Lincoln Electric Holdings Inc (LECO) 2004 Q4 法說會逐字稿

Hello and welcome to the 2004 fourth quarter financial results for Lincoln Electrical Holdings, Inc.

Today's conference is being recorded for instant replay purposes. (OPERATOR INSTRUCTIONS).

At this time I like to turn the conference over to Mr. Vince Petrella and Mr. John Stropki.

Gentlemen, you may begin.

Good afternoon, and welcome to the Lincoln Electric Holdings' 2004 fourth quarter and full year earnings call.

We released our financial results this morning prior to the market's open.

If you don't have a copy, please contact our Investor Relations office or obtain a copy from our website.

The press release is also available through a number of financial sites.

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

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

Joining me on the call this afternoon is John Stropki, Chairman and Chief Executive Officer of Lincoln Electric Holdings.

John is going to cover the results for the quarter and the year, and provide some additional discussion on activities throughout our market regions.

Following John's commentary, I will go into more details on the financials.

Now let me turn the call over to John.

Good afternoon to all joining us today.

We have completed a record sales year for Lincoln Electric, a significant milestone as we continue on target with our successful growth strategy as we enter our 110th year as a global market leader in the arc welding industry.

The growth experienced in the fourth quarter and the year was driven by a number of factors, including significant volume increases, price appreciation, new acquisition, and foreign exchange gains.

Net income for the fourth quarter was 15.6 million, or diluted earnings per share of 37 cents, including non-recurring items of 4.9 million net of tax, compared to a 2003 fourth quarter net income of 14.1 million, or diluted earnings per share of 34 cents.

These numbers include non-recurring items associated with the strategic rationalization actions of 2.1 million net of tax that we took in Europe, and a retirement charge of 2.8 million net of tax associated with the Company's former CEO's retirement.

If you exclude these significant non-recurring items, net income was 20.5 million, or diluted earnings per share of 49 cents.

Results from the quarter also included significant LIFO cost of sales charges, which Vince will cover in his remarks.

Total sales for the quarter rose 30 plus percent to 351 million.

Net income for the year increased 48 percent to 80.6 million or $1.94 diluted earnings per share, which includes the non-recurring items.

Excluding the non-recurring items, net income was 85.5 million, or $2,06 diluted earnings per share.

Full year results also included LIFO cost of sales charges of approximately $21 million.

Sales for the year were the highest in the Company's history, increasing 28 percent to a record US$1.33 billion.

Our U.S. sales rose 22.6 percent to $193.3 million, and export sales grew 23.5 percent to 19.7 million.

Non U.S. sales were up by 41 percent, or 33 percent in local currencies.

All around good solid numbers.

And we're very pleased with the strong performance in both the year and the quarter throughout the Company.

Let me take a minute to review how our major subsidiaries performed.

First here in North America.

During this past fourth quarter demand continued to be strong across our operations in both the United States and Canada.

The industrial economy, as represented in key measures such as industrial production and capacity utilization across the factories in the United States and Canada, continued to be strong.

For example, although on a month-to-month basis trends are more erratic, year-over-year trends in key industries served, such as construction machinery, heavy-duty truck manufacturing, agricultural machinery, as well as other industrial equipment sectors continued to contribute to an attractive business environment.

In our primary distribution channels, industrial distribution and retail, we continue to see very strong results.

Each of our product groups, consumables, machines, and robotic welding products, continue to see strong demand year-over-year.

We continue to see investment patterns that would suggest that plant modernization and upgrading remains positive.

The positive growth is despite a more challenging year-over-year comparison in this fourth quarter compared with the previous 3 quarters.

As you recall in September of 2003, we began to see a significant escalation in our business following a long period of softness in the industrial markets served.

In our consumable product lines in the United States and Canada, supply has stabilized but we have continued to be challenged with the managing of significant increase in material cost, particularly steel, and the related price increases necessitated to protect our margins.

Vince will cover this again in more detail shortly.

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

For example, we began operating our new manufacturing facility in Mexico, which will be producing higher labor content product, with a principal focus on supporting North American product demands.

