Lincoln Electric Holdings Inc (LECO) 2004 Q3 法說會逐字稿

Good morning and thank you all for holding.

(OPERATOR INSTRUCTIONS)

I would like to turn the call over now to Mr. Vince Petrella.

Sir, you may begin.

Thank you, Kelly.

Thank you and good morning to the Lincoln Electric Holdings 2004 third quarter earnings call.

Our financial results were released prior to the market opening this morning.

If you have not received a hard copy, you can obtain one on our Web site or through a number of financial sites, as well as contacting our investor relations office.

Before we proceed I would like to remind you that certain statements made during this call may be forward-looking and that actual results may differ from our expectations.

Risks and uncertainties that may affect our results are provided in our press release and in our SEC filings on Forms 10-K and 10-Q.

I'll cover the details of the financials for the quarter a little later in the call, but first let me introduce John Stropki, Lincoln's chief executive officer and our newly elected chairman of the board.

John will cover the quarter as well as our overall performance across the regions.

John?

Thank you, Vince, and good morning to all of you.

As Vince said, as I'm sure most of you already know, I have been elected chairman, succeeding Tony Massaro.

I'm very honored to be named only the seventh person to serve as chairman of the Lincoln Electric Company and I'm very excited about our future as a company as we expand our market position around the world and as we prepare to celebrate our 110th year anniversary in 2005.

Tony Massaro served the Lincoln Electric Company and our shareholders very well over his 11 years with the company and we wish him the very best as he enters a new phase of his life.

He leaves a company that is the clear global leader in the arc welding industry and rock solid financially as reflected in our results for the quarter and year to date.

We are extremely pleased with our third quarter performance and equally excited that all regions of the company contributed to the strong results.

That income was 23 million, or 55 cents per diluted share, on record net sales of 344.3 million.

The economic acceleration that began in the industrial sector a year ago has continued through the past four quarters with strengths in all channels domestically and in all of our international markets.

We believe our internal programs and ability to meet and exceed our customer needs in the current economic environment drove our performance.

Our U.S. operation sales were up over 28% to 198.3 million in the quarter.

U.S. export sales increased over 32% to 20.1 million, with increased sales to Latin America, Asia, Australia and the Russia, Africa and Middle East regions.

Our international subsidiaries contributed with record net sales of 146.1 million in the quarter.

All regions showed strength in orders and strong demand from our customer base, especially the energy and mining related segments in China, Latin America, Russia and the Middle East.

During the quarter demand continued to be robust across our operations in the United States and Canada.

Economically, the industrial activity, represented in key measures such as industrial production and capacity utilization across factories in the United States, continued to expand.

For example, year over year results for the key industries that we serve, such as construction machinery, heavy-duty truck manufacturing, agricultural machinery, as well as other industrial equipment sectors, continued to contribute to a positive business environment.

In our primary distribution channels, industrial distribution and retail, we continued to see healthy levels of business.

Also, in each of our product groups, consumables, machines, cutting and robotic welding products, we saw a continuation of significant year over year sales growth.

If you recall, last September 2003 we began seeing a significant escalation in business.

Therefore, this level of growth is despite a more challenging year over year comparison in the third quarter compared with the first two quarters of this year.

In our consumable product lines in the United States we have continued to stabilize supply and, as a result, we have eliminated the product allocation process we established with our customer during the first quarter of this year.

We continue, however, to experience significant cost increases for our materials, particularly steel, chemicals and transportation, and with that, we have continued to rollout product price increases in an effort to recoup these costs.

Specifically in this third quarter we experienced a higher escalation in steel and other commodity prices, both in our consumable and machine product lines.

Our sales price increases have offset actual dollar increases in cost, however, these cost increases have been detrimental to our margins, especially in the North American markets.

On balance, our operating profits increase with volume increases.

But as a result of material cost challenges are not in line with the traditional expectations for the ratios in operating profits as a percentage of sales.

Vince will cover this in more detail during his financial review.

We are continuing with key strategic capital programs and improving our capacity and cost reductions throughout our North American operations.

In November we will begin operating our new manufacturing facility in Mexico.

This manufacturing facility will be producing higher labor content products with the principal focus in supporting North American product demand.

We expect to begin seeing a significant ramp up of production beginning in the first quarter of 2005.

Since we're on the topic of Latin America, let me move on to that region.

Lincoln Electric Latin America had a very positive third quarter with sales growing more than 50% and profitability more than doubling.

