Lincoln Electric Holdings Inc (LECO) 2003 Q4 法說會逐字稿

(OPERATOR INSTRUCTIONS) I'd like to introduce you to your host today, Mr. Massaro. You may begin, sir.

Good morning and welcome to the conference call of Lincoln Electric Holdings Inc.'s results for the 2003 fourth quarter and full year. Joining me today on the call is John Stropki, Chief Operating Officer of Lincoln. And in addition I'd like to welcome Vince Petrella, who last week was elected our new Chief Financial Officer.

Vince joined Lincoln in 1995 and was Vice President and Corporate Controller prior to his recent appointment. We're very fortunate to succeed one very capable CFO, Jay Elliott, who most of you know, with a person of Vince's background and company experience. I look forward to working with Vince.

Our quarterly and year-end 2003 earnings were released this morning prior to market open. And if for some reason you did not receive a copy, the press release is available through our website and on a number of different financial sites. You can also you can also contact our investor relations office and ask that a copy be faxed or sent to you via e-mail.

Let me start today's call by reminding you that certain statements made during this call and discussion may well be forward-looking. You also should be aware of the risk factors associated with our businesses. These risk factors are provided in our press release and more generally in our SEC filings, including our 10-K and 10-Q Reports. And incidentally, our 10-K for 2003 was filed this morning.

I would like to now give a brief overview of how the Company performed in the quarter and a look at the full-year results. After my remarks, John Stropki will cover details regarding our operations. John will be followed by Vince Petrella, who will go over the financials in more detail. And of course, then we will open it up to questions.

Turning to the financial results, for the 2003 fourth quarter the Company reported net income of $14.1 million or 34 cents per diluted share on net sales of $269.4 million. The results compare with 2002 fourth quarter net income of 18.4 million or 43 cents per diluted share on net sales of 238.5 million.

We're very pleased with our results. The sales increase in the quarter started with the up-tick in incoming orders for our US operations that we experienced in September and continued in October, November and through December, an encouraging trend which we believe reflects a recovering North American industrial economy. We are optimistic about the year ahead and look encouragingly with strengthening industrial sector.

The Company's US operations had net sales of 157.6 million in the quarter compared with 143.9 million in the year ago period, more than a 9 percent overall increase. Export sales were 16 million compared with 15.2 million in the same quarter in 2002. Non-US sales in the quarter were 111.8 million compared with 94.6 million in the same quarter last year. In local currencies noon-US net sales increased approximately three percent.

Now looking at the full-year, net income for 2003 was $54.5 million or $1.31 per diluted share. That compares with 29.3 million or 68 cents per diluted share in 2002. The 2003 net income includes rationalization charges of approximately 1.3 million net of tax. Excluding the rationalization charges, net income in 2003 was 55.8 million 8 million or $1.34 per diluted share. Excluding the cumulative effect of an accounting change and rationalization charges, 2002 net income was 73.9 million or $1.73 per diluted share. However, I must point out that our 2003 net income was negatively affected by an additional -- that is incremental -- $15 million in pension costs versus 2002. On a complete apples-to-apples basis net income in 2003 would have been $65 million versus 2002's 73.9 million.

Net sales for the 2003 full-year were $1.04 billion compared with 994.1 million in 2002. Our US operations had net sales of 614.5 million in 2003 compared with 612.4 million in 2002. Export sales were 62.1 million in the 2003 year compared with 63.2 million in 2002. The Company's non-US net sales for the year were $426 million compared with 381.7 million in 2002. In the local currencies non-US net sales were essentially the same compared with last year. These sales do not include Lincoln's AS Kaynak joint venture in Turkey, nor our Kuang Tai joint venture in mainland China and Taiwan.

Cash flow from operations in 2003 was a very strong $95.7 million compared with 103.6 million in the previous year. Cash flow was significantly affected by voluntary funding of $40 million to the Company's US pension plans in 2003 compared with only 20 million in 2002. Therefore, on an apples-to-apples comparison cash flow was 115.7 million versus 103.6 million in 2002.