We expect to see a continuous ramp up of production beginning in the first quarter of 2005.

Looking forward we believe the industrial environment in the United States and Canada should provide for sustained levels of demand through the first half of 2005.

Although sales dollars should remain positive, year-over-year comparison will temper, including the impact of price increases, as business activities in the prior year's period were significantly improved from the activity in the most recent years.

In addition, our current view is for more stabilization in the material costs and the related impact on selling prices.

But this will be dependent on how the overall marketplace evolves as it relates to steel demand and pricing.

Turning to Latin America, results for the quarter in our Latin America region were very strong, reflecting growing momentum in the region's economy and solid advancements in the execution of our business strategy.

Sales growth for the quarter in the region topped 50 percent, while profitability more than doubled, showing the good operating leverage we're developing with our growing and modernized infrastructure in the region.

For the year our Latin American sales grew over 40 percent, with profitability again doubling that rate.

Strong commodity prices continue to provide the support for both the healthy fiscal position and growing infrastructure investments in the region.

Specifically, investments in the mining and oil and gas sectors remain robust, which is driving demand for our industrial and construction oriented products.

The increased growth rate and the relative macroeconomic stability in the region is resulting in an improved domestic consumption and a growing housing market which are driving demand for our base products.

The stronger U.S. economy and the weaker U.S. dollar are also positive factors combining to both increases in demand for the region's exporters and increases in the competitiveness of Lincoln's U.S. exports in the region.

We have also been able to benefit from the free trade agreements in the Latin American markets.

Lincoln's footprint has improved dramatically in the region over the last number of years, and with the great local coverage allows us to maximize benefits of the trade agreements all over the world.

We expect, and we see early evidence, that the momentum experienced throughout the year in this region will extend into 2005.

And while we're optimistic about the overall environment we remain very mindful of the region's vulnerability to external factors such as global commodity prices and interest rates, in addition to the internal factors such as political cycles and other structural weaknesses.

Turning to Europe, our second-largest region, we had a great fourth quarter and an excellent year with record sales and earnings.

We also believe that the sales growth that we experienced reflects market share gains in the area of 2 plus percent.

In the quarter net sales increased 30 percent and 13 percent in local currencies.

A strong December contributed greatly to these results, with some parts of the region exceeding expectations by over 20 percent.

Virtually all regions of Europe reported improved fourth quarter results compared to the third quarter.

For the year European sales grew by 25.7 percent in U.S. dollar terms and 14.3 percent in local currency, cumulating a strong year with market share gains, particularly in Eastern Europe regions.

We anticipate that the core business volumes will continue strong.

However, there is a strong possibility of future price pressures on most commodity items.

This is due to the fact that some commodity consumable producers who completely shut down during 2004 have begun producing again, now that steel is more available and market prices are more attractive.

The effect of the movement of the euro continues to be a concern with respect to the overall business level and long-term competitiveness of the European industries in the global marketplace.

Net exports from Europe manufacturers continue to be under pressure, if not declining during this -- due to the strong run of the euro over 2004.

The impact of this situation could most likely be felt in 2005 as industry in general absorbs the full brunt of last year's currency movements, particularly in countries like Germany and France.

Eastern Europe continues to be bright spot in the region, with government projections of 2005 industrial production growth in the hide single digits.

Heavy industry, transportation and shipbuilding segments all report strong incoming orders.

Many shipyards in Romania, Turkey and Croatia are booked for the next several years.

Many of our key customer operations in Eastern Europe continue to be fully booked for the first half.

And we have received several orders for steady release dates for the next several months from these key customers.

Pipeline and pipe mill activity is reported strong as well, to support this high level of energy sector activity, and energy contractors receive new bids for infrastructure growth.

We're bringing to the market a number of new products this year, including our Powertec line at our Bester plant in Poland, and other actions include the consolidation and improvement of our MIG wire operations, both in Cheva (ph) in Italy and Sheffield in England are on schedule.

We're also planning a new production facility in Turkey with our partners there.

In our announced restructuring plan, which expands flux capacity and transfers France equipment production to Poland and the U.S. is on schedule.

