Lincoln Electric Holdings, Inc. (LECO) Q3 2008 Earnings Report, Transcript and Summary

Greeting ladies and gentlemen and welcome to the Lincoln Electric Holdings Third Quarter 2008 Financial Results. At this time all participants are in listen-only mode. A brief 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 sir, you may begin.

Thank you Ryan. Good morning and welcome to Lincoln Electric's conference call for the third quarter of 2008. Results for the quarter and nine months period were released this morning prior to the market's open. If you do not have copy, you can obtain one from Lincoln Electric website, or by contacting our investor relation office at 216-383-4893. Lincoln's Chairman and Chief Executive Officer John Stropki will provide a review of the quarter and activity in our market regions in a moment. But first let me remind you that certain statements made during this call and discussion may be forward-looking and actual result may differ from our expectation. Risks and uncertainties that may affect our results are provided in our pres released and in our SEC filings on Forms 10-K and 10-Q. Now let me turn the call over to John Stropki.

Thank you Vince and good morning everyone. Given the financial turbulence experienced in United State and abroad, we are pleased that we are able to close the third quarter with such excellent results. We had strong revenue increases, good improvements in profitability and strong cash flow despite the ongoing negative effects of the global financial crisis on several key geographic and market segment. Even that the economic growth is slowing worldwide, we enter the fourth quarter with uncertainty regarding the full implications [ph] of the global prices and commodity prices, customer purchasing patterns and specific geographic and market segment ramifications. We expect decline in sales volumes and the impact of lower commodity costs to pressure margins in the fourth quarter of this year and into 2009. However against this backdrop we will continue to execute our long-term strategy of global expansion and capitalizing on key infrastructure and energy projects. We also plan to utilize out strong balance sheet to gain market share through continued R&D investments and acquisition opportunities which leverage our value driven welding products and service offerings. As for the results, diluted earnings per share increased 39% to $1.60. Operating net income increased 33% to 90 million on a 12% sales increase to $633 million in the quarter. Cash flow from operations totaled $96 million in the quarter, and our third quarter ending cash balance was $313 million. Sales for our North American operations increased almost 7% to $370 million. And subsidiaries outside of North America recorded a sales increase of 20% to $262 million. Excluding acquisitions and the effects of changes in foreign currency exchange rates sales outside North America increased 7%. Those are the general results and Vince will return in a moment with more detail around the numbers. But for the next few minutes let me give you an update on the quarter and the view of the market regions and outlook moving into the fourth quarter and early 2009. First I would like to comment on Lincoln's position in the face of the current market volatility. The company is well positioned to withstand the current market turbulence. The $313 million of cash untapped and available credit lines of over $215 million and very strong operating cash flows, Lincoln would be able to continue to execute its long-term strategies and look for opportunities to leverage our strong financial position. While the market would like to remain volatile in the short-term and some of our most important geographies such as the United States are in the midst of an industrial recession, we remain confident of the long term growth prospect for our company and for our industry. Our continuing strength in export markets reflect the strong demand for our high quality products in developing markets, and we will service well to diversify our business profile. We have the welding industry's strongest brand, the broadest high technology product portfolio, the largest and most efficient global manufacturing platform and most importantly a great team of over 9,000 dedicated employees worldwide. As such we are confident that Lincoln Electric will emerge from the current market crisis in a better competitive position than ever before, as we continue to execute our strategies and take advantages of the global market position. Now turning to the regions; in North America. During the quarter overall results continue to be positive, while the overall economic environment was increasing challenging. We were able to capitalize on the strength of exports and manage effectively through dynamic commodity challenges. Overall, industrial activity represented key measures such as industrial production and capacity utilization, and United States have softened at accelerating rates compared to prior years. Excluding high-tech, total manufacturing industrial production was trending 6.1% below 2007 as of September 2008, while capacity utilization was running approximately 74.3%, levels not seen since early 2003. In addition market impacted by housing and consumer sectors continue to fall. The significant volatility in the credit market and Wall Street has led to much uncertainty about the overall business levels in the fourth quarter and early 2009. Specifically, orders trends in our traditional U.S. welding markets continue to be choppy and downward in the third quarter providing much uncertainty in the overall strength of the industrial markets we serve in the U.S. Third quarter results, from the region reflect decreasing volumes more than offset by inflationary price increases. As you know pricing has been adjusted numerous times throughout the year to respond to cost increase in key material groups like fuel and chemical. This could obviously represent an ongoing challenge based on the recent movements in key commodity prices. However, despite the negative economic data, the recently held industrial trade show FABTECH in Las Vegas was very well attended. And our new end-user segment focus booth was well received by participants and allowed for Lincoln Electric to clearly demonstrate our complete product line offering and application value added selling focus. In Canada, the manufacturing sectors in Ontario and Quebec continue to show softness. But the recent decline in the Canadian dollar is expected to bring some longer term relief. High oil prices have continued the development projects in western provinces and despite the recent drop per barrel, general fabrication and pipe mill activities remain very robust. Export sales growth to the key global infrastructure development projects both from the United States and Canada continue to be very strong and U.S. and Canada exports increased 22% in the quarter to over $70 million. Automation continues to be a growth sector for the region, and I'm pleased to announce that the grand opening ceremony for our new automation facility will be held tomorrow October 23rd, here in Cleveland. The new state-of-the-art facility is greater than 100,000 square feet, and will serve as a platform to support the continued growth and expansion of our flexible and hard automation offerings moving into the future. As the North American region continues to show signs of slowing, we continue to focus on cost control activities and key strategic capital program aimed at improving productivities, efficiencies and driving cost reductions throughout all of our North American operations. Looking at Europe. Our Lincoln Europe sales grew 16% to $142 million, excluding the impact of acquisitions and foreign exchange, sales increased 1% in the quarter. The growth rate during the quarter continue to slow compared to the robust levels experienced in 2007 and the general economic slowdowns throughout most of Europe's regions. However, we continue to experience organic sales increases in our European business as result of the integration of past acquisition, manufacturing expansion efforts in Eastern Europe and price increases driven by the increased raw material cost, primarily steel during the third quarter. Our regional manufacturing restructuring efforts in overall Eastern Europe expansion executed over the last several years combined with our more recent acquisitions should have us better positioned within the region as volume demand continue to soften. Looking at the rest of the world, in Latin America the rapid weakening of the region's currency set a message that the region may not be as insulated from the crisis in the industrialized world. Major concerns relate to deflation and commodity prices, the major source of revenue for most countries as well as the potential decrease in foreign and domestic investment as the credit supply deteriorates, have challenged many of these markets. Mexico volume demand decreased, as the US driven automotive sector weakened and overall domestic demand moderated. However Brazil, Argentina and Columbia continue to grow sales in excess of 30% over prior year levels as we continue to capitalize on our agenda of greater investments in commercial infrastructure and increasing our geographical presence. I'm pleased to report that the integration of our recently acquired Brastak business, in Brazil, is progressing well. The local distribution network will be leveraged with our complete brazing, soldering and cutting product lines while the manufacturing platform will provide products for exports to the entire Latin American region. Turning to Asia-Pacific. Economic growth in China has softened mildly for the last three quarters. Chinese Government is focused on stable long-term GDP growth rate of around 9% so that they can control overheating in certain sectors and push the nation's producers towards higher value output. The high growth and investment areas will continue to be focused around large scale infrastructure projects and obviously advantage for welding product sales. However, as we know the country is very interconnected with the global markets, so a serious GDP erosion starts because of export slowdowns, look for continued interest rate cuts, spending programs and additional governmental support to augment growth. We are progressing in our plans for additional investments in our Nanjing facility to provide for a more diversified product portfolio that will include expansions in the more value added semiautomatic consumable projects. We continue to invest and upgrade our Shanghai manufacturing campus which will enable us to expand out our product base with a wider range of welding consumables to address the fabrication, ship building and other market sectors that are currently only accessible with local products. We're also adding manufacturing capacity in our Inner Mongolia manufacturing operations to address growing export demand especially in the Middle East. We've just launched an initiative to have all of our facilities in China compliant with ISO 14001 standards by the end of 2010, including our Shanghai headquarter operations which are expected to be certified during 2009. In India the pipe mill sector remains very strong. We've virtually all major mills holding healthy backlogs of orders. And we expect to start production of our new plant in the first quarter of 2009. That's the view of the quarter and in the regions. With the economic growth slowing worldwide, we are facing the fourth quarter with uncertainty regarding the full impact from global prices and commodity prices, customer purchasing patterns and specific geographic and market segment ramifications. We remain, however, very bullish in the long-term. Now Vince will go over the details of the financial results.

