Lincoln Electric Holdings, Inc. (LECO) Q1 2008 Earnings Report, Transcript and Summary

Greetings ladies and gentlemen and welcome to the Lincoln Electric First Quarter 2008 Financial results. At this time, all participants are in a listen-only mode. A brief-question and answer session will follow the formal presentation. [Operator Instructions] As a remainder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Vincent Petrella, Senior Vice President, Chief Financial Officer for Lincoln Electric. Thank you. Mr. Petrella you may begin.

Thank you, Doug. Good morning and thank you for joining Lincoln Electric's first quarter conference call. Results for the 2008 first quarter were released this morning prior to the markets open. Copies are available through the Lincoln Electric website or by contacting Investor Relations at 216-383-4893. Our Chairman and Chief Executive Officer, John Stropki is joining the call this morning and will provide commentary on the quarter in a moment. But first, let me remind you that certain statements made during this call and discussion may be forward-looking and actual results may differ from our expectations. Risks and uncertainties that may affect our results are provided in our press release and in our SEC filings on Form 10-K and 10-Q. Now let me turn the call over to John Stropki

Thank you, Vince. Good morning to everyone and thank you for joining us. We had an excellent start to 2008 with strong sales, profitability and cash flow. Despite a very volatile domestic economic environment, and rapidly rising commodity costs, we were able to continue to leverage the strengths of our strong domestic and global market positions. We remain focused on executing our long-term strategy despite the softening in the industrial economic outlook by continuing to capitalize on key global infrastructure development opportunities, and expanding our value-driven welding products and service offerings around the world. This will cover the financials in detail later in the call. But I will cover the high level numbers and then review our operations and the economic environment as we move forward in 2008. First, let me begin by reviewing a few key economic measures that we follow as indicators of the broad conditions of our business. Key industries that we reserve show mixed results in terms of year-over-year comparisons. As an example durable goods manufacturing excluding vehicles and fabricated metals were up in the quarter 4.5% and 2.4% respectively. While heavy-duty truck manufacturing and motor vehicles were down year-over-year 19% and 10%. Overall, in US industrial production, excluding high-tech sector decreased 0.2% in March over the prior year March. And lastly the US purchasing managers index continues to show contraction although the measure increased slightly in March to 48.6%, up from 48.3% in February. Turning to our Q1 results, overall sales increased 13% to $620 million from the first quarter of 2008. Operating income increased 14.9% to a record $78.5 million in the quarter and cash flow from operating activities increased 59% to $67.5 million. Sales of the company's North American operations rose 7.3% to $371 million in the quarter. US export sales in the quarter increased almost 30% to $61.5 million. And sales recorded by our European subsidiaries grew 21% to $147 million, while other international subsidiaries recorded increases of 25% totaling a $102 million in sales for the quarter. Also the high level numbers, Vince will again provide details in a moment, but I would like to cover the activity in the quarter for the regions and the sectors first. First looking at North America, despite the slowing economic growth trends and forecast our overall results and demand continue to be positive during the first quarter in our North American operations, as sales increase was driven by a combination of both volume and price. We do however expect the overall economy to continue to show weakness and possibly some additional contractions in certain key sectors during the remainder of 2008. Any sector tied to automotive heavy-duty trucks and housing construction including HVAC and light construction machinery continue to be soft in Q1 '08. Sales trends in the first quarter of 2008 for our traditional US welding markets remain consistent with all the experience in the fourth quarter of 2007 with the exception of light commercial equipment sales. Across most consumable product lines in our main distribution channels we saw growth in the first quarter of 2008 compared with 2007 levels. Pricing has been adjusted effective February the 1st, and again on April the 1st to respond the cost increase in our key material groups like steel, copper and chemicals. Pricing and supply for key raw materials will present ongoing challenges in 2008 in all areas and all regions of our business. Continuing upward pressure on these input costs will necessitate additional pricing adjustments and we anticipate additional increases in June as our cost continue to escalate [ph]. US sales growth, export sales growth continues to be strong or key global infrastructure development projects have preferred our higher-tech products versus other international and local competitive options. These large scale long-term projects associated with oil and gas and energy, overall sectors continue to drive both the sales and expansion of our global brands and we look for continued growth in this area for many years to come. In terms of the short-term outlook for North America, we believe demand should begin the bottom out. With the longer-term landscape somewhat more positive if those industries already heavily impact start to move in a more positive direction. However, overall results will be heavily driven by the key end user market sectors. Turning to Europe, the first quarter of 2008 European growth rates excluding exchange rate impacts continue to slow compared to the robust bubbles experienced in 2007. However, there continues to be growth in our base European business as integration of past acquisitions in our manufacturing expansion efforts in Eastern Europe continue to benefit the region. The recently announced acquisition of Electro-Arco will contribute both a strong Portuguese commercial sales channel and expand our regional manufacturing capacity to support the overall European market for wealthy consumers. The additional manufacturing capacities will provide needed release for key consumable products spacing capacity constraints in the region. The integration of this acquisition is well underway and the significant benefit should be realized moving forward in 2008. Looking at the regions outside of North America and Europe, first focusing on Latin America. South America continued its 2007 strong growth trend in the first quarter of 2008 with greater than 30% sales growth. The oil & gas sector as well as the mining sectors continued to invest heavily as commodity prices remain at historically high levels and demand continues to exceed supply. Our expansion efforts in Columbia and Brazil are allowing for our full participation in the increased investment levels related to offshore, mining and the pipeline sectors. This expansion provided significant volume increases throughout the region. The level of activity in Mexico also continued the positive growth experience in the fourth quarter of 2007, as many related projects continued investing in expanding capacity and the political issues affecting project work seem to have [inaudible] Asia-Pacific, Asia continues to be central focus point for our international expansion and a significant progress was made in the quarter. The integration of our early joint venture executed in February of 2008 is providing the region with additional offering of high quality submerged arc consumables. Additional investments continues in building our manufacturing capacity and commercial distribution network in China and construction continues on our first consumable manufacturing facility in India, which is scheduled to begin production in the fourth quarter of this year. Economic growth in China remain strong, but tightened measures and stronger courtesy are expected to take one to two points of the GDP growth for the full-year. We also expect some negative impact from the Olympics as many industries and mines will be shutdown in the North-East of China for several months before the games in order to reconsider pollution. This will likely cause raw material shortages across many industries, as said, strong infrastructure spending especially in the energy field will continue to drive our business growth there for the next several years. These markets also continue to drive a significant portion of our US and European export sales along with the sales of our local subsidiaries. Our overall market penetration into China and India continues to grow as total sales grew by 83% and 39% respectively in the first quarter of 2008 compared with the year ago quarter. Import sales volume supports our efforts to develop the local, commercial, and manufacturing capabilities in these countries in Asia and in the region in general. These strong Q1 results were also achieved in China despite a significant slow storm in Northern China during late January and early February, which affected transportation and power supplies. Looking at the Middle East and Africa, the Middle East continues very strong with energy related projects, pipeline, offshore platform and power plants book several years into the future. They entered [ph] welding machines and consumables along with our newer technology, which improves efficiency and throughput are still being ordered at robust and record pace. Related energy investments are strong in shipyard, cement mills, aluminum smelters, petrochemical plants, and steel fabrication plants, all making demand for welding products very strong. The steel industry within this region plans for solid growth as mining, shipyards, and infrastructure programs continue with excellent pace. With the world’s strong appetite for energy and natural resources, both the Middle East and Africa will continue their robust pace of welding activity. Many projects are planned and committed over the next several years. That’s a quick view of the company's regional results and relative market conditions for the last quarter and year, now Vince will go into the details of the financial results.