In the market comprised of Russia, Africa and the Middle East we experienced exceptional sales growth in all 3 regions.

Overall sales for the fourth quarter of 2004 were strong in spite of the Ramadan holidays.

RAM registered record sales for the year.

Construction activities relating to the oil and gas industry segments undoubtedly were the primary drivers.

However, the weaker U.S. dollar and improving political landscape contributed to the increased business activity in the region.

Looking forward to 2005 prevailing trends of 2004 should continue, setting expectations for another strong sales growth year.

In Asia Pacific, the region with the highest growth potential and greatest infrastructure needs, we posted excellent results again this year.

Lincoln Australia achieved its highest single quarter sales in the Company's history for the fourth quarter and for the full year.

Lincoln Australia sales increased 28 percent against prior year in U.S. dollars and 11.6 percent in local currency.

Adding to that achievement was the successful launch of new products, both machines and consumables.

The mining sector customers are growing strong, and with that expectations for the trend to continue in 2005.

We're starting 2005 with a record back order in Australia.

And our strategic reinvestment and factory upgrade plan is moving ahead on schedule with the addition of new MIG wire lines.

We will also be introducing a number of new machines in the months ahead.

And we're installing new production machinery in our machine factory, and have implanted lean manufacturing systems as we continue our Six Sigma-driven process improvement.

In China, the largest market in the region, the growth economy aided our total sales growth with 250 percent increase for the quarter and a 140 percent increase for the year.

Of this increase 24.1 million was attributed to the consolidation of our newly acquired businesses in China.

Lincoln's newest subsidiary, Shanghai Lincoln Electric Company is expected to start production of welding equipment in the second half of 2005.

Shanghai Lincoln Electric is also expanding its flux core wire production capacities in China to serve both the growing market for this product in China and the export markets around the world.

Our new stick electrode venture, Raytie (ph) in Inner Mongolia has achieved ISO 9001 certification.

This plant produces high-quality stick electrodes for the Chinese market and export markets throughout Asia.

In China government measures to slow down the economy are still in place.

But there are indications that the growth is starting to resume, and that project-based business in our industry is picking up steam again.

China remains a very important export market for our high-end machines from the United States to support the steel building, bridge and oil and gas industries.

The pipeline business in China remains an important part of our business.

And we recently won a significant order to supply products for the first stage of an oil pipeline scheduled to start construction in March.

And our engine drive projects have been selected by the pipeline engineering contractors for branch lines to be constructed off of the 4,000 km West to East pipeline project, which we have discussed in previous calls.

That is the Company overview.

Again, strong results throughout all regions.

And we will be happy to answer your questions during the Q&A period.

Next Vince Petrella will cover the details of the financials for the quarter and the year.

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

Non U.S. markets, including Latin America and Asia, continue to show very good year-over-year volume growth.

The quarter's consolidated sales were up 30 percent, with U.S. sales increasing 23 percent, and sales reported outside of the United States up over 40 percent.

Excluding foreign currency effects, non U.S. sales increased 33 percent.

In addition, 8 percent of the non U.S. sales increase was attributable to our acquisitions in China.

Pricing had an important impact on sales for the quarter, contributing 17 percent of the increase in sales dollars year-over-year.

Volume increases were approximately 10 percent, including 3 percent related to the acquisition.

Therefore fourth quarter year-over-year base business sales volume comparisons were lower than the third quarter and 9 month 2004 comparisons.

Based on current volume levels and higher pricing, we expect year-over-year sales comparisons to be favorable in 2005.

However, the 2004 year-over-year increases will moderate significantly in 2005.

Looking at the volume of purchases by customer location, rather than our selling unit location, U.S. customers were up by approximately 21 percent.

U.S. product sales were strong across all market channels.

Russia, Africa and the Middle East customers are up over 20 percent, Europe's sales up over 30 percent.

And in local currencies sales in Europe are up approximately 13 percent.

Latin American sales increased over 60 percent.

And Asia Pacific sales were up over 100 percent.

More than half of the Asian sales increase was related to the newly acquired businesses in China.