As announced earlier, the Board of Directors of Lincoln Electric Holdings Inc. has authorized share repurchase programs for up to 15 million shares of the Company's common stock, and during 2003 the Company repurchased 1,917,022 shares of its stock at a cost of $41.9 million. The total number of shares purchased through the share repurchase programs was 9,657,811 shares at a cost of $199.1 million through December 31, 2003.

Those are the general numbers. Let me take a minute to cover some other exciting news at Lincoln.

As previously reported, Lincoln has signed an agreement to purchase the majority interest in several Kuang Tai, China operations. This agreement, which we expect to close by the end of March, is as significant and important an acquisition as we have made as a Company. It will put us in a clear number one position in China, the fastest-growing and now largest market for arc welding products in the world.

Our overall China business was very good last year, driven by the pipeline business and other infrastructure projects. And the overall Asian market continues to operate offer significant growth and potential for our equipment and consumable products.

Along with our acquisition expansion into China, the market there continues to be important in terms of exports from our US operations. Our new acquisition strongly positions us to access the immense market for general industrial welding in China.

In addition to China, we saw our business double in India, the second-largest growth market in the Asian region. This growth was driven primarily by sales to pipe mills and in support of pipeline work such as the Gas Authority of India Ltd., known as the Gail Pipeline Project (ph). In addition to supplying arc welding projects for the project, we also trained in excess of 300 welders. The rebounding domestic markets, combined with our continued global expansion, puts Lincoln in a very, very positive competitive position.

Next, I would like to turn to John Stropki for comments regarding our operations.

Thank you Tony.

During our third quarter conference call we communicated on the positive trends we saw in our North American business. We can now report that we have seen a consistent improvement in our business levels across North America, as reflected in our fourth quarter 2003 results.

Order patterns have been very positive and have resulted in a very strong backlog of business moving into the first quarter of 2004.

We saw much stronger volumes across all of our sales channels -- industrial distribution, retail, rental, and end-users. Sales through industrial distributors were significantly higher year-over-year for the fourth quarter. This is the first time in many quarters that we have seen steady sales growth, and we believe this increase was a reflection of economic expansion within the industrial sector of the US economy, as well as the successful launching of certain key marketing programs and new product introductions. We believe our results demonstrate clear market share gain in this most important sector.

Most importantly, we have seen significant acceleration of our consumables order patterns. This demand, coupled with other activities, reflect a much healthier business level across many key manufacturing industries in both the US and Canada. This has been a very positive development, as consumable business levels more closely align with general economic patterns and was negatively impacted by the manufacturing recession we have been working through since 2000. Our consumable profitability will significantly improve with the improved overhead absorption within all of our North American facilities.

Within the retail channel we continue to be pleased with our sales results. We are the major supplier in this channel, and with the acquisition and successful integration of the Century Marquette product lines which we closed this past quarter we are further increasing our market share here and the gap between us and our nearest competitors.

From an operating profit perspective we continue to see steady recovery towards our objective of returning to the profit levels we realized during the late 1990s. On a quarter-to-quarter basis we continue to see favorable trends, despite the fourth quarter being a typically slower period of the year-end manufacturing slowdowns and holiday seasons.

As we have said many times, the investments we have made in new products, our operating facilities, welding technologies and business processes have positioned us to take advantage of the increased levels of business we're now experiencing. Our messages to the end-user is very clear -- we have the very best way to help you improve your productivity.

As you are aware, we have been strategically investing in our worldwide plants in order to drive productivity improvements and to reduce our costs position so that we may continue to operate competitively within the global markets. Just last month US Secretary of Commerce Donald Evans visited our Cleveland facilities and remarked on the impressive results we have achieved in navigating through a very difficult time for the manufacturing sector in United States.