Thank you, John. First quarter of 2008 represented our 17th consecutive quarter of strong earnings growth. As John mentioned in his comments that in our press release, you will note that our sales were up 15% in the quarter with North America increasing 7% and sales recorded outside of North America up by 23%. Break that down, our foreign currency impact increased reported sales by 5%, volume increases contributed about 3% of the sale dollars in the quarter, pricing contributed about 3% as well year-over-year and finally acquisitions contributed an additional 2% to the top line. The percent of gross profits in the quarter was 28.6% of sales compared with 28.8% in the prior year. This price decrease in gross margins was primarily attributable to our sales mix. The quarter also included a LIFO charge of $5 million compared with $2.8 million in the prior year's same quarter, reflecting inflationary expectations of raw materials. SG&A expense was $99 million or 16% of sales in the quarter compared with $89.5 million in the first quarter of 2007 or 16.3% of sales. The lower SG&A as a percentage of sales was primarily driven by volume leverage. There were higher bonus costs and unfavorable translation impact of foreign currency exchange rates that grow the dollar increase in SG&A. First quarter operating income at 12.7% of sales was up 30 basis points versus the first quarter of 2007. Operating income increased 15% in the quarter; the prior year's quarter did include approximately $400,000 related to the finalization of European rationalization program. On a geographical segment basis, North America recorded EBIT margins of 14.2% in the first quarter. Europe's EBIT margins were 11.8% and other country’s segment achieved a 4.9% EBIT margin in the first quarter. As a reminder, our fourth quarter 2007, EBIT margins were 14.8% for North America, 10% for Europe and 1.4% for the other country’s segment. The income tax provision for the first quarter reflected an effective tax rate of 32.3% compared with 30.4% in 2007. The higher effective tax rate was primarily attributable to higher income levels in higher tax rate jurisdictions. Cash flow from operations, totaled $67.5 million for the first quarter of 2008, compared with $42.3 million in the prior year’s first quarter, a significant increase in operating cash flows. The company invested $12.8 million in capital expenditures in the first quarter compared with $15.7 million in the prior year same quarter. We continue to focus our capital spending plan on our capacity expansions around the world as well as continuing improvements on our cost base. Other uses of cash flows in the first quarter included the payment of $10.7 million of dividends to shareholders and share repurchases of $18 million or 298,000 shares. Our weighted average diluted shares outstanding decreased to 43,090,000 shares for the first quarter compared with 43,349,000 shares for the 2007 first quarter, a 60 basis point decrease in overall shares. Shares outstanding at March 31st, 2008 were 42,722,000 shares. The company has available 4.2 million shares under previously authorized share repurchase program. Our return on invested capital stood at 20.2% at March 31st, 2008 and the company closed the quarter with a $105 million net cash position on the balance sheet including $238 million of cash. Those are the extent of my prepared comments. At this point I would like to open up the call for question. Doug? Question and Answer