On a product line basis, both machines and consumables experienced good rates of growth, with both product lines increasing over 25 percent.

Sales by product line were approximately 57 percent consumables and 43 percent equipment.

The percent of gross profit in the quarter was lower versus the prior year at 24.3 percent of sales compared with 27.1 percent, a 2.8 percentage point decline.

The decline in gross margins was a result of significantly higher raw material costs and the related LIFO inventory accounting method used for U.S. inventories, as well as lower production volumes and the related overhead absorptions.

LIFO accounting reflects the most recently incurred costs in cost of goods sold.

In periods of rising cost, costs reported under LIFO are greater than costs reported under the FIFO method.

The fourth quarter included a LIFO evaluation charge to cost of sales of $10.6 million compared with a 2003 credit of $600,000.

Although higher raw material costs were largely offset by product price increases, this factor contributed to the compression in gross margins.

Full year 2004 gross profit margin margins of 27.2 percent compared with 27 percent for 2003 reflects much higher volume levels, better overhead assertion, increases in product pricing, offset by significantly higher raw material costs, primarily steel.

As raw material pricing moderate, and the LIFO evaluation charges decline, we expect first quarter 2005 margins to approximate those achieved for the full year 2004.

Of course, future gross margin levels will be dependent upon raw material pricing and our ability to pass on rising costs.

We do expect to see moderation in steel price increases in 2005.

Aside from raw material challenges, we continue to focus on programs to reduce our costs and increase efficiencies to mitigate the negative effects of the macroeconomic factors in our marketplace.

SG&A expense in the quarter of $65.8 million was 18.7 percent of sales, down 2.2 percentage points from the prior year.

Higher bonus costs, stock compensation charges, and the impact of foreign exchange translation due to the weakened U.S. dollar affected SG&A in the quarter.

SG&A included 4.5 million, 2.8 million after-tax, or 7 cents per share of compensation and retirement related costs related to our former Chairman and CEO.

For the year the 256 million SG&A was 19.2 percent of sales, down 1 percentage point from the prior year's 20.2 percent.

Again, higher bonus costs, stock compensation charges, and foreign currency translations negatively impacted year-over-year dollar comparisons.

Removing the incremental cost of the CEO retirement charge, SG&A as a percentage of sales would have been 18.9 percent of sales in 2004 compared with 20.2 percent in 2003.

Fourth quarter operating profit at 4.9 percent of sales was down 1.3 percentage points versus the fourth quarter of 2003.

This decline was primarily attributable to lower U.S. margins caused by higher commodity prices, primarily steel, and the related LIFO evaluation charges.

As previously mentioned, the quarter included incremental charges of 4.5 million related to the retirement of the Company's former CEO.

In addition, the Company recorded $2.4 million pretax, $2.1 million after-tax, or 5 cents per share of rationalization charges related to actions taken in Europe.

The European rationalization actions include the movement of machine manufacturing from France to other Lincoln facilities, and the consolidation of sales and distribution activities in Norway and Sweden.

Without the incremental CEO retirement charges and the European rationalization charges in the fourth quarter, operating profit margins would have been 6.9 percent of sales compared to 6.2 percent in 2003.

For the year, operating profit at 7.8 percent was up 1.2 percentage points compared to 2003.

The increase was attributable to much higher volume levels and the associated operating leverage achieved.

Excluding the incremental CEO retirement charges and the European rationalization charges previously noted, operating profit would have been made 8.3 percent of sales in 2004.

The income tax provision for the quarter reflected an effective tax rate of 17 percent compared to the prior year same quarter rate of 19.9 percent.

The annual effective tax rate was 25.2 percent compared with 21.2 percent in the prior year.

The lower effective tax rate in the quarter was the result of the cumulative adjustment required to arrive at the full year's rate.

Depending on the level of full year earnings, as well as estimated tax deductions, we expect our effective tax rate in 2005 to be in a range of 25 percent to 30 percent.

Now reviewing the balance sheet.

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

Significant increases in accounts receivable and inventories were necessary to service the much higher sales levels.

In addition, significantly higher raw material prices and planned increases in raw material volumes drove up inventory value.