Thank you, John. The third quarter of 2008 represented our 19th consecutive quarter of strong earnings growth. The quarter's consolidated sales were up 12%, with North American sales increasing 6.9% and sales reported outside of North America up 20.3%. Foreign currency effects increased reported sales by 2.4%, volume decreases reduced sales dollars in the quarter by 5%, pricing contributed 11.5% of the increase in sales dollars year-over-year. Acquisitions contributed about 3% to the year-over-year growth in sales. On a product line basis, machine sales increased 5% and consumable sales increased 17%. Excluding acquisitions consumable sales were up 12%. 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 31.1% of sales compared with 28.3% in the prior year. The increase in gross margins as a percentage of sales was recorded across all geographies. Higher pricing, the benefit of selling lower cost inventories and improvements in operational effectiveness drove the higher margin. Year-to-date gross profit was 29.6% of sales compared to 28.6% of sales in the prior year. This year-over-year improvement in gross profit was primarily due to favorable operating leverage caused by increased pricing and improved operational effectiveness. SG&A expense was a $107 million or 16.9% of sales in the quarter. The higher SG&A as a percentage of sales was primarily driven by higher bonus expense of $7.8 million and incremental selling and administrative expenses of $4.5 million. Foreign currency exchange rates, increased SG&A expenses by $2.6 million. SG&A expense for the first nine months was $319 million or 16.3% of sales, up 10 basis points from the prior year. Incremental selling costs associated with higher sales volumes, additional SG&A associated with acquisition and higher bonus cost were the primary factors driving the dollar increase. Foreign currency exchange rates increased SG&A expenses by $10.8 million for the first nine months of the year. Third quarter operating income at 14.2% of sales was up 220 basis points versus the third quarter of 2007. As John mentioned, operating income increased 33% in the quarter. On a geographical segment basis, North America recorded EBIT margins of 15.3% in the quarter. Europe EBIT margins were 13.2% and the other country segment achieved 10.8% EBIT margin. Second quarter of 2008, EBIT margins were 14.4%, 11.5% and 9.5% for North America, Europe and other countries respectively. Year-to-date operating income rose to 13.3% of sales from 12.4% of sales in 2007, an increase of 90 basis points. Operating income increased 23% for the first nine months of 2008. The income tax provision for the second quarter reflected an effective tax rate of 25.5% compared to 28.7% in the 2007 same quarter. The year-to-date effective tax rate was 27.8% compared to 29.6% in the prior year. The effect of... in the quarter of adjusting the year-to-date effective tax rate to 27.8% increased net income by $2.1 million or $0.05 per share for the third quarter. The lower effective tax rate was due to the additional utilization of foreign tax credit from the repatriation of higher tax foreign earnings as well as higher income in lower tax jurisdiction. The company invested $53.5 million in capital expenditures in the first nine months of the year compared with $45.8 million in the prior years, year-to-date period. Other uses of cash flows in the first nine months included the payment of $32 million of dividend to shareholders and the repurchase of shares totaling $23 million. Share repurchases in the third quarter totaled $5.1 million or 75,400 shares. Weighted average diluted shares outstanding, decreased to 43,209,000 shares for the third quarter compared with 43,467,000 shares for the 2007 third quarter, a 0.6% decrease. Shares outstanding at September 30, 2008 were 42,819,061 shares. Our return on invested capital rose to 23.4% at September 30, 2008 compared to 20.3% at June 30, 2008. The company closed the quarter with $313 million of cash and a net cash position after debt of $172 million. Now looking to the future. We expect volumes to continue to slide until the fourth quarter of 2008 and perhaps into 2009. Commodity prices including steel are falling which will likely result in lower market prices for welding consumables. These factors combined with the liquidation of higher cost inventories will lead to a greater than nominal... greater than normal seasonal decline in operating earnings in the fourth quarter of 2008. The degree of margin and earnings declines will be largely dependant on the magnitude and timing of commodity price declines and the related market prices of welding consumables. We do remain optimistic that the company's profit margin profile will outperform previous periods of declining sales volumes because of our broader geographical and market diversification. In addition, Lincoln has a very strong track record of good cash flow generation and profitability in slower economic environment. At this point I would like to open up the call for any question. Ryan? Question And Answer