Thank you. Ladies and gentlemen at this time, we will be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Steve Barger with KeyBanc Capital Markets. Please go ahead with your question.

Hi good morning John and Vince.

Good morning, Steve.

I would like to talk about steel first. Can you talk about what percentage of your buyers is spot versus contract and how that’s changed, maybe since the '04, '05 time frame?

I don't really have the knowledge or the data to go back to 2004, 2005.

Okay.

I would say Steve, that we don't have a very large percentage of our business in the spot buy market. We would only do that, if we were in a situation where our capacity was stripping out any contracts, agreements that we had or any of our very long-term suppliers, who are having difficulty filling their commitments. That being said, we have seen some of that, but I wouldn't say that it’s a tremendous or significant portion that we have traditionally relied on a good number of reliable long-term suppliers, particularly in our North American market and we see the long-term that's the best approach we tend to stay in that direction.

Okay. In the last week or two, there have been some stories out about the deal, then there is starting to talk about surcharges on top of fixed-price contract. Have your vendors come and talk to you about that yet?

Well, I would just say that, our impression of steel market is, right now, there is no such thing as a fixed-price contract, could be rapid acceleration of raw material. What we are seeing is changed around the world and we are adjusting to that change. We do think again that the contract that we have give a better position than pure spot buys, because people know that we are committed to the volumes and these long-term relationships. But as their cost accelerate, we are challenged with that as they are.

Right. So, it is, I guess, my question is, in '04 and '05, when we saw a similar kind of situation where surcharges came in on top of fixed-rate contracts, end markets in North America were accelerating and you guys really did a nice job of going back to get pricing from your customers. Now we are in an environment where you have moderating end markets and potentially globally priced, steel inputs. Can you talk about your expectation for your ability to get price in the environment now?

Well, my expectation is, we will get price increases that are required to meet our rapidly increasing cost and I will tell you that I have never at least in my career with Lincoln being so much equalization in the steel cost around the world. There used to be significant advantages particularly in the Asian markets at a cost basis of steel in the more mature markets of Western Europe or in the Americas, that doesn't exist today. And we are seeing, in many cases, the prices are higher in some of the emerging markets due to either fiscal restrains, in China as an example, where the government is trying to curtail the amount of exports for steel and energy cost inputs and we look at it as being a very much level playing field at this particular point in time. There may be some short cycle spikes in one market or another, but in general, our cost for raw material are pretty [inaudible] around the world today.

Okay. Are you seeing any distributors kind of build inventory in anticipation of steel price increases?

Again that seems to come up on about every call and quite frankly no, I don't think so. I will say if we announce the price increase, which we will hear shortly. We will get a little bit of short-term spike, but that just doesn't carry over very long and we also… we have limited capacity Steve in consumables and we can't just go out and make double or triple in short order to allow people to offset those price increases. So our supply will be pretty consistent and what we don't ship within the deadline, remember our prices or [inaudible] of shipment. So there is really not a big advantage in being able to do that.

