on welding automation cells. And I think until we get our global footprint built out and start to continue the emphasis that we've placed on this space over the last 12, 24 months, we probably won't have a very good indication about relative penetration. But when we do, it certainly will be more regional. And again, just a very difficult metric for us to look at. Again, as I mentioned, the exciting thing about automation is we believe it's a global platform. It's a global process solution. And in our development of that business model within Lincoln Electric, it'll all be about the arc and developing that solution as global OEMs continue to look for process efficiencies and reduction of labor costs with the installation of automation.

Okay. And would you say that automation and the revenues associated with such are greater than 10% of your sales yet at this point?

No, we've been consistently disclosing that as less than 10% of our sales.

Okay. And your CapEx is up this year, obviously, some new plants. Just wondering where you expect that to come out for the full year and any early indications for next year.

We're adjusting our CapEx view for 2013 up to approximately $75 million. And one of the main drivers for that increase is we did buy our manufacturing facility in Venezuela in the quarter for about just under $12 million. So we do have an additional at the beginning of the plan year unplanned for capital purchase in our South American segment. So we're bumping up our target to about $75 million for this year. And then, we would say for next year, something around what our D&A is running or maybe a $50 million to $60 million type of spend.

Our next question comes from the line of Schon Williams with BB&T Capital Markets. Christopher Schon Williams - BB&T Capital Markets, Research Division: Wonder if we could maybe just talk about -- I mean, it's still a difficult macro environment, maybe based on the previous discussion, obviously, it's trending better here, but could you just talk about maybe what you saw trends throughout the quarter and then maybe just going into October here? Any impact from the government shutdown at all?

Yes, what we see early on in the quarter, Schon, is pretty much the same. We're in a flattish, sluggish type of environment. We are not seeing a catalyst that's driving our business one way or another. So it's relatively stable, and I wouldn't be able to comment on any significant impact from the government so-called shutdown other than maybe the psychological loss of confidence and the uncertainty that, that might have created for the future. But I can’t say that we can point to that episode to drive our sales down specifically in the quarter, or for that matter, the start of the fourth quarter. Christopher Schon Williams - BB&T Capital Markets, Research Division: Okay. And then could you talk a little bit about pricing, maybe specific in North America? I would have expected the pricing component to maybe actually accelerate kind of Q3 versus Q2, as you got some of the good traction from some of your new pricing rounds. I mean, can you just talk about what you expect from pricing maybe the next quarter or 2? I mean, does that actually decelerate or should we see some pickup there?

We don't really see a whole lot of pricing actions that will be taken from a global welding standpoint. The top line, from a volume standpoint, is sluggish. Raw material prices are flattish, if not slightly down. That is not the kind of environment that an industry will look to drive additional pricing initiative. So I would expect, Schon, much of the same that you've seen in the previous 2 quarters. They're subject to the vagaries of our participation in the South American market and the Harris business. But from a broad welding and cutting standpoint, more of the same with flattish type of pricing actions. Christopher Schon Williams - BB&T Capital Markets, Research Division: Okay. And when -- as we look into 2014, when would we -- when would you typically look at doing more price actions? Is that normally Q2 of next year?

Traditionally, in our industry, led by Lincoln Electric, we look to pricing actions early in the year, generally beginning of February or in the first quarter sometimes. So we have an annual pricing review that occurs at the first of the year. And then those typically would be rolled out in February, March.

Our next question comes from the line of Steve Barger with KeyBanc Capital Markets.

I got on the call a little bit late. You were talking about the automation facilities. Are those really a function of leveraging the technology you acquired and the lessons you've learned from Tennessee, ITT and Wayne Trail? Or is there still a big benefit from revenue synergy yet to come as you kind of build out that footprint?

Well, I think there is a little bit of each of those characteristics. Certainly, the value of Tennessee Rand is that they had some presence already down in the Brazilian market, and their experience has assisted us in the successful greenfield of that automation business there. But we also are utilizing the leverage of the automation assets that were within Lincoln Electric, and then leveraging our relationships with our global customers that have facilities there and were looking for these types of solutions. So my expectation is that we'll actually drive leverage into the portfolio, both from the intellectual capital of the people that we've acquired and our own, as well as the relationship of those global customers and our knowledge of driving solutions into those particular markets.

And you had Tennessee and ITT for about a year now. Are the revenue and recurring margin trends you're seeing from those companies exceeding your initial expectations?

They are improving, Steve, from what we experienced at the acquisition days.

And when you think about those acquisitions, whatever you paid for and whatever the EBITDA is, is the return on capital starting to approach consolidated return on capital? Or are those still a drag? And can they -- if they are below, can they get to consolidated?

Well, it is early in the acquisition time frame. And they are, at the present time, lower than our consolidated return on invested capital. But we fully expect those businesses to meet and exceed our consolidated cost of capital averages after a period of 5-plus years.

Got it. You just raised the dividend by 15%. I think it's gone up about 10% per year over the past few years. Even with the increase, it's still less than 25% of net income on my current numbers. Is there any updated thought about dividend payout ratio from the board?

No, I don't believe there's an updated view of our dividend policy. We will continue to take the opportunity to raise our dividend in a robust fashion as we continue to drive higher and higher earnings and maintain the confidence that we have in the long-term earnings growth potential of our business. Our view of dividend increases is a steady, predictable type of pattern, and so I think you can expect robust dividend increases, I believe, into the future as our earnings grow and we continue to avail ourselves very strong cash flows.