Although the magnitude of these increases were helped somewhat by a relatively weak third quarter in 2003, demand throughout the region continues to strengthen notably.

The external business conditions are much improved in most areas and we continue to expand our market share in this important region.

Oil and gas related investments is helping drive demand for our products in Brazil, Mexico and Venezuela.

Strong commodity prices are supporting mining investments throughout the Andean region in South America and the steady growth in the U.S. economy has helped strengthen our sales to the Mexican manufacturing market.

But the relatively peaceful settlement of the August Presidential Referendum in Venezuela, along with the relatively stable political and macroeconomic conditions throughout the region, we are hopeful that we are beginning to see a sustained recovery in the domestic demand throughout the region as well.

During the quarter we made good progress increasing our capacity to meet the growing demand throughout this region.

For example, in Brazil we finished the installation and successfully ramped up production of additional electrode capacity.

In Venezuela we added additional production shifts and in Mexico`, as I mentioned, we made significant progress on the construction of our third manufacturing facility, which will help serve both the growing Mexican and U.S. markets. so during the quarter our Latin American companies did a good job in controlling costs, while managing average selling price in order to preserve gross margins.

We are optimistic about the market position we are building in Latin America, along with the evolution of the markets themselves.

We are moving forward very positively in the region, but we are also careful, knowing the region remains very vulnerable to external shocks.

Over in Europe the Eurozone manufacturing growth, which has been heavily dependent upon growth in exports to the U.S. and other economies, slowed to its lowest level in the last seven months according to the purchasing manager survey.

But our sales volume was strong throughout with sales increasing over 30% in the quarter.

Product mix was about equally split between consumables and equipment.

Unfortunately, there is no market on earth that is immune from the increases in raw materials, namely steel, and Europe is no different.

Reserve margins and pass through raw material cost increases we have implemented price increases in September.

Strong sales in the U.S. -- excuse me, the UK helped us achieve a good September following the anticipated European holiday slowdown period in august.

Eastern Europe continues to be a strong performer and pricing and volume increases generated sales results 30% over last year's quarter.

The area continues to be strong with most end user segments continuing to experience an overall 4 to 6% growth rate.

The general outlook for fourth quarter revenue and margins continues to be in line with third quarter levels.

While higher petroleum prices present some challenges, they bode well for the pipeline and pipe mill customers who are focusing on filling demand for increased infrastructure as refineries, contractors and pipeline owners seek to capitalize on higher prices.

LNG tank producers are also experiencing higher activity levels as the demand in all regions of the energy sector continues to be strong.

This is true not only in Europe, but in all major markets we serve.

Automotive and transportation sectors continue to be strong as well as with the fourth quarter trend in line with third quarter results.

Pricing levels for the fourth quarter are expected to remain in place or slightly higher over the period.

Consumable price increases were announced and are effective for October the 15th.

One concern in Europe for the upcoming quarter is the result of slowing consumable orders from our distributor channel.

Many distributors increased their inventory levels over the past two quarters in order to avoid price increases and to combat decreased supply trends.

These distributors may be relieving these inventories over the last quarter, which could point to reduced demand levels for some of our key consumable products during the fourth quarter.

Equipment demand is projected to remain steady in the third quarter levels throughout the fourth quarter.

Turning to Asia Pacific.

As previously announced, Tom Slohn has been named to succeed Mike Gillespie in January 2005 as president of Lincoln Electric Asia Pacific and Bill will be responsible for the sales, marketing and manufacturing operations in that market region, which include Australia, Greater China, India, Southeast Asia, Japan and Korea.

Tom has served as vice president of sales and marketing for Asia since 1999.

He has racked up an impressive track record over his 20 years with Lincoln, holding a number of field sales and sales management positions.

Tom's vast sales experience and solid customer relationships in Asia have contributed to our growing position in that region.

As we have said before, we have a strong succession planning process, and Tom is proof of that, and I know he will do a great job as we expand our position and share in that important and growing region.

And Asia Pacific did grow in the quarter.

Sales in the region kept pace with the upswing throughout all regions.

Sales were up 100% in the quarter compared to last year's quarter and increased approximately 60% year to date.

Year over year comparisons are rated by the recently completed acquisition of the consumable businesses in China.

One important barometer of the economic environment in the region is a meeting held with our major Asian Pacific distributors.

That meeting occurs biannually and was held late September in Thailand.

The spirit and the mood of the meeting was very upbeat and was well attended with distributors from every major market country in Asia represented.