Okay. Your inventory, was the increase more a function of finished goods, work in progress or raw material?

Well, I will make my point and allow Vince to answer. Again if you look at what's happening in steel cost, we've got the same amount of steel and steel costs were up 30% to 50% to 100% kind of which product you are talking about. We are going to see an increase in the dollars of our inventory driven by that alone?

Right.

And then again in anticipation of both pretty robust demand and accelerated cost on steel, we've have done some forward buys where those opportunity is presented itself.

Steve, the increases have been largely across the categories of raw, within the finished goods, with the largest dollar increases between March 31st and the end of the year being in within finished good.

All right. Thanks very much. I will hop back in the line.

Thank you.

Our next question comes from the line of Mark Douglass with Longbow Research. Please go ahead with your question.

Good morning gentlemen.

Good morning.

Good morning.

Good job. Vince, can you break out the FX acquisition price volume on the EU and rest of world and North America?

Yes. Sales side?

Yes.

Yes. For North America the increase in volume was 2.2%, price was 3.5%, acquisitions were 40 basis points and foreign exchange was 1.2%. Europe, volume was 4.2%, acquisitions 1.4% and favorable impact from foreign exchange was 15.4%. All other countries, volume was 2.2%, price was 7.8%, foreign exchange was 7.7% and finally acquisitions were 7%... 7.0%.

Okay, great. Healthy price increases in the rest of the world. Can you talk a little bit about your automation group, is this... I assume that that growth is still healthy and are you seeing an accelerating growth or decelerating growth in particular markets, it looks like robot growth, just overall, robot industry has been pretty healthy?

Yes. I would describe our automation and environmental services business as being from a percentage increase year-over-year, our strongest product line. That certainly has a smallest base, but it continues to be robust and growing at a very rapid clip.

So above average?

It's above our overall growth rate.

Corporate average growth rate.

Yes. And I would just add to that that you asked a question about... that is on an international basis is traditionally our robot automation business was very much focused on US and Canada, but clearly that is spreading around the world. And we are extremely excited about the new relationship that we formed with FANUC Robotics in Japan and in Asia in general, and its just that the Japanese Welding Show which is only held every two years we had a major expedition… exposition of our new welding and FANUC’s new robotic platform that was very well received and we have booked some very nice orders just right out of that show and we are quite enthusiastic about the growth opportunities both in Japan and in China in particular for robotics.

So you are already establishing orders with international relationship with FANUC?

Oh yes, yes.

Okay. And just finally, can you give an update on other facilities that are coming on line in '08, how is the flux line coming in Euclid, any other facilities around the world?

The flux capacity at Euclid is ahead of schedule, we should be in full production late second quarter and we are quite excited about that, because it has some technology upgrades, it’s going to, I think further differentiate our sub arc consumables from our competitors, as well as have the capabilities of improving our cost position there. The other flux capacity expansion that's going on, is in China with our joint venture company early. That's been a fairly rapid expansion, the market for most of our products in China is growing quite rapidly. And we have a very significant share of that market with our joint venture partner, so we are growing that business quite rapidly. We are still looking at what we need to do to expand flux in Europe and we have a number of options that we are exploring, but we will be making that decision this year and should get some capacity increases into that marketplace early next year. In terms of other consumable expansion programs that are underway, I think you know that we are expanding our Menor [ph] Cleveland facility, 120,000 square foot facility. That's not pure production but will improve our production capacity by giving us a better flow of materials with the same amount of production equipment, we think that will be a nice cost advantage and we are expanding consumables in China, for flux-cored wire because that market, particularly in the shipbuilding and the energy sector, is growing quite rapidly and those expansions will be on line yet this year also.

Okay thank you, I’ll get back in the queue.

Our next question comes from the line of James Sank [ph] with Sidoti & Company. Please go ahead with your question.

Hi, good morning John and Vince.

Good morning.

Hi, James.

So, I know you keep mentioning contraction in certain key markets in North America, but seemingly you outperformed again here in the quarter, I just want to know where is that contribution really coming from?

I think it’s fairly broad. I mean I think again we continue to focus on the infrastructure build out opportunities around the world because again we think that those opportunities are very much in line with what our strategy is of high value, high technology products that aren’t subjected to a pure commodity view as people invest billions of dollars in these important projects and want to be sure they have the right technology to support it and also we are looking for productivity improvements, because they are facing labor shortage and timelines to get these projects done. So, that's very much an important part of our element. In those sectors that have been slower and I touched on them and I think most of you know what those are that have been depressed for quite sometime like automotive or heavy-duty truck. We continue to look for opportunities where we can capture market share and when we see those opportunities I think we have a very good strategy as to how to adjust to those and I think we have evidenced over the last quarters with the slower North American US economy that we have continued to be able to demonstrate that market share growth.