However, working capital turnover efficiency remained relatively constant with an average operating working capital to sales ratio of 32.6 percent compared with 32.4 percent of sales at the prior year-end.

The Company invested approximately $18 million in capital expenditures in the quarter, bringing the total amount invested for the year to approximately $56 million excluding acquisitions, and increase of $21 million from 2003.

Acquisition costs totaled another $12 million.

For 2004 capital spending plans focused on capacity expansion to meet higher demand levels in our global operations, as well as improvements in the cost base.

We expect to invest approximately $50 million on capital projects in 2005, further expanding our capacity capabilities worldwide and improving manufacturing efficiencies.

In addition, the Company paid $27 million of dividends to shareholders.

All told, the Company reinvested in the business and returned to shareholders over $100 million.

In addition, the Company contributed another $30 million to its U.S. pension plans, consistent with 2003 contributions.

Still the Company closed the year with $24 million net debt.

The $143 million in cash will continue to be available to support our continuing acquisition program, pay dividends and reinvest in our operations.

Looking to the future, we will continue to experience good volume levels in our global operations in 2005, albeit at much more moderate levels compared to the increases experienced in 2004.

The Company experienced a dramatic upturn in welding industry volumes in 2004.

We expect year-over-year sales comparisons achieved during 2004 to moderate in 2005 as year-over-year comparisons become more challenging.

On the profitability side, we will experience year-over-year operating margin improvements as our leverage achieved at the higher expected volume levels and moderation in raw material pricing result in some stabilization of margin.

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

Our 54 percent increase in earnings per share for the year is certainly a good result.

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.

Mary, could you open the call?

(OPERATOR INSTRUCTIONS).

Zach Zinger.

This is Walt Liptak.

Congratulations on good revenue and good earnings for the year.

And, Vince, my question for you is on the gross margin in the quarter.

I think you've clarified the LIFO adjustment of the 10.6 million, which would get us to a gross margin that it looks like in the 27.5 percent range.

Could you quantify for us the raw material costs hit in the fourth quarter and maybe for the year?

The bulk of that LIFO inventory evaluation charge is related to raw materials.

We had raw material increases of our primary material being steel that were 80 percent plus during the course of the year.

I guess I don't understand.

The evaluation charge that you took of 10.6 million?

That incorporates the higher raw material costs, is that correct?

Yes, absolutely.

That is the bulk of the inflationary increase for the year.

And so that would be the cumulative amount throughout the entire year?

Actually the total amount for the year related to ending inventories was, I think John mentioned in his comments, more than 20 million, between 20 and 21 million.

Now that is only the charge related to inventories.

So under the LIFO method you take your most current costs through the P&L and you value your inventories on the balance sheet at older costs.

So the 20 million is only the inflationary costs related to what is in inventory.

The actual inflationary cost of raw materials for the whole year would be a multiple of that number.

Fine.

But as we look into the first quarter you mentioned 27 percent or so gross margin.

There is no reason why you shouldn't do in my view 27 percent or better gross margin throughout the course of the rest of year, especially with the price increases.

Yes, based on what our current cost structure is, based on what our most important raw material input being steel is being purchased for today, based on our current pricing levels, we should be at approximately our full year gross margin in the first quarter of '05.

Now obviously we had a lot of ebbs and flows during 2004 with accelerations in raw material prices and catching up with product pricing.

If things remain stable and we have moderation in commodity prices in particular, that -- our margins will approximate that level that we achieved in '04.

Now again, if there's another run-up in steel prices above current levels, we will have the same kind of issues in '05 that we had in '04, raising prices, having compressions in margin, fits and starts if you will, to try to catch up and say current with cost increases.

The way it looks today based on our cost structure and our price structure I would say around 27 percent is a reasonable estimate.

You have taken out -- have you taken out prices for machines or consumables in 2005 yet?

No, we have not.

Are you planning on raising prices again?

We are evaluating that now.

But again we had increases in both of those categories late last year versus the traditional model of an early 2004 increase.

We had numerous consumable increases and a second hit on the equipment.