This event is also a selling event with promotion of specific products.

And I'm happy to report that we booked over $4 million U.S. and growing most of the new machines produced for our Lincoln Australia plant designed specifically for the Asia market.

In Australia ourself -- itself, our market share position continues to improve as we develop Lincoln Australia as a center of excellence for manufacturing of machines and consumables for both domestic and export markets.

We mentioned on our last call that the Lincoln board approved a major reinvestment plan for Lincoln Australia and that work has begun and is on schedule.

China.

We have talked on previous calls about the enormous growth that China has experienced.

For us, that growth continues, especially in the pipeline sector, which remains strong.

The development and introduction of improved specialty pipeliner products for pipelines is beginning to capture important market share.

We have secured initial consumable business for the 4,000km China to Kazakhstan pipeline project and expect this segment to continue to be strong through 2005 and beyond.

The pipeline and offshore sectors are very active in other parts of Asia as well and in order to support and capitalize on this, we have recently held pipeline and welding productivity seminars in India, Singapore, Thailand, Malaysia, Brunei and Indonesia.

Flux-cored wire manufacturing capacity in our Baoshan, China factory will be expanded by more than 25% before year-end.

A new consumable cored wire has also been well received in both China and domestic in export markets around the world, with increasing sales into Asia, Australia, Latin America and growing interest in Europe.

We have also introduced a new high alloy wire with significant opportunities in the offshore market sector.

The project has recently been won with this wire in Latin America with several bids and trials taking place in Asia.

In November we will be participating in the Beijing Essen Welding Show with our JV partner, Kuang Tai, and we look forward to this continuing to build momentum for our products in this most important market.

It will be the largest display and will include a full range of products representing Lincoln worldwide, from the basic mild steel electrodes being manufactured at our majority-owned Rehutai facility to our latest technology, NexWeld (ph) products from the United States, inverters from our operations in Italy, engine drive welders from Australia, robotic welding cells with our partner Fantic, MIG wire and other consumables from our joint venture Kuang Tai.

And our mobile demonstration truck that we are using in China to take our products and demos out to the customer in the field will also be on display at the show.

We are nearing the opening of our R&D center in China.

This center will be a state of the art housed at a new multistory building located on the site of our Baoshan complex, which includes consumable manufacturing facilities and the welding equipment plant scheduled to be completed this year.

The building will also house demonstration, training and application center as well as our customer showroom.

This will be one of, if not the most, advanced facility of its kind in China.

Turning lastly to RAM, the market region consisting of Russia, Africa and the Middle East, it continues to show exceptional results in the quarter.

In South Africa the long-term business outlook is positive, as the rand remains strong to the U.S. dollar.

Product sales in that region were up over 30% in the quarter and are up over 20% year to date.

We are enjoying the wire and flux business in a Nigerian pipe mill and have received orders for $1.75 million U.S. for wire and flux to be delivered through the first quarter of next year.

We continue to ramp up our participation in this market and in September exhibited at the Electra Mining Show, an important industry show focused on the large South African mining industry.

Our sales with Russia continue to post strong business gains.

Sales year to date are running more than 40% over last year and were up 100% in the fourth - or in this year's third quarter.

Our Middle Eastern sales are up over 40% year to date and over 15% in the quarter.

We are also in the process of expanding our sales presence in all areas of the RAM region to ensure our market share growth continues,.

That's a quick overview of the past quarter and a look forward for the regions.

Let me add one other item.

Ford Motor Company recently granted our (inaudible) consumable plan Q1 acceptance, the company's highly rated quality certification.

The Ford Q1 recognizes suppliers that have demonstrated manufacturing excellence, superior quality and continuous improvements in their operation.

Lincoln Electric is the first and only manufacturer in the welding industry to earn this distinction.

Our use of Six Sigma in the design and manufacturing of our quality welding consumable products clearly differentiates Lincoln as best in class.

The Q1 approval and our ISO 14001 certification highlights our commitment to be the supplier of choice in the automotive sector.

Vince Petrella will now cover the details of the financial quarter.

Vince?

Thank you, John.

As noted in our release and in the previous comments by John, we continue to have significantly higher quarter versus prior year quarter sales in our global operations.

Consolidated sales were up 34%, with U.S. sales increasing 29% and sales reported outside of the United States up over 40%.

Excluding foreign currency effects, non-U.S. sales increased 36%.

Pricing had an important impact on sales for the quarter, contributing 11% of the increase in sales dollars year over year.

