Lincoln Electric Holdings, Inc. (LECO) Q2 2008 Earnings Report, Transcript and Summary

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

Thank you, Claudia. Good morning and thank you for joining Lincoln Electric's second quarter conference call. Results for the 2008 second quarter were released this morning, prior to the market's open. Copies are available through the Lincoln Electric website or by contacting Investor Relations at 216-383-4893. Lincoln's 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's review the schedule for today's call. In an effort to allow sufficient time for questions, we will keep our prepared remarks brief. John will provide an overview of the consolidated quarter results and review the performance of our individual regions. I will then review in greater detail the financial results of the quarter and then open up for questions. 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 Forms 10-K and 10-Q. Now, let turn over the call to John Stropki.

Thank you, Vince, and good morning everyone. And thank you for joining us today. We had excellent results for the second quarter of 2008 with strong growth in sales and profitability and continued strength in cash flow. Our broad global footprint allowed for significant sales growth and margin expansion in the quarter despite a very volatile time in the metal market, affecting both price and supply. In addition, slowing economic growth rates in both North America and Europe continued. We do remain focused on executing on our long-term growth strategy, capitalizing on our global infrastructure and energy-related development opportunities, as well as expanding our value-driven welding products and service offerings. Let me start by reviewing a few key economic measures that we follow as indicators of the broad conditions in our business. Total U.S. manufacturing industrial production, excluding high tech, was trending two points below 2007 as of June 2008, while capacity utilization was running 77% in June, down two percentage points from the beginning of the year. In addition, market impacted by the housing and consumer sectors continued to be very be strained. However, despite the negative economic indicators in the U.S. global... in the U.S., global steel consumption is forecasted to grow 6.7% in 2008 and another 6.3% in 2009. This should be a positive factor in the overall welding consumption category. Turning to the company's second quarter results, overall sales increased 19% to $700 million for the second quarter of 2008. Operating income increased 22% to a record of $92 million and diluted earnings per share grew 28% to $1.62 per share in the quarter. Cash flow from operations totaled $53 million in the quarter despite rapidly accelerating costs of raw materials. Looking at North America, sales for the company's North American operations rose 10% to $401 million in the quarter. U.S. export sales in the quarter increased almost 29% to $64 million. Despite a slowing economic growth trend and forecast, our overall results and demand continued to be positive during the second quarter in all of our North American operations. Our sales increase was driven by a combination of both volume and price during the quarter. We do, however, expect the overall economy to continue to show weakness and possible further contraction in certain key sectors through the remaining portion of 2008. As an example, any sector tied to the automotive heavy-duty trucks, housing construction and light construction should continue to be soft in the second quarter and through the rest of the year. Sales trends in the second quarter of 2008 for our traditional U.S. welding markets were much choppier in the second quarter, suggesting uncertainty in the overall strength of the industrial markets we serve in the U.S. However, despite the uncertainty, our U.S. domestic welding business grew 8% in the quarter of overall negative industrial production numbers. These results clearly highlight the structural change in our business profile with increased focus and exposure to infrastructure, energy-related and high value-added projects. Consumable pricing has been actively managed throughout the year, with increases implemented in February, April- May, and most recently, July the 1st to address continued increases in steel and other raw material costs. Equipment prices has also required active management in 2008, as raw material prices increased, especially copper, steel and engines, led the price increases in February and again in July. Pricing and supply for key raw materials like steel and chemicals will present ongoing challenges during 2008 in all areas of our business. The continued upward pressure on these input costs could necessitate additional pricing adjustments and we will monitor this situation and be very proactive. U.S. exports for our high-end products continued strong in the quarter. This growth is being driven by increased demand from large scale infrastructure projects currently underway, especially oil, gas and energy-related in Russia, the Middle East, China and India. Our Canadian results rebounded somewhat in the second quarter, driven by both stronger domestic consumable demand and strong export equipment demand. This recent change is a positive development as Canadian results had turned negative prior to the U.S. demand softening. We believe the short-term demand trends in North America will continue to be soft. Volume growth, which has softened since early 2007, will remain under pressure through the remainder of 2008. As such, price increases related to material cost increases will continue to drive the majority of the year-over-year top line growth with comps becoming more challenging. Turning to Europe, third party sales for our European subsidiaries grew 29% to $171 million. Excluding the impact of acquisitions and foreign exchange, the sales increase was 6% in the quarter. The second quarter 2008 European organic growth rate continues to slow compared to the robust levels experienced in 2007. However, we continue to experience growth in our base European business as the integration of past acquisitions and our manufacturing expansion efforts in Eastern Europe continue to benefit the region. As an example, the acquisition of Electro-Arco in April 2007 contributed 9% of the region sales growth for the quarter. We are very pleased with the progress made on the integration of this important acquisition into our European operational structure. The leveraging of both the manufactory operations and the capacity, combined with their strong Portuguese commercial infrastructure will continue to benefit the Europe region for many years. Looking at our other country sectors, international subsidiaries outside of Europe and North America recorded sales increases of 41% totaling $128 million in sales for the quarter. In local currency and excluding acquisitions, the sales growth in the quarter was 21%. Latin America continued its strong growth trend during the second quarter of 2008 with 20% sales growth in local currency. The combination of the region's strong end user sector demand in the energy and mining sectors, plus a continued development of our regional manufacturing capabilities and commercial distribution network have allowed for our full participation in the region's economic growth. Our investment efforts and market share gain in the Latin America region should continue through the remainder of 2008. Turning lastly to Asia-Pacific, Asia continues to be the central focus of our international expansion and 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 offerings of high quality submerged arc consumables and major expansion plans are underway Additional investments continue in building out our manufacturing capacity and commercial distribution network in China. The previously announced expansion of our Nanjing welding consumable operation is also on track. Our overall China business continues to develop market share in the region and is growing profitably. Overall economic growth in China remains strong, but the government is taking actions to achieve a targeted GDP growth rate of 9% for the next two to three years so that they can hope to control overheating in certain sectors and push the nation's producers to more high value output. Energy shortages throughout the country have affected industrial production results and illustrate the dramatic need for expanded energy capacity. This energy need favorably impacts the overall wealthy market as the government commits significant recourses to these large scale and long-term energy construction projects. Lincoln Electric is well positioned with a combination of local presence and service capabilities and our high end equipment and consumables supplies for both the U.S. and Europe to strongly participate in this sector growth. China's markets also continue to drive growth of our locally manufactured products. Sales of our locally manufactured consumables produced in our Shanghai facility increased by more than 50% in the quarter, as we continue to invest in increased production capacity to service the local market and the demand of shipyards. Our Inner Mongolia facility has also expanded their consumable manufacturing capabilities to better serve the local customer market needs. That's the view of the company's regional results and relative market conditions for the last quarter. Vince will now go over the details of the financial results.