So I would expect to see some movement of that in 2005, but we hope it doesn't end up being a similar situation.

Okay you are saying -- but you may have already taken your 2005 at the beginning of your price increase in 2004?

Right.

It's definitely -- we won't do anything early this year.

This would have been the cycle that we would have announced that already.

Holden Lewis of BB&T Capital Markets.

The fact that you did just gloss over it, I guess, would probably answer my question.

But is there any comment about the progress on J. W. Harris, the acquisition you have pending?

We're still going through the due diligence.

It is a little more challenging with a privately held company that was a public company.

Some of the issues that we need to address are a little slower than what we would like, but the process is ongoing.

At this point there's no definitive contract in place or price agreed to, and no closing date.

Okay.

So no further details to offer?

Yes.

In terms of the sort of the rate of volume growth next year, obviously I think you strip out 4X and just get the unit volumes in there, you are up about 6 percent or so in the quarter, if I am doing my math right.

Do you think that we're going to decelerate in terms of that rate of volume growth, or do you -- which was significantly below the prior quarters -- or do you think that we can sustain that or ride some of these foreign markets to a bit of an acceleration from that level?

I come up with about 7 percent.

So I think your number is good in terms of volume in the fourth quarter.

I would say that our volume levels will certainly be stable.

At this point in time, at least for the first quarter, I can say that we will be be in single digits and probably mid single-digits.

And there's a deceleration that will be slight for the first quarter.

I wouldn't go out any farther than that though.

Evan Stein of ELS.

I have a question on the gross margins.

And I guess a little reason the stock is getting hit today is people are a little bit disappointed that on such high revenue growth, and I know you had a LIFO charge, that we're pretty well along into the cycle.

And your margins for this year on a gross margin level are similar to last year, and actually well below the years of 2000, 2001, 2002.

Now I know the mix had something to do with it.

And as you invest in new areas and as you have more foreign revenue at the lower margin than the U.S.

But maybe you could speak -- I'm curious how management feels about this.

You said that margins will be moving higher next year, but when I'm looking back historically, and again I take it with a grain of salt that you're doing a lot investing and your mix of U.S. versus international has changed, but throughout the mid-90s and late '90s you were doing substantially higher margins than you did this year, by a factor of, we're talking, 3, 400 basis points.

And I understand your margins will be up higher next year, but I believe I had asked a question maybe 3 quarters ago, if you felt you could get back towards those levels.

You said, well, maybe not quite that high but may be close.

And so I guess what I'm asking is I think have done a great job building the Company.

But I think people are a little bit disappointed that you haven't been able to manage the profitability line.

And I'm aware of raw materials, but a 400 basis point gap at the peak of the cycle, or maybe you have another year or 2 left versus where you were in the past, it is a little bit disconcerting.

And I'm curious how management views that?

I think you covered some of the factors that we have talked about in previous calls.

However, when raw material pricing increases to the extent that it has this year, you appreciate the math that results in a compression in margins.

Even if you cover all of your raw material price increases and more, in percentage terms your margin, your gross margin, will decline.

Even though you're absolute dollar return is either stable or increasing, your ratios aren't going to look as favorable when you have dramatic commodity price increases that have to be covered by price increases.

Another factor that we have talked about, we talked about the mix, the global expansion.

But I remind you of the pension cost issue historically from the early 2000 era to today has had a 2 to 300 basis point impact on our financial results.

Now we're starting to see that come down in 2004.

And we hope it continues that direction as the markets have better returns, and we fund more to our pension plans.

But that has been a factor that has affected our margins as well.

What we look at at the end of the day is the bottom line and our return to our shareholders from an EPS and a gross to net income standpoint.

And so in looking at our year to have about a 28 percent increase in sales and a 48, 50 percent improvement to the bottom line is a more important percentage than a compression in margins costs caused by inflationary factors on the cost line.

Do you guys feel that you can get back towards -- if raw materials flatten out -- I don't really expect steel to be skyrocketing, maybe move up a little bit here, but I think it is pretty much peaked out.

Do you feel that doing a double-digit operating income is achievable?