Volume increases were approximately 20%, including 5% related to acquisitions, as well as the effect of strong hurricane related demand for welder generators.

Therefore, third quarter year over year based business sales volume comparisons were slightly lower than the first half of 2004 comparisons.

Based on good volume levels and higher pricing, we expect year over year sales comparisons to be favorable for the remainder of 2004.

However, the nine-month year over year increases will be very difficult to repeat.

Overall, our expanding international presence and related sales growth, coupled with continuing domestic market strength, make Lincoln the clear global leader in the welding industry.

Now looking at sales by customer location rather than by our selling units location.

U.S. customers were up over 25%.

Europe increased over 30%.

Russia, Africa and the Middle East customers were up over 20%.

Latin America was up approximately 40% and Asia increased over 100%.

The Asian increase, again, was aided by the newly acquired Chinese businesses, which contributed more than half of this improvement.

In local currencies, sales in Europe were up approximately 17%.

On a product line basis, both machines and consumables saw strong rates of growth with consumables increasing almost 50% and machines increasing approximately 20%.

Sales by product line approximated 59% for consumables and 44% for equipment.

Prior year same quarter product line sales were 54% consumables and 46% machines.

The percent of gross profit in the quarter was down slightly versus the prior year at 26.9% of sales compared with 27.2%, a .3-tenths of 1% decrease.

U.S. margins declined approximately 2%, whereas non-U.S. margins increased 1.5%.

The flattening of overall gross margin percentages and the decline of U.S. margins were a result of much higher raw material costs.

Some of these cost increases were offset by much higher volume levels and higher pricing, as well as better overhead absorption.

Although rising raw material costs were largely offset by price increases, this factor led to the slight compression in gross margins, particularly in the U.S. market.

We expect margins to increase slightly in the fourth quarter as price increases more fully offset the gross margin pressure caused by continued raw material cost increases.

Future margins will be largely dependent on raw material price levels and our ability to pass on these rising costs.

We hope to see some continuing softening of key raw material pricing in the future but believe that the continuing strong demand for these materials and the consolidation in the steel industry could create longer term pricing issues.

First half gross profit was 28.2% of sales compared to 26.9% in the prior year.

Year-over-year improvements were attributable to volume gains and better overhead absorption.

SG&A expense in the quarter of $61.4 million was 17.8% of sales compared to $51.9 million or 20.2% of sales in the third quarter of 2003.

Higher bonus provisions and the impact of foreign exchange translations due to the weakened U.S. dollar were primary factors driving the U.S. dollar increase.

Bonus provisions in the third quarter were approximately $3.0 million higher than the prior year same quarter.

The increase in bonus is attributable to higher operating profits and better performance against budget targets by our worldwide unit.

Approximately $2.0 million of the increase in SG&A was caused by foreign currency translations.

SG&A expense for the nine month period was $190.9 million compared with $154.4 million in 2003.

The primary reasons for the increase were higher bonus provisions, stock compensation costs and foreign currency translations.

As previously disclosed in the Company's 8-K filings data October 18, 2004, the Company expects to report fourth quarter incremental charges approximating $3.0 million pretax and $1.8 million after tax related to the accruals of retirement benefits for the former chairman of the Company.

Third quarter operating profit was 9.1% of sales compared with 7.0% in the prior year.

An increase of 2.1% versus the third quarter of 2003.

Again, this increase was primarily the result of greater operating leverage provided by much higher sales levels.

Nine month operating profit was 8.8% of sales compared with 6.7% in the prior year again an increase of 2.1%.

The prior year did include pretax rationalization charges of $1.7 million pretax.

The income tax provision for the quarter reflected an effective tax rate of 29.2% bringing the year-to-date rate to 27%.

The prior year's quarterly effective tax rate was 21.6%.

This higher effective tax rate primarily results from the Company's higher forecasted earnings for fiscal 2004.

Depending on the level of full year earnings as well as estimated tax deductions, we expect our effective tax rate to approximate the year-to-date rate of 27% in the fourth quarter.

Now to review the balance sheet.

Working capital needs grew during the quarter in comparison to the prior year.

However, working capital turnover efficiency continues to improve with day sales and accounts receivables and average operating working capital to sales ratios has fallen.

The Company's operating cash flow of $53.7 million has performed well year-over-year despite increases in accounts receivables and inventories to service the much higher sales levels.

In addition, significantly higher material costs and planned increases in raw material volumes have driven up inventory values.