Thank you. Ladies and gentlemen at this time we'll be conducting a question and answer session. [Operator Instructions]. Our first question comes from the line of Walt Liptak with Barrington Research.

Hi, good morning Jonathan.

Hey Walt.

Well, congratulations on a great quarter. But I guess it's probably with the stock trading where it is, that's not the point, it's what's happening right now and what's going to happen in '09. I wonder if you would talk about where you're seeing in October, in terms volume overall?

Well I think the both wins and I touched on the volume issues, Walt, as we discussed what happen in the third quarter and I would say that the trend of that is pretty consistent.

Okay that has not accelerated; the down 5% volume?

Again we are not going to get into that. I would just tell you that you could look at the industrial markets that we serve, excited industrial production capacity utilization, those are looking very good metrics that we follow and we haven't seen an acceleration of those metrics deteriorating but they surely at levels that we don't like and we expect them, quite currently to stay there for sometime.

Okay. You touched on this in your commentary but with commodities prices coming down that I wanted to clarify, are you going to adjust your pricing or how are you going... what's your pricing strategy for the fourth quarter and as you go into 2009 and the environment that we are in?

I think our pricing strategy is pretty consistent Walt, when commodity prices they are increasing or decreasing, that we focus on protecting and improving our margins in both of those dynamics. And I think we got a extremely experienced and confident management and sales organization around the world to be able to adjust to these changes and I will tell you that the changes are different in every market that we are doing business in today and to do just that, find ways to protect and improve margins and that will be our focus as we go through this short-term volatility as far as the markets are concerned.

Okay. And then so, I wonder if you could talk about what the tax rate will look like for the fourth quarter and for '09?

Well, the tax rate will approximate what we've booked on a year-to-date basis Walt. The only discreet item that I would add to that is we have an expectation based on the R&D tax credit being renewed that would have approximate $1.4 million or $0.03 per share benefit in the fourth quarter. So in summary, we have a year-to-date rate reported at 27.8%, that's the expectations for the year and on top of that $1.4 million reduction for the R&D tax credit legislation.

Okay, got it. And then any view on 2009 at this point?

I think it's too early to --

Tell us, not going to get elected President.

And then also probably just as important is our view of what our earnings will be in the mix of those earnings throughout the world at Lincoln. I think it's too early for us to give any kind of view of 2009. Okay.

Okay, thanks guys.

Thank you.

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

Good morning gentlemen.

Hi, Mark.

Good morning.

Nice quarter. Vince, first of all can you give us a breakdown of the volume price acquisitions and currency between the different regions?

Well, certainly Mark. Starting with North America, volumes declined 5.5%, price contributed 11.6%, acquisitions contributed 0.8%, foreign exchange had a negative 0.1% or a total of 6.9% improvement in sales year-over-year in the third quarter. Europe had a 3.3% decline in volumes, a 4.2% improvement in price and 8.5% increase due to acquisitions and foreign exchange contributed 6.7% for a total increase in Europe was 16.2%. All remaining geographies of the world that we refer to as other countries had a volume decline of 5.8%, price contributed 20.3%, acquisitions contributed 4.9% and finally foreign exchange contributed 6.1% or an increase year-over-year in the third quarter of 25.5%.

Okay, thank you. Looking at the other countries, I guess volume decline of almost 6% is a little bit surprising, where is that most manifested, think this --?

I would say the two big markets marked that have that kind of impact, one was Mexico, which I commented on. As you know the automotive industry in particular has moved a strong part of their subassembly operations to Mexico either of their own or through the supplier related connections, and clearly that's been very impacted. In particular that has a very strong focus on large automobiles, either vans or trucks versus small assembly type of activities. So that would be number one and I would say very significant component in the quarter; not for the year, but for the quarter. And then we saw some just traditional kind of volume reductions in Australia as commodity impacts there particularly the mining iron ore and other mining activities slow... based on the slowdown in the commodity pricing. Those would be the two biggest impacted ones. And yes, we view that as being fairly short-term, so it's not unexpected but it is what it is.

Right. And then on the currency, what are you expecting... it continues to be pretty flat in the fourth quarter, even maybe a little against you a little bit in the fourth quarter?