Not terrific, I would say you have done more than evidenced.

I would just add some color James on the geographical side. Certainly, Latin America and Asia Pacific continue to be very strong markets for us. You might recollect in the fourth quarter of last year our exports out of the US did dip down to low teens, I think they may be 11%. And this quarter our export sales reaccelerated to approximately a 30% increase on a year-over-year basis. And so our export markets are very strong and our regions in Latin America and Asia Pacific continue to be fairly robust.

And one follow on that James, I touched on our acquisition in Portugal. But I think that this provides the same kind of model that we have demonstrated in other markets is that the company Electro-Arco has a very nice share of the welding consumable business in Portugal and has a very broad and experienced distribution network which will now be tapping into the Lincoln products from around the world to either add to their product portfolio or to displace competitive products that they currently sell. And time and time again as we made acquisitions in these international markets which might be niche markets that had certain products we have been able to broaden their participation of those companies across our total platform and really get the leverage out of those. And we are quite optimistic and excited about that opportunity in Portugal.

Right. I appreciate the comprehensive insight, I was just kind of focusing on North America but just... is it fair to assume with the infrastructure or maybe even energy related build out that you guys are seeing here domestically should be able to offset further softening in some more of those other areas such as Canadian Automotive or HVAC.

Well, I mean that's our optimistic view. I mean that… I would tell you that if we were in the economic model that we are in today five years ago, we wouldn't have seen the same kind of good results.

All right.

Clearly, our position globally is greatly enhanced and the infrastructure element of the overall global economy is very robust and we think it’s going to continue to accelerate, particularly in the oil and gas sector. An example of which would be the number of pipe mills that are making investments to manufacture steel pipe in the United States. There are six new mills under construction, which will add over 2 million tons of steel pipe capacity in the North American market in short order. And so if you go do the math of that of the amount of welding consumables and equipment that will be needed to make the pipe and then to install the pipe in the ground, it's a big number.

All right.

And we are seeing that happen all over the world and it's a sector of which we have a very dominant share.

Sounds good.

I would emphasize the point James that I think the story is the continuing transformation of the company from North American centric market enterprise to a truly global enterprise, an enterprise that is taking advantage of the opportunities in overseas markets. And if you would have rolled the calendar back to the last time we saw the kind of softening that we have seen over 2007 and the beginning of 2008 in the industrial markets of North America, our earnings stream and pattern would not have held up and expanded at a robust pace that we are seeing now. So, it's true that the North America has slowed and softened, but there is a continuing strength and acceleration in our international expansion and our margins from the Non-North American standpoint.

All right, okay, thank you both for that. Could I have... I think you gave the volume and pricing earlier. Could I just have the sales and operating income or EBIT split out from Europe and other country?

Europe sales were $154.4 million. The EBIT was $18.2 million, other countries were $103.2 million of sales, with EBIT of $5 million and North America is $398 million of sales with EBIT of $56.5 million.

Okay. Great, thank you. And I am Vince, how many more shares do you have left on your buyback program?

Approximately 4.2 million shares.

Okay. And your interest expense, there was a little bit...not that was alarmingly high but higher year-over-year and I was just a little confused because I thought the two notes that you had remaining were variable notes, I would only assume that those rates would have come down?

Actually the interest cost is about 6.2% of the effective rate on the notes as well as the swap, interest rate swap impact puts that at about 6.2% James.

Okay.

The reason for the higher interest expenses, I noted in the previous call was that, we terminated some interest rate swaps in the previous year, a few years ago and the accounting for that requires an amortization of the gain. We had a $10.8 million gain from terminating previously held swaps. And those have been amortized against interest expense for a number of years and that amortization period is run out now.

I thought you had $1.7 million left?

Yes. There is the little bit left...

Okay.

But one of them has dropped off and dropped down that credit coming through interest expense at this point in time.

Okay. And tax backup, no more R&D credit.

Yeah, that's one of the reasons why the effective tax rate is up, is that we haven’t been able to accrue for and take the benefit of the R&D credit until our legislators extend that again. So, that drove up the rate as well as the mix of earnings towards higher income tax rate countries in the quarter.

Do you think that this fourth quarter might look like the fourth quarter from '06 where I guess the legislation finally went through and you kind of took the credit all in one quarter as opposed to levying it through the year?