Pension contributions in the quarter were $10 million and $30 million year-to-date the same as 2003.

The Company invested approximately $18 million in capital expenditures in the quarter excluding acquisitions bringing our total capital expenditures for the nine months to $38.3 million, an increase of $14 million over 2003.

Our 2004 capital expending plan continues to focus on capacity expansion to meet the higher demand levels in our global operations as well as improvements in operating efficiencies.

In addition, we purchased $1.5 million of common shares through our repurchase program in the third quarter.

As previously announced, the Company spent an additional $6.4 million during the quarter on our investments in China.

Looking to the future, we will continue to experience higher volume levels in our global operations through the fourth quarter of this year.

Fourth quarter 2003 marked the beginning of the upturn in the welding industry volumes.

Therefore, year-over-year sales comparisons achieved during the first nine months of 2004 will moderate in the fourth quarter as year-over-year comparisons become more challenging.

On the profitability side, we will continue to experience year-over-year operating margin improvements as our leverage achieved at the higher expected volume levels progresses through the fourth quarter.

Raw material prices will continue to represent the critical factors in the determination of future margin levels.

A 62% increase in earnings per share is certainly very encouraging.

We're optimistic that the Company will continue to take advantage of the recovering U.S. and world economy during the remainder of this upturn.

At this point, I would like to open the call for any questions you may have.

Kelly?

OK, thank you and at this time if you do have a question, please press the star one on your touch-tone phone and you will be prompted to record your name.

Again, please press star one on our touch-tone phone.

One moment please.

The first question comes from Walt Liptak.

Sir your line is open.

Hi, thank you.

Congratulations on a nice revenue quarter and good leverage and I guess my first question is on SG&A you had real nice leverage here in the quarter.

Do you have a target as a percentage of sales what that would go to in '04 for the full year and maybe for '05?

Well obviously that depends on what our volume levels are Walt.

We certainly - we've had as a target somewhere around 18%.

We've really in this particular quarter did feed that particular target so we're pretty happy with the leverage that we were able to achieve in this quarter so I would expect something around that same range going into next year.

OK great and the operating leverage during the quarter was about 15%.

Is that something that we would expect in the fourth quarter?

Yeah, I don't think it should be any different than what we've had experienced in the third quarter.

OK and looking at the gross margin and the drop there because of North American could you - you've kind of gone over this already, but could you explain again why you know if you're able to pay off higher steel costs and other raw material costs what percentage are you capturing in the price increases and is it just a lag affect where we see gross margins move back up?

I think you hit it right Walt.

I mean we've said all along that the steel pricing both on the costs and on the selling side dynamics are really timing type issues and we cannot adjust pricing on the fly, but our costs can change on the fly.

I think we've communicated that we've tried to take a conservative approach towards this and not get out in front, but at the same time try to balance our costs increases with our selling price increases and you will see some movement positive and negative on that based on month to month timing type issues, but we have adjusted pricing again for the fourth quarter.

We are seeing some degree of stabilization but you know there's no commitment that the cost side will hold.

The consolidation that Vince talked about with steel presents an ongoing challenge and we're just going to have to keep our eyes on it and to us its been more important to pay a premium if you have supply than it has been than to just focus on trying to get the lowest costs supply.

OK good and the - we've heard that at least one competitor has been not as aggressive in raising prices in an attempt to gain market share.

Can you discuss kind of the competitive dynamics of these price increases?

Well every company has their own decision to make.

We think that our market share will remain strong and we're focused on improving our profitability, but we have taken a conservative posture as I said and I think that will be demonstrated in the months to come and I think we did a tremendous job of supplying our customers when supply was a criticality and I think they will reward us for that despite the fact that we may have been forced to pay a premium for the price of the steel and we need to pass that through to our customers.

OK thank you.

Again our next question comes from Seva Wang.

Sir your line is open.

Hi.

Good morning.

Just had a question.

In previous calls you had talked about over time, you were at a high rate of capacity utilization in your plans and which basically I think you guys were basically making as many products as possible and you cited that production was a little bit less efficient because of the newer employees and the kind of learning curves that's required.

Can you give us kind of a status of the workforce right now?

Well as I said in the consumable area we've been able to eliminate the allocation program that we had in place for a good part of this year and that's really driven by the fact that we have a fully staffed structure in place as far as our consumable organization is concerned.

Those people have gained some traction as they have become more experienced.

We've continued to upgrade the equipment to get additional capacity out of the same number of lines so we've got pretty good relief I would say in that area.