Thank you, John. The second quarter of 2008 represented our 18th consecutive quarter of strong earnings growth. The quarter's consolidated sales were up 19% with North American sales increasing 10% and sales reported outside of North America up 34%. Foreign currency effects increased reported sales by 5%. Volume increases contributed 3% to sales dollars in the quarter. Pricing contributed 7% of the increase in sales dollars year-over-year. And finally, acquisitions contributed about 4% to the year-over-year increase. On a product line basis, machines sales increased 9% and consumable sales increased 26%. Excluding acquisitions, consumable sales were up 21%. Sales by product line were approximately 63% consumables and 37% equipment compared with 60% consumables and 40% equipment in the prior year's same quarter. The percent of gross profit in the quarter was 29.3% of sales compared with 28.8% of sales in the prior year's same quarter. The increase in gross margins as a percentage of sales was primarily attributable to an increase in margins in geographies outside of North America and Europe. The quarter did include a LIFO charge of $14.5 million compared with $3.2 million in the prior year's same quarter. First half gross profit was 29% of sales compared to 28.8% of sales in the prior year. This year-over-year improvement in gross profit was primarily due to the favorable operating leverage caused by increased volumes and improved pricing. SG&A expense was $113 million or 16.2% of sale. The higher SG&A as a percentage of sales was primarily driven by higher foreign currency transaction losses and incremental selling and administrative expenses. Foreign currency exchange rates increased SG&A expenses by $4 million in the quarter. For the first half, SG&A expense was $212 million or 16.1% of sales, flat with the prior year. Incremental selling costs associated with higher sales volume, additional SG&A associated with acquisitions, higher bonus costs and foreign exchange losses were the primary factors driving the dollar increase. Foreign currency exchange rates increased SG&A expenses by over $8 million in the first half. Second quarter operating profit at 13.1% of sales was up 30 basis points versus the second quarter of 2007. Operating income increased 22% in the quarter. On a geographical segment basis, North America recorded EBIT margins of 14.4% in the second quarter, Europe EBIT margins were 11.5%, and the other countries segment achieved a 9.5% EBIT margin. First quarter 2008 EBIT margins were 14.2%, 11.8%, and 4.9% for North America, Europe, and other countries respectively. First half operating income rose to 12.9% of sales from 12.6% in 2007, again a 30 basis point increase. Operating income increased 18% in the first half of 2008. The first half of 2007 did include European rationalization charges of approximately $400,000. Excluding these charges, operating profit margins would have been 12.7% in the prior year. The income tax provision for the second quarter reflected an effective tax rate of 26.3% compared to 29.6% in 2007. The year-to-date effective tax rate was 29% compared to a year-to-date rate in the prior year of 30%. The cumulative ketchup [ph] effect of adjusting the year-to-date effective tax rate to 29% increased the net income by $2.6 million or approximately $0.06 per share. The lower effective tax rate was due to additional utilization of foreign tax credits from the repatriation of higher tax foreign earnings. The company invested $31 million in capital expenditures in the first half compared with approximately $30 million in the prior year's first half. Our 2008 capital spending plan will continue to focus on capacity expansion as well as our continual improvements in the overall cost base. Other uses of cash flows in the first half included the payment of $21.4 million of dividends to shareholders and the repurchase of shares totaling 18 million. Weighted average diluted shares outstanding decreased to 43,173,000 shares for the second quarter compared with 43,461,000 shares for the 2007 second quarter, a seven-tenths of 1% decrease. Shares outstanding at June 30, 2008, were 42,845,000 shares. Our return on invested capital stood at 20.3% at June 30, 2008, and we closed the quarter with over $117 million of a net cash position on our balance sheet. That's the extent of my prepared comments. At this point, Claudia, I would like to open the call for any questions. Question And Answer