Let’s all right our letters to the Congressmen.

Okay. And I believe that's it. Thank you folks.

Thank you James.

Okay. Thank you James.

Our next question comes from the line of Walter Liptak with Barrington. Please go ahead with your question.

Hi, thanks. Walt Liptak with Barrington. Good morning John and Vince.

Hi, Walt.

I think we covered North America pretty comprehensively, but I've got one more question for you about the North American operating margin last year, what was that number Vince?

In the first quarter of '07, it was 13.3% and this quarter is 14.2%.

Right 90-basis point improvement.

Okay, well congratulations on a great quarter and that's phenomenal given what's going on in North America. My question has to do or two questions, one with, John your commentary on the China Olympics and the shutdown, what would we… is there a timing you think to your year in China and that your revenue and profitability flows stronger in the first three quarters or the first half and then what kind of a hit do you take later... during the Olympics?

I would first respond [inaudible]. We haven't developed a pattern in China at this point in time. Our businesses there are still in a developmental stage where we are adding capacity and we have talked a few times about how we are building our business there through manufacturing capacity bricks and motor. Now, John pointed out we are putting more flux-cored wire lines in our business there. The SG&A build and so as you know, if you follow our other country’s EBIT margins, which China is a significant part of we've had, I would describe, fits and starts where we have made progress and then we've added costs or brought down production levels and added more capacity. So, I wouldn't say that there is any particular pattern that's going to play out over the next year or two in China even after considering the Olympics in Beijing. So it's going to be volatile and choppy, but at the end of the day we have great confidence that the trend line should remain upward.

Okay, so this, the 4.8% other country operating profit, we’ve seen most of the expenses that we saw in the third and fourth quarter last year, I mean, are we more solid now in this mid-single digit level for profitability.

I wouldn't say… again I would not say that that's going to be linear. In other words, I would like to think that we have some of those issues behind us now, but again we are in a very early stage of developing our markets in China and Asia Pacific in general. And I would like to be able to tell you that the EBIT margins will continue on the uptick, but there will be future challenges and future developmental execution strategies that will continue to make in my opinion that line a volatile.

Okay. Are there any major spending programs that you see right now that you can talk about where you didn’t take a margin or is it well behind you?

[inaudible]. I mean, we are planning on starting our production of our Indian plans by the end of this year that will add more cost and potential volatility to our model in Asia Pacific.

Okay.

As John pointed out, we are adding flux-cored wire in our business in Shanghai. During the course of the past year or so we built a completely new facility there Walt, that is currently mostly empty. So we will be adding capacity there and then adding the capabilities from a selling and distribution standpoint to satisfy the productive output that we will be building on the manufacturing side. So there is a fair amount of investment that will continue as well as building our flux business there on the back of our Healy [ph] joint venture that we signed and closed this year. So there is a great deal of investment going on in all product categories in that region and so it's likely our greatest investment requirement going forward for some time.

Okay, okay. Got it. And the last question is on the 30% export growth, is that consumables or machines or is it both?

Primarily equipments, as you know, most of our manufacturing facilities around the world are consumable factories where we think it's important to be close to the market and with the logistics cost today, it’s just not economically attractive to be shipping product from places like China into the US or vice versa. We think that that's really going to catch up with some of the global competitors that have targeted the US market and give us some significant advantage. That being said, in certain areas of the high end consumables submerged are flux-cored wire in particular for these infrastructure projects like pipelines and energy related stuff. We still export out of the US into those marketplaces where we continue to develop those products and manufacture those products here in Cleveland.

Okay great. Okay, congratulations again.

Thanks a lot.

Our next question comes from the line of Greg Halter with Great Lakes Review. Please go ahead with your question.

Hello.

Hi Greg.

Hi. Just wonder if you could comment on the M&A pipeline as you see it today?

Greg, we have said in the past that we have some optimism in terms of our M&A pipeline. We have also said in the past that we view that as a very important component of our strategic plan for Lincoln Electric, but aside from that I don't think we can make any kind of predications over how much in revenue or how much we may spend in the next year or so. We did close the Electro-Arco deal and we will contribute 40 million to sales on an annualized basis from 2008 and other than that I would simply leave it at there is a lot of a activity and we are hopeful that we can bring some closure to some of these transactions.

Okay. And last question, I wondered if you could provide the volume growth in China and India?

We don't provide that kind of detail, but I would give you some guidance in that, those two countries are some of our biggest volume increases of any of our end market geographies in our world and it certainly would be in excess of 20%.