The strengthening of the euro continues to negatively impact the ability of European manufacturers to export their products to the US dollar denominated regions and we fully expect that trend to continue. This has helped to keep low-priced importers out of the US market, and overall prices as a result have improved.

We continue to make strategic investments in our business units, which include actions associated with improving the productivity and profitability. These actions include the rationalization of production across North American businesses, including Mexico where we are broadening the scope of our efforts.

In Canada we saw a significant increase in volume and dollar amounts relative to our consumable sales. Throughout the year we made investments in the operations there to increase efficiencies and productivity. We experienced strong performance through market share gains against the slowing economy in Canada, as the Canadian dollar strengthened by almost 21 percent.

In Latin America we posted very good results in 2003, despite the weak economies in that region. In particular, the US economy recovery has been slow to benefit Mexico. However, the strengthening of the cross-border demand and improved local activity will drive Mexico's 2004 GDP expansion to an expected 3 percent, with industrial production expected to grow by 2.9 percent in 2004. We are expanding in Torreon, Mexico by building a second facility adjacent to our present plant as part of our announced welding gun retail product and accessory product line expansion. We also continue to invest in our Brazil facility, and are adding a second electrode line to better serve the market and increase market share.

Turning to the market region covering Russia, Africa and the Middle East, this region continued to dominate the news headlines for other issues than welding. But nonetheless, we had a very strong year here in 2003 and we're looking forward to continued good results and growth in 2004. Sales in this region benefit our operations in Cleveland, Europe, Canada and Asia.

In a Turkey, as Tony mentioned, we own 50 percent of the welding company AS Kaynak. The Company's remaining 50 percent is owned by Eczacibasi Group, one of the largest and most diversified companies in Turkey. AS Kaynak is a very important and strategic investment for us. AS Kaynak not only gives us access to the Turkish market, but to the Middle East and many parts of Eastern Europe. AS Kaynak has about 33 percent of the Turkish market share and is a very successful company. They had an excellent year and continue to take market share while improving their productivity.

In Europe GDP for the euro zone ended the year at 0.4 percent. Germany, the largest economy, reported negative growth for the year at 0.1 percent, the first time in 10 years, with a significant drop in domestic demand. On the on the other hand, it was recently reported that the manufacturing sector in Europe expanded for the fourth consecutive month in December.

Against that backdrop, our Uhrhan & Schwill unit had a positive year with major sales into Russia, Africa, Middle East regions and China. Uhrhan & Schwill’s business is a design and installation of pipe welding systems for pipe mills and energy-related business in Russia and China had a very positive impact.

In Eastern Europe our Bester operations continue to perform quite well and had sales improvement over last year. We are very happy with the integration of the Bester company into our global distribution channel, and we continue to make strategic investments in this facility.

The European economy appears to be past its worst, with the GDP growth for 2004 projected to be 1.8 percent in the euro zone. We are continuing to implement projects to reduce our costs and our cost structure. We are also excited about the improved business environment we're seeing going into the first quarter of 2004 and we look to realize improved profitability from that of which we have seen over the last four years.

That's a summary of the regions; next, Vince Petrella will review the financial details.

Thank you John.

As noted in our press release and in the previous comments by Tony and John, we continue to have higher quarter versus prior year quarter sales in our US operations. We're also seeing favorable year-over-year comparisons in most of our international operations. Based on the increased level of business in our North American unit and the continuing level of strong orders and shipments experienced in January, we're hopeful the US economic recovery in the basic industrial and manufacturing sectors is now here.

Looking at the volume of purchases by customer location rather than our selling units locations, US customers were up over 10 percent. An encouraging bright spot in the US market was an approximate 17 percent year-over-year increase in equipment sales through our industrial distribution channel. Russia, Africa and the Middle East customers were up double digits. Increases were also achieved in Latin America and Asia. In local currencies sales in Europe were down slightly. Although our business activity continues to have mixed rates of change around the world, we see a general strengthening of most industrial economies.

On a product line basis, both machines and consumables saw consistent rates of growth. Sales by product line remain an approximate 55 percent consumables and 45 percent equipment split.