Than you. Ladies and gentlemen, we will now be conducting the question and answer session. [Operator Instructions]. Our first question is coming from Walt Liptak with Barrington Research. Please state your question.

Hi, thanks. Good morning, Vince and John.

Good morning, Walt.

And congratulations on a great quarter. I wonder if you could just kind of quickly go through the geographic segment data in detail. I know that John touched on some of the things, but the exact numbers, Vince, like, volume, foreign currency, acquisitions, price by those geographic regions?

Sure, Walt. North America: volume 1%, acquisitions 1%, price approximately 8%, and foreign exchange approximately 1% for a total of around 10% based on rounding. Europe: volume was up 5%, acquisitions about 9%, price about 1%, and foreign exchange approximately 15%. And finally the other countries, geographical statement volume was up 6%, acquisitions 11%, price was up over 15% and foreign exchange contributed about 9%.

Okay. And the things to jump on me [ph] first, the volume growth in Europe up 5% versus up 4.2 in the first quarter, and on a pretty tough comp. People worried during the quarter about Europe's slowing and how dramatically. And you talked about choppiness, I think, John, maybe you were talking about North America, but I wonder if you can talk a little bit about what you're seeing in Europe, maybe how things trended during the quarter and what do you think the environment might look like in the third quarter?

I think a big part of our volume growth, Walt, in Europe is based on the expansions that we put into place as far as capacity, particularly in our Polish Flushcore [ph] brand. We have been talking about the growth of the European economy and particularly the shipbuilding industry, which is quite strong there. And we focused a lot of our energy on aligning our resources to be able to participate in that growth, as the mature countries have slowed a bit. And obviously that strategy has worked quite well for us. The other element of that would be, and I think it's representative of what we continue to see in the U.S. to some extent, is that even though the overall European economy is slowing, those industries that are part of the energy and infrastructure sectors are doing exceptionally well both in the domestic markets wind towers and things like that, but also for exports of the energy-related projects. And again, that's a sector in which we have put a lot of energy in to and one of which we're doing quite well in.

Okay. Looks like in Europe you were able to raise prices a little bit again. Are you expecting more price increases in the back half of the year?

Yes, I would say in Europe in particular we were probably a little bit behind the price to cost curve there versus the North American market. I think they caught up a little bit later than what we saw in some of the other markets. Obviously it's a very volatile situation. We're seeing steel continue to be volatile, both on the supply and on the cost side, and we're seeing that at a period of time where the economic conditions don't seem to support it, but the yet steel consumption numbers are very strong. And the interesting dialog of that is what happens if the core base businesses come back and what's the overall impact on the market is concerned. So we don't have quite the pricing leverage in the European market that we have in some of other markets because there's not quite the consolidation and there are a lot of local players. But I think our guys did a great job there and they clearly understand the fundamentals of what needs to be done.

Okay. And then the other thing is the 15% price in other countries. Was that the main reason for the nice operating profits that you had in other countries?

Walt, it's a combination of both pricing and volume. We did have a nice volume increase in the other countries and it's taking the opportunity to catch up a bit on pricing, in particular in Asia-Pacific where the latter half of last year we fell behind. And so we've caught up on some of our pricing management during the course of the first quarter of 2008.