Okay. Great, thank you.

I would just add Greg that the India opportunity is one that we are quite excited about that market is growing very strongly and also the profits in that marketplace appears to be pretty attractive because of the lack of large sophisticated competitors. So, we have really think that our export sales into that market demonstrate the size and the magnitude of what the growth potential is for us.

Okay. And one other quick one, on your EBIT in North America, that includes the export sales, is that correct?

Yeah. That's the legal energy North American businesses reported sales and EBIT margin.

Okay great. Thank you and congratulations on the fine results.

Thanks Greg.

Our next question is from the line of Jason Rogers with Great Lakes Review. Please go ahead with your question.

Hi, had a question on the price increase you talked about April 1st, I wondered if you could talk about the magnitude of what those would be and same things goes for June.

Yes. They were… in April, in our North American business on the consumable side, because they have been focused on the consumable side of the business, because that's where the bulk of the raw material cost increases are coming through. We would estimate that it will have an impact of between 3% and 4%, the April 1st, increases.

Okay.

And I would anticipate that the June increases would be larger than that in magnitude. I think the that's way to kind of track the forward looking view of that is track what’s happening as far as steel cost are concerned, which is pretty readily available information and I think that the surcharge is that, I think, Steve asked about have accelerated and become more prevalent in terms of the industry standard and obviously we have to adjust to that.

And the share repurchases in the quarter, do you have the number of shares bought or the average price paid?

Yes, it was 298,000 shares.

Okay. And ...

$60.40 in the quarter in average.

And the foreign currency, what impact did that have on operating income in the quarter?

In the quarter it has $1.8 million impact on net income compared to $900,000 impact in the prior year.

Okay. And the tax rates for the quarter around 32%, is that what you think the tax rate may shake out for the remainder of '08?

Well, one of the big drivers as we discussed in a previous question is the R&D tax credit and that's close to three quarters of a basis point on the effective rate. So if that gets approved and renewed and extended, we can expect a fairly significant reduction on that basis. I would also expect our mix to perhaps change a bit as we run through the course of the year and so, I think that this 32.3% is likely on the high-end of what we should expect for the year.

Okay. Thank you.

[Operator Instruction]. Our next question comes from the line Holden Lewis with BB&T. Please go ahead with your question. Holden Lewis - BB&T Capital Markets: Good morning. Can you, the affiliate income looks like it was down a bit in Q1, certainly year-over-year, can you give a little bit of color there since those affiliate seem to be an area that are performing reasonably well?

Yes. The primary reason for the decline in our equity income Holden, was our result in our Turkish joint venture. As you know we’ve talked in the past about our transition from a ... into a new facility and we are still ramping up our efficiencies and our cost there. Probably the biggest detrimental impact to that business has been the strength of the Turkish Lira during the past several months and our Turkish joint venture is a significant exporter of products in the region and to the Middle East, the all CIS countries and Russia and many of the exports they are in hard currency denominated US dollars or Euros. And so, they have been under fair amount of margin pressure because of the strength of their local currency. And so, the bulk of that decline is attributable to those factors affecting our Turkish joint venture. Holden Lewis - BB&T Capital Markets: And then secondly, can you give a little bit of color on, on kind what you are expecting against particularly for the pricing? I know it was that 300 basis points for the quarter, doesn't see like a real big number, particularly given what you are facing on the raw material side. When you go forward into Q2, Q3, Q4, do you have some sense of the timing in these hits? I mean is that 3% number kind of a good go forward or do you kind of expect that to step up in out quarter, how should we be viewing some of that?

Well, I think, I would just reiterate what John said to an earlier question, and that is, our expectations would be that is likely, that those percentages will escalate. Now based on what we are seeing in terms of world steel prices and some of the indications that we're getting, three to six months out. It’s our expectation that if those hold, I would agree with you the 3% to 4% is going to look a lot less than what we might expect in the second and third quarter of 2008. Holden Lewis - BB&T Capital Markets: Okay, fair enough. And then if I look at the math right, it may not be, but it looks like the… you saw some slowing in sort of the rest of world market. I mean North America is 7%, Europe I think was still north of 20%, which means some of the deceleration must come out of other. Is that right or am I just not doing the numbers right?

No, I think you are right. I don't see what's the numbers that you are doing, but that is true Holden that the other country’s volumes have moderated in the first quarter of 2008. Holden Lewis - BB&T Capital Markets: And it is not a comp issue or are there specific markets that may not have been as positive as China India or how should we view that?