So I'll just wrap up by saying congratulations, John. And I don't know, have you been pushing for 100% on the payout.

John is not allowed to answer that.

Thanks, John, and yes.

Our next question comes from the line of Walt Liptak with Global Hunter Securities.

John, good luck with your retirement and a pleasure working with you.

Thanks, Walt.

I got on to the call a little bit late, too, so I wanted to just make sure that you addressed the margins in North America. The 100% year-over-year decline and sequential decline, and I'd like to hear what the response was on that.

I'm not sure we had a 100% year-over-year decline in margins in North America.

100 basis points.

I show on...

I'm sorry. Well, okay, I was looking at my model numbers.

Okay. We're a little sloppy today on this call. Well, it might be Halloween.

It could be, okay. All right. Sorry about that one. Okay. I wonder if we could talk about North American and just what you saw during the quarter on a monthly basis, if business trended up or down. You had mentioned the ISMs, I think, when I was getting onto the call. And Airgas and some of the distributors have been talking about potential for some nonres construction projects picking up later in the year. I wonder if you're seeing it and if you can provide any color like that.

Yes, we didn't see a strong trend either way, Walt, in terms of our business in North America for the quarter. We've talked a bit earlier and some of the prepared remarks, as well as in response to questions, that we see a relatively flattish, sluggish environment and there haven't been a strong directional action either increasing or decreasing our overall revenues.

Okay, okay. Fair enough. And in Europe, the volumes are still weak. I wonder if you can -- you know the margins held up okay. I wonder if you can talk about cost reduction activities, things you've done to permanently reduce expenses and what those margins might get to if that volume came back.

Well, you saw in our announcement today that we announced our restructuring of some of our assets in Europe, really doing some realignment of our production capabilities that we think are going to drive further efficiencies and better balance our capabilities for what we see for that market moving forward. We will continue to take those initiatives. I've been very happy with the way our management team has managed through the cycle in Europe over the last 8 to 12 quarters. I think we've mentioned that we have seen some stability in the European market, and we're hoping that, that stability has a little sounder foundation to it as we move forward into 2014. And there certainly are elements to the European market that I believe could become more of a catalyst for growth as we look out over the next 4 to 6 quarters. But the recent actions that we've taken, I think, will improve our bases and certainly improve our margins. And I think we mentioned that, that would be accretive to the EPS expectations that we'd have for the company as we move into 2014.

Okay. Can you get Europe close to where North American margins are over time?

Well, we're going to continue to make progress there. And our objective is to have a continuous improvement environment where we drive our margins up on a sustainable basis. And I think we've made good progress over the years. And you will continue to see those margins climb over the intermediate and longer term.

Okay. And I wonder if I could ask one on Harris Products, the revenue declines there. I would've thought that with the housing recovery, we'd see a little bit of better growth. I wonder if you could address that already?

Well, a part of what we're seeing on the top line compression at the Harris Products Group is just a year-over-year drop in material costs, specifically, I believe, in silver, which compresses the top line. We've actually seen some of the activity in the residential marketplace, although a lot of the residential marketplace has been in -- a movement in the new home construction, which has been a movement off of an extremely low base, but very far from the historical highs or even the average for new home construction builds for the market. I don’t have that data sitting in front of me, but I'm very confident in that comment. We've been happy with that business. That business has had a very good movement and improvements in its operations and improvements in its margins. We continue to see it as a business that we can make further improvements to, much like Vince's comments about our European operations. So we weren't surprised by where the revenue numbers came out for Harris for the quarter. Again, a slight margin compression because of some of the way the commercial transactions work as the metals are moving through that portfolio. But certainly, excited about the improvements made in that business and the strategies we're executing for future improvements.

Our final question comes from the line of Tom Hayes with Thompson Research Group.

Just a couple of quick follow-up questions. Kind of following up on Walt's, Chris, did you -- or I guess, could you tell us, did you shut facilities in Europe?

We made a major relocation of a product portfolio, consolidating it into another location within Europe. It did not completely shut that location. There are still some operations that are there, but it was a major move in the consolidation of a product line.

Okay. And then I guess to the extent that you can provide it, where are you kind of globally and regionally as far as utilization rates?

Well, I think with our portfolio, it's very difficult to talk about a utilization rate. With our equipment portfolio, the various consumable products that we manufacture versus alloy, high-alloy products that might be focused in a couple of facilities versus other products in our automation business, I can only give you confidence that if we were to see some volume return back into the marketplace, that we would be able to show some operating leverage from that with the current portfolio.

Ladies and gentlemen, I would now like to turn the conference back to Mr. Vincent Petrella for any closing comments.

Thank you, everyone, for joining the call today and for your continued interest in Lincoln Electric. Again, our third quarter results demonstrate the company's solid execution in aligning operations for a more profitable growth. Longer term, we remain well positioned for ongoing profitable growth with contributions not only from our core businesses, but also from acquisitions, which have expanded our presence in high-growth areas, such as energy, transportation and automation solutions. We will continue to leverage our world-class R&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 joining us today on the call and look forward to reporting our next quarter to you. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.