Well, in terms of what happened in the quarter, Mark, on earnings, we did have a benefit still in the quarter from an operating income standpoint of $957,000 compared to the prior year's third quarter at about $1.4 million. So we lost over $400,000 of operating income profitability because of the currency strengthening of the dollar vis-à-vis most major currencies. I would expect based on the number that we've been seeing in October with additional strong and fairly rapid strengthening of the dollar that this will continue to diminish into the fourth quarter and into 2009. As far as where that ends up, I wouldn't comment on that but I would say that the dollar has been moving very rapidly and pretty dramatically in a strengthening position. It's hard to say where its going to stabilize but it has been a very quick and rapid move.

Right. Okay thank you very much.

Our next question comes from Tom Hayes with Piper Jaffray.

Hey, good morning gentlemen.

Hey Tom.

Good morning.

You had actually mentioned; I just went through some of the of volume declines, I think if you look at North America down 5% and obviously there's an extended weakness in that market, so give us a little thought on where you... where the realistic level where margins getting... really declines and what steps could you basically hold those little bit?

Well let me first comment, Tom, I think that the quarter-to-quarter comparison is a very difficult one. If you recall the third quarter of last year we saw fairly strong escalation as far as volumes are concerned, because the commodity prices were going the other direction and people were worried both about availability and the cost of steel. So, it is probably not a direct relation to that other than it's a bad quarter-to-quarter kind of comparison. And in terms of what we do to preserve that I think there again are a number of things and I think Vince touched on this, I think it would behold everybody to go back and take a look at the record of Lincoln in slower economic times and how well we've outperformed not just our competitors but the industrial marketplace. That our variable compensation system has a real effect in the downturn opportunities as far as our costs are concerned and our piecework process is part of that. And then secondly is how we manage the pricing in the marketplace. We obviously have to be competitive in the market but Lincoln is well known around the world for providing the absolute best quality and the absolute best service to our customers.

Okay.

And they are willing to pay some premium for that and it's our responsibility to be sure that we attract the maximum premium for that.

Great. And if you tell us a little bit on the pricing increases, could you just remind us when your last... at least on the continual effect [ph] that the price increase was, your thoughts on the percent that was actually obtained... the percent of the increase that's stocking in? Lastly have you started to see any pushback as far as maybe from your customers looking for price relief?

Our customers were always looking for price relief that we do that with all of our vendors and most of our customers do that with us regardless of what the economic circumstances happen to be. That being said, as we said as we were raising prices, all of our customers are steel buyers. And I think they're very much in tune with what's happening with steel prices when they're going up and when they're going down. And then, there's a component of the cost that's beyond what the commodities are that we are responsible for. So, we expect pressure absolutely. I mean it would be unrealistic to think that that won't come and quite frankly that you expected it hasn't already come. And again it will be our job on a global footprint, not just in North America to manage that in a very proactive way, is such that we do everything that we can not only to preserve margin where possible but to increase margins where possible.

Okay. And I guess just lastly, if you look into what you guys... as guys reported, your Africa and Russia also included a larger geographic footprint, I was wondering if there is any insight you could provide to some of the more separate markets that... an outlook for that?

I don't quite understand your question.

Well, does this year that ended [ph] also includes your Africa and Russia footprint as well?

No, the reporting that I reviewed in terms of North America, Europe and other countries are on a legal entity.

Okay.

So those are our legal entities that are operating within Europe, North America and other countries.

All right.

And if you are asking specific about what we are seeing in those markets I'd be glad to entertain the progression and comment on it.

Yeah, I mean, in fact it would be great.

Well I just returned from a trip from South Africa which is really the major market that we have in Africa or at least the platform for our African business and I would say that things have been very, very strong there and we are quite optimistic. We're looking at additional expansions of our personnel and of our warehousing capabilities in that region and we've got some very good distributors that are expanding quite rapidly based on their opportunity to take significant share from what we see as a weakening competitive landscape in that marketplace. So, I'm quite bullish about Africa. In general Northern Africa obviously is strong in oil and gas reserves and we're doing a lot of things to improve our capabilities in that area and again expect that to be a fairly robust economy for quite some time. I think in the quarter we were up 30, 40% in Africa and very strong growth trajectory that's been in place for several years.

Okay.

In the Middle East, I would say it's very much still the same. We have not noticed any slowdown or curtailment of any of the big infrastructure projects that are there. Obviously as oil prices soften; that's a potential, but I'd go back to earlier comments that we made in earlier calls that it's our understanding and it's been confirmed numerous times by the people who are in that business that most of these projects are tagged at $60 a barrel of oil price and as long as the prices are in that range or they think they will be in that range they'll continue to make those kind of investments.

Okay, appreciate it. Thank you.

Our next question comes from the line of James Bank with Sidoti and Company.

Hey, James.

Good morning.

Good morning. In discussion of declining sales volumes, this is something that's global. I can assume from the 6% decrease in the volume that in your other countries' segment or was this something a little bit more towards your industrialized nations, such as Europe, ours and so forth?

I... John covered in the previous question the strength that we're seeing in Russia and Africa, the Middle East; those regions still have good volume. I think it is true that industrialized countries, the United States, Canada, Europe, Australia, Mexico are some of our bigger markets are declining format. China's still doing well from an export standpoint out of the U.S. and the base market is not shrinking there. So --

Now, do you think there will be any switch between equipment sales and maybe some of your automated welding packages versus your consumable products?

Well, our automation business is up over 30% this year, so it continue to be a very strong growth arena for Lincoln, and we expect over the longer term that we will continue to grow that business rapidly.

What about the consumable side, I am just trying to figure, it seemed like there is a heavier way to consumables in this quarter than there had been in previous quarters and since that one gives you better profit margin, I'm just wondering if there's going to be a heavier way toward that as people continue to purchase consumables not necessarily will invest in equipment... just could... maybe give you guys a patent going forward?