Well, there are some, some parts of Latin America have been very strong for us, but have been offset by some other parts of Latin America that we have been bringing our volumes down. In particular Venezuela is one of those countries that we are mitigating our risk of the end markets there by selling that more direct out of North America. So, from a other country standpoint, you will see some lower sales in parts of Latin America like Venezuela where we are selling more direct mitigated foreign exchange exposure. And other parts of the world have been very strong from an end market standpoint. The mix has been stronger on into China as compared with some of the locally produced products that we are making there as well.

Yeah. And Holden I would just reemphasize one point that I made and add one other. If you remember the Easter holiday was in the first quarter of this year versus the second quarter of last year. And in Latin America, that is a big event. It’s not eight day, it’s multiple days of celebration for that holiday. And secondly, in China, from a domestic market side of things, not the import, the snowstorm had a major crippling affecting in several of our facilities and several of our end user customers and I would say again that was not a day, but multiple day event in the quarter. Holden Lewis - BB&T Capital Markets: Okay. And then going back to a comment you made earlier, you talked about how your export sales picked up pretty sharply from… in Q1 versus Q4 in terms of rate of growth, [inaudible] Venezuela doing more shipping direct from the US instead of producing it. Is there a conscious decision to move more of your production into the US given the currencies or anything like that that’s sort of causing those two pieces moving in opposite directions?

No, what I would say is the exports are very much product-focused and we don't move that product around. It’s generally just where they are. So Venezuela thing is a conscious decision because of the currency exposure where we would sell through our subsidiary and we are direct exporting now, but in the scheme of overall size of the company is relatively minor event. The other comparison that I think would be important again is that exports into other parts of the world in the fourth quarter are dramatically impacted by the Christmas, New Year holiday season in comparison to the first quarter where you don't have that. Holden Lewis - BB&T Capital Markets: Okay. Your feeling is that the... the rest of world markets haven't changed in terms of tone and end market demand in anyway, there just seemed to be some holiday and weather factors?

Yeah, I would say maybe the one exception of that is and again if you follow this as well as we do, we've seen a little bit of a slowing of growth in the Western European market, the traditional Western European market and economies of Italy and Spain in particular, but the heavy picture infrastructure kind of stuff, which could be export or locally manufactured still remains pretty strong as just in the traditional markets. Holden Lewis - BB&T Capital Markets: Okay. And then just one little piece of data, you didn't give price for Europe, the price component for Europe, is that because there is none?

Right, it was... pricing was flat year-over-year in Europe. Holden Lewis - BB&T Capital Markets: Okay. Great. Thanks guys.

You are welcome.

Our next question is a follow-up question from Mark Douglas. Please go ahead with your question.

Hello.

Hello.

Hello.

Sorry.

Okay. I think most of my questions have been answered already. So, I will just kick off then.

Okay, thanks, Mark.

Thanks.

Our next question is a follow-up question from the line Greg Halter. Please go ahead with your question.

Hello, again. You just answered it on the European pricing being flat, but I am just wondering if that’s something you look at seeing an increase down on the road here?

We expect to be raising prices in all markets.

Okay, thank you.

Okay, well, Doug, if there are no more questions, we thank everyone for joining us today.

We do have a follow-up question from Holden Lewis.

Okay, we will take that.

Okay, no problem. I will go ahead. Mr. Lewis, your line is live. Holden Lewis - BB&T Capital Markets: Thank you. We haven’t done a full hour yet, but you can get in.

Hurry up. Holden Lewis - BB&T Capital Markets: You had referenced light commercial being a little bit weak in North America, is that your term for the retail operation and if not can you comment on sort of what retail has been doing?

Yeah, I'd say... light commercial would be retail as well as over-the-counter kind of sales out of the industrial distributors, more discretionary kind of spend geared towards... I'd say, light commercial kind of construction project. So guidance put on well around the back of a pick up truck or putting something into this garage or either private user... small end user kind of products. Holden Lewis - BB&T Capital Markets: Okay. And so retail obviously I think that’s getting a bit softer, I mean does that get worse or is that just kind of stable?

In the quarter, it was down a little bit, but we are seeing a little bit of an uptick of that as far as an order pattern is concerned. Holden Lewis - BB&T Capital Markets: Okay. Great. Thank you.

There are no further questions at this time gentlemen.

Okay. Well, thanks again Doug and as a remainder, we do have our Annual Meeting of shareholders this Friday in Cleveland, the 25th. And we look forward to seeing you at our Annual Meeting and reporting our 2008 second quarter results in late July. Thank you for joining us today.