Yes, Walt, just a follow-up to that, as you remember, we had some issues on the U.S. currency-related pricing, particularly of exports out of places like Australia where their currency accelerated substantially versus the U.S. dollar, our contracts were U.S. dollars. We fixed that and I think that's normalized and clearly have a much greater focus on managing those margins.

Okay, okay, thanks very much guys.

Our next question is coming from Michael Cox with Piper Jaffray. Please state your question.

Congratulations on a very nice quarter and thanks for taking my questions.

Thank you.

Thanks, Mike.

In terms of the North America business holding out better than we had expected, I just wonder if you could comment on maybe specific end markets, the strengths that you are seeing out there that's keeping that business trending the way it is.

Well, I think it's been pretty consistent. I mean, it's big infrastructure, energy related kind of project. I mean, I saw Caterpillar's results, their export business is very strong. I think that's true of other companies in the heavy duty construction equipment kind of business where they're using their capacity that fill international orders and export demand and that's where the play is. The big question mark is how bad can the domestic economy get and that can continue to offset it. And the overall economic news doesn't appear to be getting any better in terms of the overall durable goods kind of stuff and it's a question of how much business we can gain in those sectors and how efficient we are, and then how quickly the turnaround comes about in the other sectors.

Okay, that's very helpful. And I was hoping you could provide us with an update on your plans to open a facility in India, any timing on that?

Well, the construction is well under way. We're probably a little bit behind our very aggressive schedule for that. The biggest bottleneck is in the water treatment facility where we're installing a state-of-the-art environmentally-friendly environmental system there. And the technical expertise within country to do that is not what we would like it to be, but we're optimistic that we'll be near the schedule of late fourth quarter or first quarter of next year in the producing product and moving it into the marketplace.

Okay, that's helpful. And in terms of price increases, have been very successful through the course of the first half of the year. Do you anticipate further pricing as you move through the balance of the year?

Well, that's going to be predicated on our cost inputs. We are not in business just to raise prices to our longstanding customers, but we are passing through the cost increase that we receive from our suppliers. So we'll be watching that. We're doing everything that we can to mitigate our costs, including a lot of investments and efficiencies improvements in our... in driving productivity. But with the steel input costs what they are as a percent of our overall business, if we get continued increases in steel and other raw materials, obviously we're going to watch that very closely.

Okay. And then my last question on the tax rate, should we be thinking of the second half tax rate being more in line with the first half tax rate in the 29% range?

Yes, our effective tax rate estimates for the year now stand at that 29%, which we've booked year-to-date.

Thank you very much.

The next question is coming from Mark Douglass with Longbow Research. Please state your question.

Good morning, gentlemen.

Good morning, Mark.

Good morning.

Nice quarter. Going back to some of the steel price issues, you've obviously... North America got ahead of the curve there. Will you see the costs pressuring you more in the third quarter, becoming headwinds for your margins?

Well, as you might know, in the U.S., our largest operating segment, we use the LIFO accounting convention for valuing inventory cost flow. And so we're taking charges based on our current inflation activity and assumptions. And so from a P&L standpoint, the matching is pretty good for our largest business unit. So, I would say that we're not... based on where we stand today, there are no expectations to have a deterioration. That will be subject to future cost input increases and our continual placing management vis-à-vis those cost increases.

What were the LIFO charges in the quarter?

We took $14.5 million of LIFO charges in the quarter.

Okay. I think you said that [indiscernible]

Yes.

Okay.

So $20 million year-to date and just to harken back to 2004, the last time we saw the kind of steel and commodity cost increases that we're experiencing this year, we took a $20 million charge for the full year. And so we're half way through this year and we already have a $20 million charge recorded.

Okay.

So, the inflation from a steel and a commodity standpoint is obviously escalating at higher levels than 2004's experience.

Right.

And it's our expectations that we are going to see some deceleration, or hopefully leveling of that which will get rid of a lot of distractions in the marketplace.

Right, right. Any indication of customers moving to other products with the strong pricing?

No, we don't have any indication of that. Obviously, that's something that we have to be receptive to, but I would say that a lot of the price pressures that existed in the marketplace were coming from imported products and with the high transportation costs and a much more normalized steel price around the world, I think a lot of that pressure has evaporated. So we will obviously have to keep a continuous focus on that. And if the markets continue to decelerate or get worse, then obviously there could be some freed capacity. We'll have to keep an eye on that, but I think utilization numbers are pretty high within the industry right now.