On the equipment side again we are I would say generally fully staffed.

We've hired well over 100 people in that area this year.

They've now been on board anywhere from three to six months.

They're much more experienced and we're seeing some excellent through put in that area so I think most of the challenges in both the equipment and the consumable side of the supply side are beyond us and quite frankly our sales organization now is looking forward to turning back on the jets to continue our market share gain activities.

Seva (ph) as far as the overtime costs levels on a year-over-year comparability basis we certainly have incremental costs and higher labor unit costs comparing ourselves to the prior year's third quarter, but on a sequential basis it has moderated slightly.

So we're not operating at the same levels of overtime than perhaps in the second quarter.

Can you give me an estimate of your (inaudible) organization right now?

I would say on the consumable side we're still in the very high level 90+% range but we were operating at you know over 100% (inaudible) number.

On the equipment side, we're fine.

I think we're probably in the 75-80% in those areas where we need overtime, we're running 24-hours a day, six days a week in some cases.

In others we've been able to get the through put increase with less man hours involved so again we're in good shape there and again I would highlight that late fourth quarter - a first quarter of next year we'll begin to offload some of the production needs here to our new facility in Mexico which will allow us to redeploy very skilled workers within our Cleveland operations and those areas of critical need here reduce our hiring and alleviate both the overtime and the training costs that are associated with bringing new people in.

OK.

One last question just on the increase in prices to offset the raw material costs.

The previous strategy if I have this right was that you were able to add a surcharge - shipping I believe which was kind of - so you can better match the costs and price increases.

Was is the strategy now?

Well we've just tried to cover all of the costs in one aggregate pricing strategy versus trying to compartmentalize it based on individual costs increases.

The shipping surcharge was effective but it was cumbersome for us and for our distributors to manage so we tried to stay away from that.

That being said, you know if oil and particularly diesel fuel continues to accelerate at the pace that it is, it's something that we'll have to keep our eyes on to see whether or not we need to change that strategy.

We will as we traditionally do change our pricing structure at the first quarter of next year to reflect an accrual view of what our currents costs are and if we can get some better visibility of things like transportation and particularly steel you know we can get to a stabilized position on that factor.

Right and steel - the percentage of costs to good.

Do you have a number in general on that?

On the consumable side, it's the majority of the costs.

By far steel is the preponderance of the cost driver on the consumable side.

On the machine it's obviously somewhat less.

Pricing does go into effect from time of shipment and we've continued that policy through the third and fourth quarter of this year.

OK, thank you.

Thank you and the next question comes from Holden Lewis.

Sir your line is open.

Thank you.

I wondered if we could go over the gross margin a little bit more and I guess it's because surprising that you had your gross margins drop sequentially from 32.2% to 26.9%.

I mean the steel price increases have been an issue through much of the year including Q2.

I know that you guys are on a lifecycle basis where the inventories and all that is on.

I guess it's just maybe me that you had such an enormous sequential drop given that the conditions surrounding steel and pricing aren't a lot different in Q3 than they were in Q2.

Is there anything else involved?

Well Holden, we're surprised as well, but the conditions are different.

Our third quarter raw material costs particularly for steel reflected the largest single cost increase during the course of the year so as some other products - steel products that might have been stabilizing a bit and moving up more gradually, our principal products that are use on the consumable side of the business shot up in the third quarter faster than any point in time during the course of the year, but we had a pretty dramatic increase in the quarter as compared to what the price increases were in the first and the second quarter for raw materials as well as our ability to raise those prices in the first and second quarter.

And does the rate at which it shot up in Q3 over Q2 does that reflect sort of the ending of any supply contracts?

I mean what's kind of behind that?

Does this really mean that rather before we were able to sort of get real pricing and you stay ahead of things.

Going forward now we can really expect to be behind things?

Well as far as supply contracts there aren't supply contracts in place for our material steel buys at this point in time ever since the market demand accelerated so dramatically the latter part of last year and certainly the first two three quarters of this year so most of our purchases I would say on a spot basis and there's not a great deal of visibility in the near term or even intermediate term where prices are going.

I would say to Holden that there's been speculation of some fairly significant increases in the first quarter of next year.

That's been publicized quite heavily by several of the major steel companies.

The most recently announced merger with L&M Ispat and ISG will I think will put some additional pressure on that.

That all being said, a lot of it's going to depend on what the global economic environment is.

If China continues to be strong and maybe even accelerates in the first quarter of next year and some people are speculating it will, there'll be continued pressure.