The percent of gross profit in the quarter continued to be lower versus the prior year at 27.1 percent of sales compared with 29.9 percent, a 2.8 percent decline. Full-year 2003 gross profit margins of 27 percent, compared with 30.2 percent for 2002, reflect the narrowing of the year-over-year declines during the fourth quarter. In addition, we have seen improvement in the margin comparisons from the second quarter of 2003 on. We expect this improvement to continue into the first quarter of 2004.

Although higher sales levels and better overhead absorption have benefited the fourth quarter, continuing pricing constraints caused by excess industry capacity in most mature economies of the world, higher pension and insurance expenses, higher commodity prices and less favorable product mix have somewhat muted the potential improvement in year-over-year gross margin comparison. Higher pension costs alone knocked a full percentage point off of our consolidated gross margins in the fourth quarter.

We do continue to focus on programs to reduce our costs, increase our efficiencies to mitigate the negative effects of the macroeconomic factors in our marketplace. SG&A expense in the quarter of 56.3 million was 20.9 percent of sales, up 1.5 points from the prior year. Higher pension costs, the impact of foreign exchange translation due to the weakened US dollar and increased foreign exchange losses were the primary factors driving this increase. Over one-half of the increase in SG&A was caused by foreign currency translation and transaction losses. For the year the 210.7 million SG&A expense was 20.3 percent of sales, up slightly from the prior year's 19.9 percent. Again, higher pension costs, as well as foreign currency translations, negatively impacted year-over-year comparisons. Removing the incremental cost of pensions and the impact of foreign currency translations, SG&A as a percentage of sales would have been 19.6 percent of sales in 2003 compared with 19.9 percent in 2002.

Fourth quarter operating profit at 6.2 percent was down 4.3 points versus the fourth quarter of 2002. This decline was primarily attributable to lower US margins. Without the higher pension cost of approximately 4.2 million in the fourth quarter operating profit margins would have been 7.8 percent.

Cash flow and working capital management again have had a positive outcome in the quarter and the year in comparison to the prior year. Working capital turnover efficiency continues to improve, and the Company's operating cash flow has improved year-over-year after adjusting for the increase in pension contributions in 2003, even despite our lower net income. In addition, as previously noted by Tony, the Company contributed 40 million to the US pension plans compared with 20 million in 2002.

In summary, during 2003 the Company repurchased 1.9 million shares at a total cost of $42 million; fourth quarter purchases totaled 1.1 million shares, costing us $25.6 million. In addition, the Company paid 26.7 million of dividends and invested approximately $35 million in capital expenditures. All told, the Company reinvested in the business and returned to our shareholders over $103 million. Still, the Company closed the year with $9 million more cash and marketable securities than debt. This is essentially where we ended the year in 2002. The $170 million of cash will continue to be available to support our continuing acquisition program, repurchase additional shares, pay dividends and reinvest in our operations.

As was previously mentioned by Tony, we expect to close our recently announced investment in China by the end of March. These investments will total up to $24 million and will add 50 to $60 million of annual revenues to the Company's consolidated financial results.

Looking to the future, I see our most significant opportunities and risks in 2004 as follows -- we will be rewarded with higher volume levels, particularly in our North American operations; we expect our pension cost to decline by over 5 million because of our aggressive funding strategy and a 26 percent return on assets in our US pension trust during 2003; we will take advantage of our recent investments in capital and infrastructure to gain additional operating leverage at higher expected volume levels. On the other side of the ledger, we have been evaluating very closely the growing indications of much higher commodity prices and transportation costs, and our ability to pass these cost increases on to our customers. We are increasing our prices to offset these increases in costs. On balance the Company is poised to take advantage of a recovering US and world economy, and is positioned very well to further enhance its growth and profitability should additional acquisition targets become available.

That's it for the financial details, Tony.

At this point, Joyce, it's time to open the call for questions.