Well Jim, you have to be careful on the consumables versus equipment increases. Although consumables grew in absolute sales dollars, the faster and to a greater proportion than machine, the reason for that is really pricing. The pricing went up much faster for consumable products and to a much greater degree than machines and so the whole of that disparity in growth in sales dollars is really pricing.

Okay. And also you guys mentioned I think in the press release in addition to this call that this decline in sales are sort of your... this near-term pessimism outlook is really early 2009 which you referenced, so just wouldn't have an idea of what's supporting your confidence at the back half of '09 might be a little bit better?

Well I would comment James as it... we are talking more about visibility than anything, I think that with the turmoil that we've seen in the last 90 days, I think it's very difficult for anybody to predict much out beyond a quarter if you're lucky to be able to do that. I think we have huge uncertainty as far as the election is concerned and how people are going to react whatever the outcome of that is concerned is and then, are the bailout and/or stimulus programs that are being proposed not just here in the United State, but around the world going to have the kind of impact that people would expect. So we're just saying that visibility is pretty positive, it's uncertain and we're going to do whatever we need to do to get results based on what the circumstances that are dealt with.

Okay. I understand you guys don't give guidance but then is it reasonable to even assume that there won't be growth next year?

I don't think anything is reasonable for next year. It is difficult to predict what the outcome of all of these global initiatives are going to be. And we said many times when people asked us what are we most concerned with, my answer has always been, we can't control what the economies of the world are doing. We get paid to perform with the economic models that exists; we've demonstrated that we have great capabilities of doing that, and I have no doubt that we will continue to demonstrate that.

Okay.

Vince, I would add, in terms of looking at probabilities and what we've experienced in the third quarter and certainly based on what's been happening in the marketplace in the fourth quarter is the higher probability that we will continue to experience at least into the fourth quarter and likely into 2009 declining volumes. So looking out beyond the fourth quarter and end of the first quarter will be difficult to predict. One follow up for me James is that I think people need to understand is that as we liquidate our higher cost inventories and replace those with lower cost inventories, the margin compression risk will be eliminated and we'll have good opportunities to get back on track for any deterioration that we see. And that would be cyclical based on each individual markets based on the inventories that we have and how strong those markets are and our ability to sell our products in whatever the declining market conditions are but we're quite optimistic that phenomenon was fairly short term.

Okay, thank you. The... and Vince I'm sorry if you already brought this, the interest expense what was the reason for it being a little bit elevated versus the first half of the year?

We have some higher foreign borrowings at higher rates than what we had for our domestic borrowings to position our capital structure and our foreign exchange risk in countries outside of the U.S., for example Latin America.

Okay. And than the priority on the cash, well over $7 per share now, is that going to be still acquisitions?

Those priorities haven't really changed much. We're going to continue to look for good opportunities in the acquisition front. We'll continue to invest in our strategic initiatives around the world and we'll also be opportunistic and judicious in our share repurchase activity.

Okay, terrific.

I would just comment on that James is that we do think that with the financial constraints that there will be some excellent acquisition opportunities, it could surface and we've said all long that that was our priority and we've got a list of companies that we are interested in and we'll obviously keep a very close watch on those situations.

Okay, now that's terrific. Thank you very much.

Thank you.

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

Good morning.

Good morning Steve.

Good morning Steve.

This question is probably going to be hard to quantify because I know you distribute through gas suppliers but just thinking about your general fabrication, your process and heavy fab customers in North America and in Europe where its applicable, are you seeing a bigger slowdown in volume from large customers or small, if we kind of call large customers as publisher or tier I?

I would say that the trend that we discussed a little bit in the last quarter has really kind of continued. Our large industrial machine sales are still very good, which is reflective of heavy fabrication industry, both domestic and international. And I think again, many of those projects are heavily weighted towards infrastructure, energy type of activities. I mean that's where the heavy steel is used. But contrary to that as we discussed last quarter, we see soft sales in small machine products, be they through our retail outlets or through the industrial gas people and the industrial gas suppliers have confirmed that pretty much across the Board. So it's a little bit upside down from what we've seen in traditional type of recessionary environments where it was the little guys who hung on there and the big guys who crashed and burned very early in the equation. And I don't really look for that to change much because I still believe, and I think maybe even more so, that infrastructure will become greater focuses of governments around the world. Even here in the United States lot to talk about what the investment should be to rebuild infrastructure and the need to do so. And that's not only is a good stimulus for governments to focus on, but it also employees a lot of people which gives it a compounded benefit, and we think that that will continue. I talked about the FABTECH show, Las Vegas. I was extremely bullish to see the number of large fabricators that were out looking at equipment at that show. I really expected very small attendance kind a numbers and I was very positively or pleasantly surprised. And these people are investing and they expect to continue to invest in projects like pipe mills and wind towers and power plant type of construction and even under the economic times that we see now, I have never seen so much activity of that taking place not only again outside of the U.S. but within the U.S. So, I think that that trend is very positive and as we said, the traditional markets will rebound and that will a high and [ph] long impact over this strong base of infrastructure activity that's out there in the world that we're taking very strong advantage of.

Yeah, I think I agree with you over the longer term, in terms of the infrastructure build. But as we've gone through this earnings season and we're early into it some of the steel companies have said they don't have a lot of visibility into the order book for fourth quarter. So do you think that the supply chain, the inventorying or are your customers... is it your sense that they are already pretty lean and you was just seeing slower production across the board?