Right. And then a final question on share repurchase [ph], there weren't any in the second quarter. Were there any in July thus far?

No, we haven't purchased any shares in July.

Do you anticipate doing any in the rest of the year, are you holding off to invest in acquisitions --?

What we have communicated in the past is that our share repurchase strategy is one of opportunistic repurchases. It's not a top strategy of the company to buyback our shares on a systematic and continual basis. We would put at the top of the list investing internally in our growth strategy. That's post in building plants in India and China and Eastern Europe and Latin America. But also taking the opportunity to very selectively buy companies like Electro-Arco in the first quarter that extends our geographical reach or our product portfolio. So, we are very focused on the long-term growth and profitability expansion of our business. And if we see the opportunities in that pipeline, not requisite with our balance sheet and cash flows and the share prices attractive to us, we'll enter the market from time to time and take some shares out.

Okay. One last question on CapEx do you think what you spent this quarter would more of a run rate for the rest of the year... $18 million?

Yes, we're estimating that we're going to spend for full year between $60 million and $70 million.

Okay. Thanks, good quarter.

Thank you.

Our next question is coming from Steve Barger with KeyBanc Capital. Please state your question.

Hi, good morning.

Hi, Steve.

Good morning, Steve.

Yes, some of the global companies that have reported this week have talked about the weakening picture in North America and Western Europe as you did a little bit. You've been raising prices to good effect, but in the back half do you think you can get price realization in excess of material costs in a moderating demand environment?

Well, first I would say that we haven't had a very aggressive posture of trying to do that. We've tried to walk a conservative line, not the opportunistic. I think we've commented that we think long term in regard to this, and we surely haven't looked at large volumes in trying to accelerate price because of that. Again, as I said earlier, we will be very proactive in looking at the market conditions and being responsive to those market conditions. And we have a very good cost base all around the world and we can be reactive to any competitive pressures that exist if we need to do so.

Well, yes, I mean, in the context of not being aggressive on price, you got 8% in North America and 15% in other. In other I think that may have been some catch up, but for 1% volume growth and 8% price in the domestic market, is that kind of dynamic sustainable?

Well, again, it's going to be predicated on what happens on the cost. I mean, if you look at what the cost input change was versus what our price increase was, you'd see that they were very much alike.

Okay.

If our cost base goes up, and the steel market stays as high as it has been, then we will be reactive to that. If we see some leveling, which we're hopeful of, then we won't be pushing that envelope harder.

Alright. And so we're seeing the U.S. and North America slowdown a bit and it sounds like rest of the world or emerging economies are staying pretty strong. But do you think there are backlogs to some of the longer lead time segments in those markets like shipbuilding or some of the constrained heavy machinery markets given higher steel and energy prices? Are you seeing any kind of demand destruction and your customers talking about concerns about those backlogs?

Not in those sectors, no. I would say that we see continued investment in the construction sector, particularly in China. Caterpillar and Deer and Komatsu and also the local Chinese manufacturers investing very heavily and growing capacity in that marketplace. Caterpillar announced a big expansion of their plant in India, which in well in line with what we are doing. Shipbuilding, I haven't seen nothing but acceleration as far as the shipbuilding sectors are concerned with the existing markets trying to add capacity, acquire land, buy any equipment to be able to expand. And I think again the forecasts of these are pretty positive within the industries and quite bullish.

Great. Can you talk about... go back to your comments on industrial production in North America, maybe talk what your expectation is for the back half. Do you expect a continuation of some of the declines we have seen or is this... do you expect a bottoming?

Well, I think the economic forecast that I am looking at, Steve, are becoming more mixed. I think the general consensus at the start of the year was the second half of the year would be stronger than the first. And I think what happened was the first came in a little bit stronger than what people thought and I think most people are tempering their expectations for the second half of the year. I think our message is that we've done very well in what's been a fairly weak economic model. We're not totally immune to that model. If that model deteriorates further, obviously there's some consequence to us and it's our ability to offset that. It determines how successful we are. But there's... at some point in time there's going to be a big upside to that too. The U.S. market rebound... the North American Market rebound would be on top of some of the great strength that we have and we will stay focused on that.

Sure. So, in that context, on the 1% domestic welding volume growth, what were some of the end markets that were significantly up or down in this environment?