(OPERATOR INSTRUCTIONS) Gary McManus.

J.P. Morgan. I'm just trying to get a little bit more elaboration on what's happening in the North American welding whitman (ph) market. Ten percent growth in the fourth quarter -- John, you were saying that you have a strong backlog; orders have been up significantly, especially in the distributor channel. Can you quantify how much volume increase are you seeing and what your expectations are for '04 industry demand?

I think we tried to comment that the trends that we saw in the fourth quarter are clearly carrying over into the early parts of 2004. And it would be our expectation that those numbers would sustain themselves based on every forward-looking view that we have. I think one of the factors of that that Vince talked a bit about is the commodity prices and the price increases that those are bringing to the marketplaces could change that dynamic a little bit on the upside.

I think we're going to see similar year-over-year comparisons, at least through the first quarter, and hopefully for the remainder of 2004.

You're referring to ten percent revenue growth?

Yes.

The second question -- you repurchased $25 million of stock in the fourth quarter, which was a much faster pace for sure then you were doing previously. Is that rate sustainable?

Actually, that was a block transaction that was privately negotiated with the Lincoln Foundation. And that was the bulk of our purchases in the fourth quarter were the 1.1 million shares that we purchased from the Lincoln Foundation.

So that's not -- let's just take full-year. I think you repurchased about $40 million of stock. Should I assume similar, greater or less share repurchase activity?

I don't know that you could assume anything. We have to look at what the price is. We feel that the current price -- we repurchased that block at $23 a share. We thought that was an attractive price. I think if we're trading in those types of ranges, we will be very active in the repurchase market.

Certainly, Gary, our cash flow is sufficient to continue these kinds of purchases as long as the price is appropriate.

Thank you.

Paruk Faruki (ph).

Jefferies & Company. I actually just got in in the middle of the call, so I apologize if you've already explained this. But I thought at one point I heard you say that you saw equipment up 17 percent. Was that North America and was that orders or sales?

Those are sales and that was a North American view, yes.

How does that compare with the ten percent you just mentioned a minute ago?

The 17 percent is through our industrial distribution channel; the 10 percent is total machine equipment sales, along with consumable sales. So the message is that the rate of growth is a bit slower on the consumable side, as well as other channels -- for example, retail, rental and not through industrial distribution, as well as end-users.

I think to clarify, the total machine sales were up 14 percent, the industrial segment was up 17 percent and the total Lincoln US sales were up 10 percent.

I got you. Thank you.

The next thing I have is -- you talked about gross profit for the entire year being down 300 basis points, and you said 100 basis points of that was from pension.

Yes.

Can you break out the other 200 basis points? You said it was pricing and mix; I'm just wondering how much of that was each of those.

And also, could you possibly also talk about the year-over-year pricing trend in the fourth quarter, both by consumables and equipment?

As far as the margin is concerned, there are a number of factors, none of which individually are a significant part of the decline. Other than mix, we had some higher distribution costs and freight. But there's a lot of smaller factors that are driving down that margin. But none of them individually are significant.

On the pricing trend, year-over-year the quarter I would say consumables were flat and up slightly on equipment. And again, it's our expectation with the changing dynamics of the currency, as well as increased business levels, as well as increased commodity prices that both will be up, I would say significantly, this year.

I just want to understand -- the pricing which you're saying was up slightly, this is really more of a pass-through issue than you increasing prices on top of your costs. Do you see what I'm saying?

It is also supply and demand; the demand for products is increasing rather rapidly in the first quarter. That's what John was referring to. There will be, obviously, commodity pass-through price increases, but the absolute value of prices is also going to go up, driven by demand.

Thank you very much.

Dax Valasis (ph).

Gates Capital Management. I was wondering if you expected to make a cash contribution to the pension plan this year.

My expectations are that we will contribute up to $30 million during 2004.

Okay. And that's going to lead somewhat to the decline in the pension expense?

That's also helping the decline in our pension expense as well.