I think there are two elements to that. I think there was an inventory correction, I think if you remember what our position was going even in the last quarter, we talked about the availability of steel and the fact that we were inventorying heavily because we couldn't take any risk of shortages in that area. So there is some inventory reductions taking place. And I think the other element is, is that people are kind of waiting to see where the pricing's going to accelerate. If you follow scrap and take iron pricing, it's taking some very significant drop and people know that will drive the manufacturing cost of the steel manufacturers and they don't want to buy high and sell low. So, what you are seeing is the steel industry almost in a uniform consolidated manner is beginning to take capacity offline. As they reduce that capacity you will see a stabilization in the price and that will allow people to kind of get back into the market when they recognize they are not taking that kind of risk.

Okay. And to that inventory point, Vince, can you give us the numbers for raw material work in progress and finished, do you happen to have that with you?

Yes Steve, our total inventory at the quarter end was approximately $420 million, raw material was $115 million, work in process was 59 million and finished goods inventory was about 245, $246 million.

So not a big change sequentially?

It's up; we even... we look at year end as well, it's up.

Mature, year end is up, right.

Right, yes.

Have you slowed your own production yet below your sales levels to kind of work out inventories from your own system or has this slowdown been faster or rapid enough that you're still in a process of trying to right-size demand?

Well our consumable production is very responsive. I mean we can increase or decrease that very quickly. I would say more of what we're doing it will be depleting the strong inventory position we had on the raw material side and that flushes through pretty quickly. On the equipment side, I would say we again pretty much match our production to incoming order levels, we've become very responsive on that side of the business and we track orders on a daily basis and adjust our schedule according to it. So you could, you should expect some slowdown in our production schedule, yes.

Okay, one last questions, I know your revenue growth is leveraged to the cycle, but can you... you talked in your press release about new products and your R&D effort and it seems like this could be a pretty good opportunity to get further penetration into the contractor base. Any thoughts on how new products in this environment allows you to do that or what your ability is to take share in a downturn to support volume and maybe make those gains permanent when volume returns?

Well, I think if you go back and track history, I would say that the third quarter is a good precursor to that. We're very, very good at taking share in downturns. We don't have all public companies that we compete with but I've looked at others that have reported their result for the first quarter... third quarter, excuse me, that showed decline in sales, dollars and obviously that's driven by declines in volumes that are much greater extent than what we had. So where we were up plus 6% in the quarters, others have had reported declines in the quarter. That's got to be a result of market share gain. We have a very committed and aggressive R&D program; I think we know better than most of our competitors, what products will capture share, and what's needed to support the contractor market. And I can tell you that we have a portfolio of products that are inline and will be rolled out to do just that.

Thanks, very much gentlemen.

Our next question comes from the line of Holden Lewis with BB&T. Holden Lewis - BB&T: Good morning.

Good morning. Holden Lewis - BB&T: Can you talk a little bit about your ability to sort of ratchet in, I guess, the SG&A, and then price to in a weakening environment trying to limit sort of the under absorption that might take place on that line. I mean you are kind of talking then, I guess, about the production cost that would be sort of a hidden gross margin. But you obviously have a unique employment model, is that going to be an issue in terms of leveraging and deleveraging SG&A? And in terms of your investments oversees, I mean it includes that you want to continue those, but I mean is there any sort of ratcheting up or ratcheting down at some level those investments in an effort to sort of defend margins and that sort of thing. Can you just give us a philosophy... little talk [ph] where you are there?

Well, I'll allow Vince to comment. I'll make a general comment; you could talk about maybe more specificity. But obviously the variable compensation bonus program has a huge SG&A component associated with that. And if you look at our SG&A expansion and aggregate dollars this year year-on-year, a big part of that has been the tremendous success that we had through the third quarter driving increased bonuses. If we see reductions in profitability and order levels and everything that's associated with that that's the first item that quickly comes off the table and it has a big impact. And there's a lot of our compensation that is tied to that. Secondly, we will look at all elements of our business to control SG&A and match it to the volume levels that we have. I will say though is that we are focused on the long-term and we're not going to make radical cuts that would impact our ability to execute our long-term strategy of capturing larger and larger and larger shares of the global marketplaces. And where we think we need to invest in places like Asia, the Middle East or Eastern Europe, Russia, we will continue to make those adjustment as appropriate, because we want to be ahead of the curve of the market rebound not behind it. And I think we've demonstrated our capabilities to do that time and time again.

And I'd add Holden that back to SG&A first, as you know a fair amount... a significant amount of our SG&A cost structure is fixed in nature. We will be looking at and are presently looking at all opportunities to ratchet back what we would consider to be discretionary spending. We'll slow hiring of replacements and be very careful on the human resource side. And John touched on the biggest variable in SG&A which is the global bonus and incentive compensation programs. On production side, certainly we'll be looking at being much more measured and careful in adding productive capacity. Where perhaps a couple of quarters ago we were looking at bigger hunks of productive capacity additions in our international market. We will likely be more careful in adding smaller hunks of capacity in different parts of the world at some of our productive base frees up with these capacity... these production and volume declines. And so we're carefully reevaluating all aspects of our spending from SG&A to capital expenditures to be a little more conservative and how we're spending our resources going forward. Holden Lewis - BB&T: Okay. And John, did you have any LIFO issues, the LIFO charges this quarter or unwinding some LIFO charges this quarter from prior ones?

We actually booked an additional LIFO charge in the quarter of $3.5 million compared to the prior year's third quarter of no LIFO charges. But in the context of the full year, that $3.5 million boosted our LIFO charge for the nine months, Holden, the $23 million. So it gives you a perspective of the rapidly accelerating and increasing cost of raw materials, and particularly steel, in the first half and then the third quarter was a greater moderation in what we forecasted our inflationary impact on our LIFO inventories in the US to be. So, 3.5 million to boost our year-to-date to $23 million compared to a prior year year-to-date in '07 of $5.8 million. Holden Lewis - BB&T: Would you expect to unwind any of that in the fourth quarter, I mean raw materials have been coming down maybe not your particular stuff, but what's your expectation into Q4?