Well, I think I commented on that in my opening statements. I mean, clearly automotive and light construction, light construction equipment, heavy duty truck have been hit very-very hard and have been for quite some time. So you'd think from a historical perspective they be nearing the bottoming or a rebound kind of cycle. Those activities that have [ph] anything to do with energy, I mean, wind power expansion. I read an article in the Financial Times just yesterday, the U.S. now is the largest producer of wind energy and there's been a huge acceleration of that. And lot more of that pan for U.S., not only from an installation, but from a manufacturing platform basis. We are still seeing a lot of expansion in the pipeline industry to get some of the resources to the marketplace. And we are optimistic that the Congress is finally going to wake up and recognize that they've got to tap into some of the resources that we have available and reach some compromise in that area that should be positive. And then lastly, again, I think that a lot of the agriculture and construction equipment manufacturers in the U.S. are using their embedded U.S. capacity to service the export markets. And even though their domestic markets for those kind of products are very weak, they are getting a big bang up for that based on a weak U.S. dollar and again embedded capacity to service those international markets.

That's great background, John, thanks. And if I could ask one to Vince, of the SG&A increase that you saw, can you kind of talk about what's permanent versus non-recurring or... and should we expect a similar absolute number in 3Q and 4Q?

Yes, good question, Steve. The way that I look at it, I believe about half of the dollar increase I would consider to be not related to increasing the cost base. In other words, we had fairly significant foreign exchange losses in the quarter of about $3.5 million, and there was a $4 million translation impact. And so also, fair amount of the increase was associated with the incremental selling costs, associated with higher sales volumes, but there's also an acquisition effect. I wouldn't consider that to be a base cost increase. And so the most obvious item that we don't expect to recur would be the foreign exchange losses that occurred in the quarter.

Okay, good. Thanks gentlemen.

Our next question is coming from James Bank with Sidoti & Company. Please take your question. James Bank - Sidoti & Company: Hi. Good morning.

Hey James. James Bank - Sidoti & Company: Sorry, if this has already been asked. I was actually with the operator really in the call fixing a technical problem but ultimately, can I have the sales absolute dollar breakdown for Europe and other countries?

Yes, James, that wasn't covered. The sales total for Europe was approximately $171 million. James Bank - Sidoti & Company: Okay.

Other countries was... actually it's in press release, the final page. The last page we added was segment highlights by most America, Europe and other countries. James Bank - Sidoti & Company: Great, 128, okay got it. Then could you...

Plus third party sales, I gave you initially, and that is also in our company copy [ph]. James Bank - Sidoti & Company: Okay. What would say was the main driver to dropping your COGS as a percentage of sales in the quarter?

That's COGS, you mean improving our gross margins in the quarter? James Bank - Sidoti & Company: Yes.

I would put at the top of the list of the Other Countries segment at a fairly dramatic expansion in gross margins and operating profit. In my prepared comments, I pointed out that the Other Countries segment had EBIT margin of 9.5%. James Bank - Sidoti & Company: Right.

Roughly a doubling from the first quarter, and that was largely driven on the backs of some of the strongest volume improvements that we've had in the world as well as the biggest price increases, and downtime maybe in Australia. But we also had in the rest of that geographical segment double-digit price increases in an effort to catch up on some of the input cost increases that we had at tail end of last year and the beginning of this year. So there's one factor that really drove the improvement in the quarter, I would put it on the back of the Other Countries segment. James Bank - Sidoti & Company: Okay. I did see that because I guess historically, the pricing environment in that group has been difficult. But at this point, should we assume this is sort of a normal run rate because we are now back to where region has been in 2006? And can we also assume that the start-up costs, the problems that you had in the back half of '07 and the first quarter somewhat this year are mature and/or gone?

Well I would emphasize that, we have said on a number of calls over the past two or even three years. And that is that we're in a long-term building process in the Other Countries segment, led by Asia-Pacific. And we've said that there will be volatility in that region. It's a very dynamic process to build our business as we add costs, we build factories, we hire and build our selling and distribution infrastructure. We are very gratified by the results that we had in this quarter, the fairly dramatic improvement in turnaround that we've seen, as vis-à-vis compared with the last two or three quarters. But we would also caution you to understand that we will continue to have volatility in this region as the market sorts itself out, as fragmentation works its way through, as the market matures, as we build our infrastructure. So, we're optimistic that we will continue over the longer term to drive operating profit, EBIT margins up to create stability in this region and to build the more matured business model. But we're a fair distance off from that in our opinion. James Bank - Sidoti & Company: Okay. That's helpful, thank you.

Your next question is coming from John Wolfensohn [ph] with Wolfensohn & Co. Please state your questions.

Hi guys, thank you. Quick question. Well first of all, congratulations on the excellent price management, the gas prices up [ph] were so effectively, particularly looking at the margins against the LIFO accounting in the U.S. But the question then would be, has it been necessary or has it been expedient to a setback and lose a little bit of little of market share in order to effect that or is this market, the competitive nature of market good enough to round it?