Second question is what do you expect to spend in CapEx this year?

We think we will spend somewhat somewhere around what our run rate for depreciation was for 2003 or a good range for you would be between 35 and $40 million of CapEx.

That, of course, obviously does not include acquisitions and joint ventures. And I might add that if the economy continues to grow, at some point in time we will consider some additional CapEx for capacity expansion.

Where are you on a capacity basis currently?

It depends on what product line and what plan. The overall Company has capacity available. But in certain areas -- for example, the United States -- we're running at about 80 percent capacity in our consumable product line and we're running three shifts on the machine product line. So we have limits that we can go to, but we're not there yet.

I'm sort of new to the story. Do you guys generally provide backlog information as far as by product --?

Backlog really doesn't mean anything in this business (multiple speakers)

Our book-to-bill time frame very short, so backlog, we don't believe, is a good indicator of long term future trends and revenues.

Would you track plate steel consumption? Is that something that you look at as a forward indicator of business?

We looked at, we look at fabricated steel, we look at a lot of different macroeconomic factors. I don't think we've found any really good economic indicators that might predict our future (multiple speakers)

Industrial production rates are a fairly good surrogate GDP growth in the developed countries, is a good indicator. In places like China we're growing at double the rate of GDP growth. So you have to be careful where you use it.

As far as the margins go, you cited some positive and negative factors going into 2004. Would you expect overall to have margin improvement on a gross margin and SG&A basis, even including the impact on a reported basis taking into account all the factors that contributed to the negative numbers this year?

We're going to have -- we're pretty confident we're going to have good margin expansion in the first quarter and rolling through 2004.

Thanks a lot.

Evan Steen (ph).

Two questions. First of all, the China thing is very interesting to me; it's very fascinating. Obviously this is the biggest market, both growth-wise right now and the biggest potential future market. Can you talk about, in addition to the 50 to 60 million, what the longer-term opportunities you might see over the three-year basis and then also talk about margins? I remember years ago -- I forget exactly when -- you guys had expanded into Europe, and you ended up -- my memory is not exact -- but it ended up being a problem, and it was foreseen as a lot of potential, but for whatever reasons the European, whatever investment that was or acquisition, did not work out. So in the back of my mind you guys did a two cents accretion (ph). I just want to make sure that although the revenues will be there and all the excitement of the potential that in fact the Company will be getting a good return on their investment.

Obviously we think it's going to be better than just a good return on our investment or we would not have spend the time and effort and money. But to answer your question specifically, the 50 to 60 million that Vince referenced is the immediate impact in 2004 on an annual basis. That does not take into account any growth from the existing levels.

Additionally, we're putting in, as part of that venture, a new machine manufacturing facility that will probably be in the start-up phase for the middle to the third quarter of this year, and start ramping up. So long-term we're looking at double-digit growth on an annual basis, at least for this combined entity of the consumables and machine facilities.

As far as margins are concerned, profitability is concerned, I can tell you that the companies are profitable. At the present time we're generating an after-tax return that's in the mid-single digits. We expect that to continue. I've had quite a bit of experience in China, and I know precisely what you're talking about -- most companies don't make a lot of money in China; we plan on making a lot of money in China.

As to the European question, unfortunately we don't have enough time today to go through the history of our challenges in Europe in the late '80s and early '90s. But rest assured that those are behind us. We now have a very good set of businesses in Europe that are making money and are positioned very well in the marketplace. So I think the European issues that you referred to, which I was personally involved in, are behind us.

One thing I think is very important to know behind this investment is our history in the region in terms of mainland China and Taiwan. We've had a relationship and a joint venture partner in Kuang Tai for several years now. That particular business has more than doubled its volume since we entered into our joint venture arrangement. Its earnings, as you can see on our press release, are predominantly the reasons why equity earnings and affiliates has gone from $1.9 million in 2002 to 2.9 million in 2003. So we have experience with partners that is growing very rapidly and profitably. And this additional investment is not us obviously going it alone in that region, but on the backs of some previous success that we've had with an existing partner.