I don't have estimates for the fourth quarter because it obviously depends on LIFO accounting on what your final inflationary impact is at the end of the year. But in looking at what steel prices are doing and other commodity prices from Copper to Silver to... you name the metal, what we're seeing in the marketplace is some fairly substantial declines in pricing as you are tracking in your weekly industrial reports as well. So, I would expect there to be some continuing declines in our LIFO charge at this point; too early to estimate what the fourth quarter might be because we need to know the yearend inflationary impact as well as what our quantities might be at the end of the year. But certainly it's on the downside. Holden Lewis - BB&T: And then can you comment also the impact of the hurricanes on your business pro or con, I guess the engines have been welded, so you'd be beneficiary there?

We had some minor beneficial impact in the third quarter, but it's not a material impact on our top line in the quarter. Holden Lewis - BB&T: Okay. So, not meaningful to the... to that volume number?

No, it's a few million dollars, not a significant number. Holden Lewis - BB&T: All right. Thanks guys.

Thank you.

Our next question comes from the line of Jason Rogers with Great Lakes Review.

Good morning. I apologize if you gave this up, but do you have foreign currency impact on net income for the quarter?

Yeah, in the quarter the foreign currency translation benefited the third quarter by $888,000, about $900,000.

And that's versus what last year?

Last year it was approximately 1.1 million, $1,064,000.

And what was the average rate on debt in the quarter?

It's about 8.8%.

Okay. And I was wondering if you could comment... if you're doing anything in the fiber, laser area either seeing that's an opportunity or a competitive break going forward?

Well, Jason we look at all emerging technologies, excuse me, on a regular basis. We view some as being appropriate for us and some as not. I would say generally we would shy away from the ones that are extremely capital intensive and focused on unique niche kind of markets, and yet we would look at ones that would present growth opportunities in areas that could expand in the future. We are familiar with laser technology both for cutting and welding. We see some opportunities for expansion in that. But I would say generally we don't view it as being a challenge for our existing market as much as it might be growth opportunities for other markets.

Okay. And Elliott Schlang has a question as well for you.

A few quick questions if I may. As far as the cash and cash equivalent, is that truly cash and equivalents or what is it invested in?

Yes, it is truly cash and cash equivalents. It's very short-term and liquid. And if we wanted the money today Elliott we could ring up our banks and have it sitting here at Lincoln Electric today.

And there is no currency in there?

Most of those cash and cash equivalents are in the U.S. The bulk of it... there are foreign jurisdictions that hold part of that 313 million. Some of those foreign jurisdictions hold a significant part of their cash and dollar, but the bulk of it... substantial portion of our cash is in dollars and in the U.S.

Okay. And on your accounts receivables any comment there as to the quality? I assume the quality is high, but I don't know where that's... whether you've taken any additional reserves above and beyond what you'd normally take in view of this environment?

No, Elliott, we are very proud of the quality of our receivables on a global basis. We have very good experience, very low bad debt and allowance experience historically. On $379 million of receivables we have about $8.5 million of allowances for doubtful account. That is up about $1 million from the year-end but our receivables are also up about $35 million. So, we feel we're in very good stead on our accounts receivable, we carefully evaluate on a global basis our aged receivables and take reserves where ageings or condition of our customers warrant them but we don't feel that we have any issues at this point with our accounts receivable at September 30, 2008.

And any comment on your capital expenditures budgeted for '09 or fourth quarter '08 and especially whether you have made any adjustments to those original figures?

Well, we've sensed 53 million for the nine months Elliott and...

Right.

We're expecting to be somewhere in excess of 65 million for the full year. It's too early to give you a projection for 2009 particularly in the face of the uncertainties that the marketplace is working through presently. In terms of probabilities though I would say it's likely that our CapEx in 2009 will be less. It will be less because of two reasons; one some of our major projects that we've been working on for the last couple of years are coming to fruition now with our development of our automation business in the U.S. to building out of our India plant, the expansion of our Chinese plant, some additions at the capital, Latin America. So some of our big ticket CapEx projects are starting to wind down but will run into 2009. And also from today's viewpoint we're going to as John stated I think a few times on the call today, going to be a bit more careful until we have a better view of what the future might hold in the marketplace from a global economic perspective.

And talking about the future, have there been any significant infrastructure projects that are either being cancelled or reduced to your knowledge in your conversations?

Well, I don't... I'll let John comment on this as he has traveled a fair amount more and is reviewing these things on a global basis. But I from my perspective haven't seen a major shift; there are the antidotal stories that you hear but I'll let John comment on any additional color you might have.

No, I think I commented no that earlier, Elliott, that it would be my expectation quite frankly that you may see some acceleration of the government funded projects as they look for ways to pop up the economy and keep people at work. And the reality is that the world's been run out of energy if we don't continue on the tack that we are on. And I think most countries; United States might be an exception to that, recognize that and are very much committed to it. So, we expect where there may be some slowdown of projects, but I've also heard quite frankly that there maybe some new projects that come into play because labor will be of that available and also some of the high cost of the steel that was of concern on some of the availabilities of these projects is coming back into play.

And do you have an R&D expense for the third quarter?

Yeah, hang on Elliott; I also need to look that one up.

Okay. While you're doing that, then if I could ask two more quick ones?

Sure. Elliott before you ask those questions...

On the repurchase program what is your balance.

The R&D number for the third quarter was approximately $6.9 million.

Okay. And that I think you alluded to the fact that you expect to keep a relatively high budget there?

Yeah, our R&D expense on a year-to-date basis is up over 4% from the prior year.

And corporate repurchase, what is your balance today [ph] that's authorized to buy?