Well I would start out, John, by saying in our largest and most important profitable market being North America. We've seen the major competitors follow our lead and a significant part of the market is a handful of competitors. And we've been able to raise prices, at the same time our competitors are raising prices in line with us. Last, that may break down a bit as we move to Europe and certainly Asia-Pacific and Latin America where market may be more fragmented. So we're very conscious of that. We're managing that very cautiously and diligently, and there certainly are opportunities for smaller competitors or more aggressive competitors to try to take competitive business by not raising their prices to maintain their margins. But overall, I would tell you that we have not seen a market shift away from us. As a matter of fact, we believe that we continue to gain market share in the regions of the world that we participate on the high end of our welding portfolio. So, we're very much attuned to that but we don't think there is market share shifting away from Lincoln Electric.

I will also add, John, that we think that the market dynamics on the raw materials impact all of our competitors. That we are well aligned globally on the steel market. We got access to a fair number of high quality suppliers that can serve us our needs, and we can that capacity around as various different suppliers around the world, because of our sophistication of our purchasing organization and our ability to manage large cash flow, international transaction and shipments. And as I said earlier we think that our overall cost base is very competitive. So in a rising cost basis, raw material cost basis, we don't think that we are at any different advantage and the fact that competitors that have raised prices are surely driven by the fact that they've had very significant raw material cost increases, equal to or greater in magnitude than that, that we've had.

Okay. So, [indiscernible] we're seeing on the steel side, you've been able to, via negotiations with mills, hold back the price increases a big compared to what a smaller guy would be able to do?

Well, we believe that to be the case. I mean --

Okay.

I mean we're a big volume user. We've had longstanding relationships. We buy steel on a global basis. So we have access to steel companies all around the world. And some of the smaller players if you categorize and that might be more local lean [ph] and are forced to buy on the spot market, are obviously going to be at a disadvantage.

Okay, good. That's a good explanation. Thanks.

Our next question is coming from Jason Rogers with Great Lakes Review. Please state your question.

Good morning. Looking at the quarter, I was wondering, just based on the information you've provided in the press release, it looked like EBIT margins improved, geographically in the North America and other countries but it was off on a year-over-year basis in Europe. I was just wondering the reason for that.

Yes I think I've mentioned earlier that in looking at the timing of the price increases in Europe that we were a little bit behind the cost curve of that. That was not done unintentionally but it was more responding to what the market conditions were, and as we've commented, there's a much more fragmented market with a lot of smaller players. And so we were, I would say, more cautious and conservative on looking to that, going back to the earlier question of Leonard [ph] allowing our market position to deteriorate. So, I think we've taken a more aggressive pass through of that. We're hopeful that we'll be able to implement those cost increases in the third quarter or price increases based on costs in the third quarter, when we should see some catch-up there, volumes stay in line.

We also have some unfavorable mix effect in the quarter as well, moving from higher margin product with some lower margin products in Europe. And that could abate itself in the future quarters as well.

Okay, and what was the impact on net income as far as foreign currency is concerned in the quarter and the year ago period?

The impact was $2.4 million increase in the quarter from the foreign currency impact of cannibalization [ph].

Yes that for last year?

I don't... I can get back to you on that.

That's fine. What about the average rate on debt for the quarter?

5.1%.

Okay. And looking at the receivables, they were up pretty significantly just looking at the first half of this year. I just wonder if you could comment on that?

Well, those increases are largely in line with our increases in sales. And then also a bit of a mix shift to longer receivables on the international front. As we grow more rapidly, internationally, those terms tend to longer than traditional 30-day terms in the U.S. market. And so we're adding sales in the Middle East and Asia that could be 60, 90, even 120 days, in some cases.

Okay. And finally, if you could make any commentary on what you're seeing is, looking at acquisition environment?

Well we've commented for the last several quarters that we've seen a fairly good pipeline of opportunities there. And we expect that to continue, particularly in the emerging market areas of the world where there are great opportunities for consolidation... smaller companies look to divest their businesses and move into retirement sort... or those companies that are so diversified that welding doesn't make sense to them in terms of their long term picture. So, it's in active negotiation, and we're expanding our resources in that area to be able to cast [ph] to broaden that and participate to a greater extent.

Okay, thank you.

Our next question is coming from Seaver Wang from Utendahl Capital Markers (sic) [Partners].

Hi, good morning. Just wondering if you could comment on how you are managing the J.W. Harris business, but housing down, also maybe a quick update on the retail and automation.