If things stabilize or soften a bit as they have say in the automotive sector there may be some weakening in that area.

I think it's very challenging for people to read about steel in general and make conclusions about our supply issues because rod is a much different steel commodity than sheets and coils and I think we know as much or more about it than anybody and we surely pay a lot of attention to it.

We have said all along we were going to be conservative in our posture and take a long-term view with our customers in terms of stabilization of supply and price.

OK.

And if you see the cost of your raw material really kind of flatten or stabilize in Q4 relative to Q3, I mean, can you envision as these timing increases kick back in, do you envision getting back to the Q2 level?

Holden, as I said in my comments I think we are going to have an increase to margins in the fourth quarter based on what the facts and circumstances suggest today and that is that we have raised our prices for the fourth quarter to recoup these significant increases in cost and tried to slightly increase our margins over what was experienced in the third quarter.

However it is - we see the same kind of spike in raw material costs which we hope won't occur in the fourth quarter, we could be faced with the same situation of lagging behind the increases in raw materials prices but where we stand today based on our pricing levels and what we are paying for raw material costs we should see some increases in margins.

Right.

I'm trying to get a sense of order of magnitude, primarily if it goes right - if things are the same in Q4 as they were in Q3 and you fit in price increases to recover what took place in Q3, shouldn't that get you a good ways back towards that Q2 margin or...

We should get increases in margins in the fourth quarter.

All right.

We'll leave it at that.

I'll jump back in the queue.

Thanks.

Thank you and the next question comes from Justin Boyzak (ph).

Sir, your line is open.

(audio gap) year to date number, I think the last we saw in the queue was 35-40?

Justin, we didn't hear the first part of your question, could you repeat it?

Sorry.

Yeah, I was just looking for an update on your cap ex guidance for the year.

Yeah, I think we're probably going to end up a little bit higher than what we anticipated when we started the year as well as even the first and second quarter.

We'll probably be $40-50 million this year as compared to somewhere south of $40 in the last couple of calls.

John Stropki, Jr.: And that's been driven by the absolute need and opportunity to invest in capacity increases that weren't on the agenda at the beginning of the year.

You just can't increase sales the 30 plus percent that we've had this year without adding some capacity.

We didn't have that kind of excess capacity sitting around any place in the world.

And the only other question I had was about growth rates.

You gave several statistics earlier on in the comments.

I wasn't sure if I heard it but what was the internal growth rate at the base business excluding acquisitions and foreign exchange for the quarter?

Well the volume increases were approximately 20 percent.

Big thanks.

Thank you and again, to remind the parties if they do have a question please press star 1 on their touch-tone phone.

Again, please press star 1 on your touch-tone phone.

I do have a question from Evan Stein (ph), your line is open.

Nice quarter.

Just maybe if you could elaborate a little bit more on China?

This is the first quarter where you have completed that acquisition.

It sounds like things are really booming.

You talked about opening up a state-of-the-art facility.

You talked about holding like seminars - well this is Asia in ten different places.

This pipe project is an enormous capital project.

Congratulations on that.

Maybe you can just give me a sense of what going on there because obviously, as everyone knows, the scope of what they are doing dwarfs anything that's going on in the rest of the industrialized world.

I'm just curious what you think now that you've gotten even bigger.

John Stropki, Jr.: First let me talk a little bit about the strategy.

Clearly, our strategy is to establish ourself as the number one global player in the Chinese marketplace.

And I think we are well on the way to that strategy with the things that we have already done and those things that we're clearly studying and plan to implement in the not to distant future.

There - the growth in China has been very significant, I think we've all read reports about some (inaudible) softening of the Chinese economy driven by the government demand to control inflation, get a little bit of control under that.

That being said they are still growing at an 8 or 9 percent rate versus maybe the 10 or 11 percent rate they were at the last several years.

Also understand that the base continues to get much bigger, so 8 percent of a much larger base and aggregate growth is a lot more than 10 percent of the much smaller base.

So there is still a lot of very positive opportunity for us there.

That being said, there are challenges and I think most people know that and I think now that we are the majority owner of a few of those businesses and are investing in another business where we will be the majority owner, we're having to staff those organizations with new and competent resources to be able to support that growth and so we're going to go through a few years of a learning curve there that will challenge the margin side of the business in comparison with the rest of the world but will continue to add aggregate profitability to the organization and again give us a ground floor level on what will become one of, if not the most significant markets for our kind of products for many, many years to come.