When you say you're going to go up to 85 percent, are we going to see that flow through the top-line now or is that going to be still coming through on the equity line? I don't know how the breakout of the three companies is.

It will be consolidated.

It will all be top-line.

Second question was you mentioned -- and I had asked this question on the last conference call and you referenced it today -- being able to surpass the margins a few years ago. When you say that, what time horizon are you looking at -- a three, four, five year period or sooner? Not sooner than three years. I don't expect that.

That's a very difficult prediction to make, but it's going to be solely dependent upon the volume recovery in our business units. And obviously the faster the volume comes back, the faster we're going to exceed it. But I think we've got a very good start in the fourth quarter and the first quarter 2004 towards that achievement.

The last question is periodically some people have asked -- and you see the headlines come across -- with regard to some of these legal issues -- the asbestos and more recently I think, which is more worse to some people was the manganese -- if I am pronouncing it correctly -- lawsuit and the recent settlement. And I quickly glanced at the 10-K and it said that it split among a bunch of different people and your portion was not nearly that much. I think the issue that some people are worried about is this is becoming a more significant type of occurrence where people are settling for large sums. A lot of people see what has happened -- I'm not equating it with asbestos, but a lot of people have seen what has happened with some of the asbestos cases. I'm curious if you could comment with regards to that.

I can comment on it. First, I would refer you to our 10-K and other public documents. And as we have reported in our SEC filings over the years, Lincoln, along with all other industry co-defendants have confronted largely successfully product liability claims relating to welding fumes. An update was included in the 10-K that we filed today.

Costs associated with manganese -- and you are pronouncing correctly -- manganese lawsuits have not been material and are not presently expected to be material based on the industry's historical experience -- its current assessment of the medical and legal merits of the claims and the applicable insurance that we have. Further discussion of the accounting and cost sharing was included in our 10-K.

In the manganese litigation, we're pleased to report that there was a favorable development in the multi-district litigation proceedings in Ohio. On January 26th, lead plaintiff's council, apparently are recognizing that a class-action suit was not viable, informed to the court that they no longer intended to seek class certification. Additionally, the plaintiffs also requested dismissal of their medical monitoring demands associated with these class actions.

The entire welding industry steadfastly maintains that these cases are meritless and will continue to defend itself vigorously against these claims. The plaintiffs' bars is mistaken if they believe that welding fume litigation is their next big windfall. And I think that's about all I can say, except to refer you to the public documents.

I think you said it very well, and I did note that in the 10-K. That was very positive. It sounds like after a long, tough period you guys are in for better times and continued success.

I think so.

Matthew Levenson (ph).

Matthew Levenson & Co. Inc. You referred to your plan to increase prices to cover material costs and transportation costs; are your major domestic competitors matching those increases or instituting similar increases of their own?

We have seen price increase announcements by all major manufacturers and suppliers in this area. And I think that the steel situation is pretty well-publicized in all trade press, and its impacting all aspects of the steel industry. So we clearly expect and have seen evidence of that.

In reference to the fourth quarter and last year you referred to an adverse mix of sales toward lower margin product. Is this stabilized, or is there some continuation of this, or could you comment on it?

I think we're going to see a better mix in 2004 as compared with last quarter of 2003.

Certainly the way the orders entered -- have been coming in, the mix is better.

Thank you.

Godfrey Birckhead.

SBK-Brooks. Are you sharing the price that you're paying for this Chinese acquisition?

(multiple speakers) all told we expect to expect to invest up to $24 million, which includes our start-up of the equipment manufacturing, additional investments in a consumables business and then purchasing a majority interest in a third consumables business.

Thank you. You mentioned that you're operating, I think, at 80 percent of capacity in Cleveland now. Is that correct?