Well first, J.W. Harris, you are right. J.W. Harris had a significant portion of their business tied to the housing market, HVAC and plumbing kind of market. But when we acquired the company, remember, we said they were primarily a domestic business. And we thought that the growth opportunity lied there on the export side. And I would say our management team there has done an exceptional job of growing their business, internationally, in an area where we had little or no market share. And we surely see a lot more growth opportunity on the international side for the brazing business. And now we're quite optimistic of that. And again, we think the housing market at some point in time will rebound and will obviously be well positioned with those customers that we had. So we took a family business that didn't focus on international, didn't have a very aggressive sales and marketing organization. We're beefing that up, and we think we are capturing share both domestic and international to offset the weakness in the traditional kind of markets. The retail sector, our business in the DIY business is clearly reflective of what's happening in the consumer market. And there's significant softness in that sector, and we don't think that that's going to rebound anytime soon, based on the forward-looking views of consumer sentiments and unemployment rates, with traditional kind of metrics to drive that business. So, we'll have to stay tight. We've got some new products that we've introduced into that market. We've added a few new distributors into that market. But the overall sector is quite weak, and I think it'll stay weak. And the last question was what?

Automation?

Automation continues to do very well, not only in the U.S. but globally. I think we mentioned to you about our global agreement with Fanick [ph] and how that would impact our automation business worldwide, with great expectations into the Asian market, in particular. And I would say at this point, our expectations have been exceeded into the Asian market with the support that we've received from a great global partner under that marketplace. Our expansion plan here in Cleveland is right on schedule. We'll be moving that business into an expanded facility in the third quarter, and we think that's going to give us an opportunity to demonstrate our long-term commitment to that market and one of which we continue to be very bullish on.

Okay. One last quick question, John, in past conference calls you had mentioned the plant shutdown for the Olympics, which, is there anything to do now, have you seen any kind of change in buying behavior about customers?

Well we're up 50% in the quarter in China, I think there is somewhere near that. So obviously the impact of that is bit minimal. And if it had grown much more, we wouldn't have been able to service that, because we're still on the building of the capacity side. But the interest that what we're seeing now, and I think you've probably seen some articles, and I talked a little bit about it where the Chinese Government, because of energy shortages throughout the country is taking offline certain percentages capacity of the figure energy consumers. And that would like a steel mill, we have seen some impact on aluminum smelters. Those industries do two things, consume a lot of energy and also contribute just appropriately to the pollution challenges that they have. The impact of that, our business sold has not been felt, as I said. And I also commented, I think that one of the things that's going to be on the horizon as far as China is concerned, as there's massive rebuilding effort that has to take place in the earthquake areas. When you look at half a million plus people losing their homes, the structural changes that have to take place to rebuild the infrastructure in that area and find more permanent housing for them should be a huge driver for, I would say, the foreseeable future and I think will come on top of all the other things that we talk about, including the massive energy sector build-out that's taking place within the Chinese mainland.

Hey, thank you.

Well on the question on impact of foreign exchange movements on net income, the favorable effect this year again was $2.4 million, compared with the prior year of $1.6 million. So the favorable impact grew by about $800,000.

Thank you. Our final question is coming from Walt Liptak with Barrington Research. Please state your question.

Okay, I'll make it a short one. But John, you mentioned wind power twice, once in Europe and the demand in the U.S. I wonder if you can provide some color, what percentage of revenue, if you had to develop new products, specifically for the wind power market. What kind of growth do you see in etcetera?

Well we're seeing a substantial growth in that sector. Walt, I don't have any details as to how big it is as a percentage of our overall business. But I think it will become a major sector, based on what we are seeing. Most of the major companies that build the towers are expanding quite rapidly, and they're expanding all around the world as people try to offset both the cost element of oil and CO2 emission issues that's going to continue to surface around the world. And it will be a significant sector. I saw an internal report the other day that indicated that the amount of welding consumables that go into a wind tower range somewhere between 5 and 8 mill... excuse me 5 and $8,000 per tower depending on the thickness of the tower and the heights of it. And I think that's all some of our qualities. And if you look around the world and determine who has the biggest share of the submerged arc business in the world, I would think Lincoln would stake up quite nicely in that. And then secondly, from the power source, welding power source technology, I would say, we are substantially ahead of any of our competitors in that category for that type of equipment.

Okay great. Okay. Thanks. Have a great day.

That conclude the Q&A session, I would like to turn the floor back over to Vincent Petrella for closing comments.

Hi, thank you very much for joining us today. There are no more questions. I would like to close the call and we look forward to giving you an update at the close of our third quarter in late October. Thank you very much.

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