You guys in the past have made that inference.

And I think some people are getting a little bit frustrated that something props up, whether it is pension or raw materials or something, that you have stated one goal and you have not quite yet been able to achieve it.

I frankly don't see why you shouldn't be able to do it as we move forward.

But I'm just curious of your viewpoint?

I would like to go back to your first question.

And I think, again, while we're somewhat frustrated with results of the fourth quarter because of the steel issue, I think if you look at other companies that have such a high content of steel in their finished products and the results that they achieved this year versus that that we achieved, our margins -- operating income improved during the year and in the third quarter where we didn't see this kind of dramatic impact.

The year-on-year results were moving along the trends that you discussed.

We had some very, very unusual circumstances.

And I agree with you that nobody feels will repeat; hopefully not in the foreseeable future.

And that allows us to manage the business for the long-term versus the short-term anomalies that we faced in the quarter.

And I think again to Vince's comment, we were able to pass through our cost increase because of the relationships that we have with customers because of the values that they see in our products.

But many other suppliers of steel based products could not do that.

We weren't able to capture the margin on top of those, but we're very pleased with our success in passing through the cost increases.

Okay.

Just the last question.

Could you tell us -- give me a sense so I can model this going forward.

What percent steel is of your total cost of goods sold, or how many tons, or like for instance if steel were to drop $50 a ton, what sort of impact that would have -- I don't know either on EPS or reduced cost, or some sort of metric so we can get a feel for how to model this going forward.

I don't think we're going to get into that for competitive reasons.

We haven't disclosed that in the past and I don't think I am going to start now.

It sounds like --.

I can tell you though that the majority of our cost for consumables is steel.

Godfrey Birckhead of SBK Brooks.

Yes, that is what I was going to ask, what of raw materials as a percentage of total sales.

I guess you don't want to reveal that.

Is that correct?

On the consumables side, it is a majority of the cost.

Can you tell me what the LIFO charge cost was in the fourth quarter please?

Isolating the fourth quarter, you have given that for the year.

I said in my comments 10.6 million.

10.6 million.

That is just in the fourth quarter.

Yes.

And you gave us your capital expenditure forecast for '05 at 50 million.

And what is the depreciation and amortization expected to be please?

Roughly 40 million.

And can you tell us what your pension costs last year versus '03?

For '04 our pension costs decreased approximately 6 million for the full year.

For the full year?

Yes.

And how much were they in '03?

They went from about 30 million to 24 million.

For the full year?

Full year, yes.

And the 6 million was just for the quarter?

The year.

For the quarter.

So they went down from 24 to 6 million?

They went down 6 million for the full year.

Oh, down 6.

All right I see.

Getting back to the gentlemen's question there about the margins and the operating leverage when you're operating a much higher rate of capacity.

When I first started talking to the Company, to Jay Elliott, we used to talk about getting the operating margin perhaps up to a 15 percent level at some point when business was -- is very good.

Is that achievable or --?

I think that would have to be a very long-term objective.

And I am not -- I wasn't -- I'm not familiar with your conversations with Jay, however, based on our global growth plan and footprint that will be difficult to achieve as we expand into international markets.

And as we expand, I would expect there to be more pressure on the downside than -- in the shorter term and intermediate term than on the upside.

That's because of the mix of the foreign business versus the domestic?

Yes.

Holden Lewis of BB&T Capital Markets.

A couple of things.

First I think you noted that your consumables mix was up -- or was about 57 percent of the total.

Over the course of this year I think and last quarter it was actually as much as, what, something like I think 59 percent.

I would have guessed that with a lot of the price increases coming in consumables and such, I just would guess that percentage would have continued to decline instead of fall?

Would continue to decline or to increase?

I'm sorry, increase.

Actually it is pretty consistent with the full year.

The full year is the same percentage as the quarter.

Right.

No, understood.

But that was 59 percent in Q3.

And the reason I would gather it was heading upwards was because of the price increases, which would be disproportionate on the consumables side.

Those pricing increases were only greater in this quarter than they were in Q3.

And that is why frankly I am a bit surprised that the consumables dropped in terms of overall percentage.