It depends on which end of the business that you're talking about. We have two very separate businesses -- consumables and equipment. The equipment side of the business, capacity is more driven by headcount versus, say, equipment utilization. On the consumables side of the business, the utilization factor is more specifically driven by machine utilization, and that's a pretty good number in the primary sides of our business. We have some capability and we are expanding that with capital expansion. And also, we have worked very hard over the last three years in the downturn to kind of rationalize our capacity for North America between our Mexico, Cleveland and Canadian facilities. And we have investments in place there that have some upside in terms of capacity, which we will utilize.

I guess my question is where do you max out at?

I would guess with some efficiency improvements that we're seeing, without major capital we could increase our capacity about 35 to 40 percent (multiple speakers) primary consumables.

One of the problems last year was the FX -- foreign exchange -- losses you mentioned. And so in building our models for this year I guess we had to take that into account. So I guess my question is can you help us along the way into what sort of assumptions you're using in terms of currency this year and what kind of currency losses should we assume this year, given all that?

In 2003 we experienced about a 3.2, $3.3 million foreign exchange loss that ran through our profit and loss account. In terms of -- although I wouldn't necessarily suggest that you use that in your 2004 model. We don't typically try to make a reliable estimate of what our foreign exchange gains or losses will be in the next year. It's just not something that is easily predictable.

Okay, but can you share with us what you think the euro will be, or the yen, or --

(multiple speakers) the general feeling that we have is what we read and hear from the economists. Our business is not to forecast currency movements, but to listen to the experts. And I think you probably know the experts as well as I do. They're suggesting that the dollar will continue to weaken through the year certainly against the yen and the euro, and we anticipate that that's the case. The big wild-card, of course, is China and what the Chinese to with the RMB (ph) or the won (ph). And that's completely up in the air.

But as far as our planning is concerned, we run businesses and we try to have our internal corporate hedge because we have cross-ocean businesses shipping back and forth. But as far as predicting currencies, we don't do that.

How much was your loss in '02 or gained?

We had a loss in '02, I believe, 1.9 million.

Thanks very much guys.

Michael Hagan.

BB&T Capital Markets. My question relates to the restructuring efforts and lean initiatives -- Six Sigma, etc. In the past you have kind of said net savings expected to be realized are ranging between 8 million and 10 million, 2 million of that being specifically from the consolidation of warehouses. Given what you're seeing in the US business, and the strengthening of machinery, and now the emergence of consumables, does that expected range move up at all? Or are you still sticking to the eight to ten net benefits expected?

Clearly, somewhat volume driven. But I think that in Vince talking about the sequential improvements that we've seen in the operating profit within the areas where we had made those improvements that we think those numbers are clearly doable, and with the increased volume level that we're seeing we would expect to get greater leverage out of that.

One extra question. The 50 to 60 million in incremental sales expected from the Chinese investment, is that an annual number or is that what you expect -- assuming it closes in March, is that what you expect specifically in 2004?

That is an annualized number.

(multiple speakers) 75 percent of that?

Assuming we close it in March, yes.

As well as it might be slightly less than that because we have an equipment manufacturing facility that will be coming online hopefully in the second half of the year. So that would be less than half during this calendar year.

It's still approximately 50 million.

Back-ended though is what you are saying. Finally, the comment of stripping out pension and foreign exchange issues -- foreign exchange losses, I guess I should say -- you guys believe that Q4 EBIT would have come in at 7.8 instead of 6.2? Is that correct?

That's just pension.

That was just pension, not foreign exchange?

Yes.

Okay. Thank you very much for the clarification.

Dax Valasis.

I was just wondering -- the expected growth rate and the growth rates that you're seeing in the market, is that consistent with the market growth rate? Or is that in excess of the growth rate of the market?

In most markets it's in excess of the growth rate. We believe we're taking market share (multiple speakers)

Is that both in consumable and equipment?

Yes.

Thank you.

Thank you, ladies and gentlemen. Just to summarize, I think we're off to a very good start in 2004 and we are very optimistic about how things are going. And I look forward to our first quarter conference call. Thank you very much.