3,920,000 shares.

And lastly, I'm a little embarrass to ask this, but I'll ask it anyway. In view of all the corporate insider calls that we've seen, have there been any Lincoln individuals of any significance that have had any significant calls?

Would you... are you referring to this margin issue that's been --

Yes, margin calls.

No.

On your own stock in the company.

No.

Good, I am not surprised. And congratulations on a great quarter.

Thanks, Elliott. Next question... we've run over about 10 minutes, I'll entertain two more questions if we have them in queue.

Our next question comes form the line of George Tall with Burrell Capital [ph].

Hi, Vince. Every new analyst that's looking at the stock is assessing whether... what are the probabilities of revisiting the 1993 or the 2003 margins? And while I don't anticipate guidance on whether what troughs [ph] look like, the trade-off of building out to long-term, building a new infrastructure for the long-term opportunity versus the near-term comfort level, with essentially the debate that's going on in the stock. So anyway you can give confidence building about whether trough is more or less likely to be either 5 or 9%, something in that range?

Yes, from... and I have this in my prepared comments, I believe John had in his prepared comments. But we believe that we're better positioned than ever before to deal with a downturn in industrial economies. Certainly today we're much more diversified from a global standpoint than we ever have been in the history of the company. Our exposure to the North American marketplace is significantly lower than what it was in the previous cyclical downturn. Those margins are still the highest in the world which will affect our global delivery of operating profit margin. But from a probability standpoint we think we're much better positioned today than we ever have been by our diversity of geographical exposure and our market segmentation exposure today vis-à-vis compared with previous cycle. Trying to predict whether it's going to be 6.7% or 9% is dependent upon as you well know, George, many variables including the depth of volume declines. Whether or not these volume declines become synchronized in the same fashion in all geographies of the world. What we could see early on as we've tried to give you color during the course of this call is that some of the industrialized and larger economies of the world are having declines in volumes but we still see bright spot in some of the developing parts of the world including Latin American countries of Brazil and Argentina and Asian countries including China albeit at a slower rate and a greater decline than what we've seen in previous times. But, our export business as we reported in the quarter is still up over 25% which bodes is well for this diversification of our portfolio on a global basis. And it remains to be seen whether the likes of China and some of the other Latin American and developing countries of the world starts to go into negative territory. But, what the early signs are is that we are better positioned now than ever before.

I agree and understand. The balancing act is you probably also have the best opportunities set for further growth and the question really is how far out would you defer the harvest. I mean are there... would there be too many missed opportunities in the next... during the down turn to maintain a higher level of trough margin or should you just take the pain now and than get paid off in three or five years?

Well I don't think we are going to walk away or turn our back on any opportunities that we see. We are trying to emphasize that we are going to be a bit more careful. We're going to recalibrate... tighten up the tolerances, if you will, in terms of our investments and our spending and simply not raise that risk level, as you describe it, to inappropriate level in the face of a lot of uncertainty in the marketplace. We are still committed to investing and growing our business in markets like China, India and Latin America and Eastern Europe and Russia, so I don't think you are going to see us table what we believe to be strategic imperatives for our business and our company. But we are just trying to emphasis today we are going to be a little more cautious.

Okay. One last point on the you mention share account change difference between... I think it was October 16, then average for the quarter, could you amplify on that, have there been share repurchases either after the quarter's close or at the end of the quarter?

Yes, after the... during the quarter and in my prepare comments I highlighted that we purchased 75,000 shares, George, and after the quarter's end and before we had to shut off our share repurchase program because of the quarter's result, we did purchase another 222,000 shares.

Okay, good. Thank you.

After September 30th.

Thank you.

Our next question comes from the line of Fritz von Carp with Sage Investment Management.

Okay Fritz, you are the last question.

My goodness I don't deserve this honor. All my questions were asked but then may be I'll just ask you for more color. I mean that you've seen that the emerging market are holding up ex China, can you give us any color on what's slowed more than your expectation sector wise or anything like that that's going on there?

In China specifically?

Yeah.

I mean well then I think people need to take China slowdown in context. I mean it had... I don't pick the number right; I would have to go back and check the records, maybe four, five years of consecutive double digit quarter-on-quarter kind of growth rates. And I think the last three quarters have been closer or aligned like 9%. But 9% uncompounded growth rates in the magnitude and scale of what China is now versus what it was four years ago is an impressive number. As an example I read in the last Wall Street Journal just early last week, the headline article saying "China Import Growth Slows." Guess what it grow... it slowed to 21% growth.

Right.

I think it's schematical in regards to these kind of numbers. 9% growth on the size of the Chinese economy as is relates to welding as a phenomenal number and one of which we are again quite bullish about. And as I commented in my earlier comments, what they have specifically said as they're going to shift their focus into infrastructure spending versus the non-value added kind of activities. And I think again that bodes well for the welding industry in total and well there's is a slight dip; it's there but long-term it's going to be a fantastic market and opportunity for us.

And just on some of the heavy, the slowing down in non-value added activities, I'm just not sure what --?

I mean again if you read what's happening in the Chinese economy most of the layoffs or the slowdowns have come in their rigid manufacturing sides of things where they don't --

Okay.

...think that as being long-term sustainable kind of business.

Well I see, okay. Thank you.

They want to be in value-added kind of businesses that employ a lot of labors, an example ship building. Lot of people are employed, that's very high value added and they think that bodes good for the steel industry in China as well as the labor consumption.

Okay, great. Thank you very much.

Hey, Fritz, you're welcome. And thank you for joining us for our third quarter 2008 conference call. We do look forward to reporting our fourth quarter 2008 results in mid February, talk to you then.

Ladies and gentlemen this concludes today's teleconference. Thank you for your participation. .