Well, for the full year it up in (indiscernible) percentage.

I understand that, but what I'm asking is, given that consumable have so much pricing, and given that pricing was so much greater in Q4 than Q3 in terms of the dollar impact, how did consumables which would have been the prime beneficiary of that pricing, how did the mix decline from Q3 to Q4?

Obviously, consumables year-over-year acceleration declined in the fourth quarter versus the first 3 quarters.

The machines took up the difference.

The quarter had a better year-over-year result for welding equipment and machines as compared to the full year versus consumables for the quarter in the full year.

So relatively speaking I think you are correct.

Also, the second and third quarters are generally the more heavy production related months within the U.S. economy in particular.

So you have factories running at higher level of production which consume a lot more of the consumables.

And there is really -- you don't see that kind of dynamic as much on the equipment, particularly with the retail sector with a lot of purchases around the holiday times in the retail sectors.

And then secondly, can you give a little bit more detail on what you're doing in Europe to rationalize?

Obviously you took the cost this quarter.

What are the potential benefits next year, are they meaningful in any way?

First let me describe what we're doing.

This is a process that has worked very well for us in North America.

But the French plant was one of the traditional Lincoln facilities.

It was built to service all of Europe with a very broad product line.

And as the product line has modernized we have not kept up in the capabilities to produce a very broad, more high technology driven line there in France.

And the volumes just aren't significant enough for that kind of product in that marketplace, particularly with the low-cost production facility that we have in Poland.

So we're shutting down the equipment manufacturing there, transferring it to other machine locations, which will improve the utilization of the remaining locations, also lower our costs for the -- that equipment into the marketplace there.

And then we are utilizing the space to transfer from a leased warehouse into an owned facility, and to upgrade and expand our production of welding flux, which is at -- to full capacity in that marketplace right now.

And I think that our goal is that we will see the results of that over the course of the next 3 years.

So you're actually, you are moving machinery to other plants just to raise that utilization.

But in the French plant you're currently capacity constrained and therefore you will be able to open that up and improve your overall production there as well?

On the consumables side.

On the consumables side, okay.

And then you said something about Norway and Sweden consolidating some distribution or something?

Right.

What we did there is we had our own sales organizations throughout the Scandinavian region.

And again there's a lot of territory to cover with not a great deal of good infrastructure to be able to do it.

And with the changes in the cost based on the Scandinavian countries in comparison, particularly to Eastern Europe.

That market has shrunk considerably for the last several years.

So we have a assigned in certain countries exclusive distribution, which will take over the majority of the sales.

And with that we have greatly reduced our SG&A side of the equation.

Basically a sales reorganization.

And do you expect that in the savings in '05, or what kind of benefit do we think we're going to get from this?

Is it meaningful of the numbers?

The timing is difficult to predict.

But we are estimating we will have a full payback of the cost between 2 and 3 years.

The actual shutdown won't be completed until the third quarter of this year.

So I wouldn't -- of '05 in France -- so I wouldn't put that in the mix for '05.

Okay.

And then just in terms of looking at your SG&A going forward, obviously you're adding machinery here and there.

That involves adding perhaps some people or what have you.

Is there any reason to think that given that you're investing in the business a bit here that the SG&A won't be leverageable as volumes continue to go up?

Is there going to be a bit of a bubble going through there at all, or no?

Clearly we will have leverage in SG&A.

It has been demonstrated by the percentage of sales that we achieved reductions in 2004.

And certainly there is a pretty significant part of SG&A that is fixed.

And the more we grow and the bigger our sales volumes become, the more leverage we will obviously have.

Okay.

And the investment is in lines and people, none of that is really going to have any impact on the SG&A?

You are always going to have -- as your revenue line grows, you have increased selling costs, and that is somewhat variable.

But largely from a G&A standpoint it is going to remain relatively fixed.

At this time, Mr. Petrella, I will turn the conference back over to you.

Thank you much for listening today.

And we're looking forward to another successful quarter and year in 2005.

And we look forward to speaking to you again in April.

This concludes today's conference.

And we thank you for your participation.