OK.

And then lastly, this topic is raised by the sell side once in a while, there's always rumors flying around, and that is acquisitions and the fear that the company might make a very large acquisition that some people might view as not as favorable as the company might.

Could you just talk about, I guess you're obviously the dominant player worldwide but your outlook on acquisitions, particularly given the fact that the mills are consolidating, there is a big merger in the steel service center industry today where Ryerson Tull is buying Integris, which was the distribution arm of BHP and ALCOA that had filed an IPO.

And it seems like in your supplier base it is getting more and more concentrated.

I am wondering if you feel that you need to get any larger or if there are other product lines you would like to get bigger so as your suppliers get more consolidated you are able to maintain an equal, powerful force in terms of being a buyer.

John Stropki, Jr.: Well let me answer first and then Vince can comment.

I would say two things in regard to the big acquisition concerned.

I think that our board and our management agree in total that we are not going down the path of investigating or considering any bet-the-farm type of acquisitions.

We have been very successful with the acquisitions that we have made.

We will continue to have a strategic focus on acquisitions and be sure that we make acquisitions that we can digest and contribute to the profitability of the company in an accretive form.

As it relates to the steel supply side, as challenging as that has been, I believe we have very good relationships with our steel suppliers.

We've had long term relationships with our steel suppliers and we will use our continued growth in size to leverage those relationships with a long term focus.

And the steel companies are enjoying a very good period but I know that they know that that will not last forever and they will appreciate those people who have been there, long term customers that have been consistent, strong customers and I think we will bode well by continuing to have that kind of philosophy and working relationships with those people.

OK.

Sounds good.

All right.

Nice quarter and continued success.

John Stropki, Jr.: Thank you.

Thank you.

Your next question comes from Holden Lewis.

Sir, your line is open.

Thanks again.

Just trying to get a better grasp on some of the moving parts on the revenue side.

I'm able to back some of this stuff out, I think, I just want to confirm.

What was the overall for ex contribution to your revenue growth?

Your aggregate revenue growth for the quarter?

Less than 3 percent.

Less than 3 percent.

OK.

And pricing you said again overall was about 11 percent?

Yes.

And that's an overall number?

Yes.

OK.

And acquisition.

That was what, 5 percent?

Yes.

Overall.

OK.

And then can you comment on the impact of the hurricane and selling of the generator welders?

John Stropki, Jr.: I would only comment that we were glad to be able to help so many disadvantaged people.

OK.

Can you put any more details into sort of the hard numbers of what kind of impact that may have had on your revenues or your profitability so that we kind of know what the non-recurring piece that affected the quarter was?

John Stropki, Jr.: I would say in the overall quarter it was immaterial.

As you know it was basically one product are.

We had to run our product, those lines 24 hours, 7 days a week for a few weeks leading up and for a few weeks leading up after that but not the kind of a thing that is going to have that kind of an impact - particularly when you look at the relative size of the company today and the overall global impact.

I think the thing we don't want to have lost in the conversation here is the tremendous success that we had in our international operations.

All regions of the company, all markets of the company have grown 25-30 percent plus simultaneously and we have said for a long time that we are out to establish a global footprint that will clearly differentiate ourselves from anybody else in the business and based on the records that we see of those other public companies in the welding business we are clearly separating from everybody else in the pack by a significant margin.

Sure, granted.

But you provided geographic breakouts that we sort of forecast on.

I was just kind of curious as to whether or not the impact on your U.S. revenues in particular was, you know, X hundreds of basis points in that region.

It's going to be less than - around 3 percent or so - less than 5 percent.

OK, so 3-400 basis points of growth in the quarter in the U.S. related to the hurricane?

Right.

OK.

And lastly can you just - what was the pension contribution to P&L in the quarter.

How much did that have an impact?

It was around $2 million, Holden.

Incrementally year-over-year?

Yes.

Lower cost in the third quarter versus the prior year.

All right.

Great.

Thank you.

Thank you and the next question comes from Walt Liptak.

Just have a quick question on '05.

Vince, do you have an idea of the tax rate you'll be using for '05?

It'll be right around the high 20s.

OK.

Thank you.

At this time I am showing no further questions so I will be turning the conference call back over to Mr. Vince Petrella.

I certainly thank you for joining us today and thank you again for you continued interest and support in the company.

We very much look forward to talking to you in February to talk about our fourth quarter and full year earnings.

Thank you, Kelly.

Thank you and that concludes today's conference.