Lincoln Electric Holdings Inc (LECO) 2005 Q3 法說會逐字稿

At this time I would like to welcome everyone to Lincoln Electric Holdings Incorporated's third quarter 2005 earnings call. (OPERATOR INSTRUCTIONS).

At this time I would like to turn the conference over to Vince Petrella, CFO of Lincoln Holdings Inc.

Good morning and thank you for joining us for the 2005 third quarter earnings call for Lincoln Electric Holdings Inc.

Our financial results for the quarter were released this morning prior to market open.

As always, the results are available on Lincoln's website and other financial news sites.

Contact our Investor Relations office if you need copies.

That number is 216-383-4893.

I want to mind you that certain statements made during this call and discussion 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.

On the call this morning is John Stropki, Lincoln's Chairman and Chief Executive Officer.

John will review the general numbers for the quarter and provide commentary on our operations.

Following John's comments, I will review the financials in some more detail.

Now let me turn the call over to John Stropki.

Good morning to all of you joining our conference call today.

We have completed an exceptional third quarter, with record net income and sales growth.

We are obviously very pleased with the quarter's performance, and thank our shareholders, our employees, and all of our customers for their continued support.

2005 third quarter net income increased 66% to a record 38.2 million or $0.90 per diluted share on record sales of 412 million, an increase of 20%.

This compares with 2004 same quarter net income of 23 million or $0.55 per diluted share on a net sales of 344 million.

The 2005 third quarter includes non-recurring items of 8.1 million, or $0.19 per diluted share relating to the resolution of prior year tax liabilities and the settlement of legal disputes.

Excluding the non-recurring items, net income was 30.1 million or $0.71 per diluted share.

We're very pleased with the higher sales levels, exceptional earnings growth, and significant cash flow generated in the quarter.

We experienced significant revenue growth in North America, on top of what was a very difficult comparison to prior year baseline.

North America consumable volumes trended favorably as we ended the third quarter, and equipment sales in the United States were particular strong in September where hurricane-related activity created demand for welder generators and also the need for additional equipment to support the reconstruction effort.

Sales were up over 20% to 1.18 billion in the nine-month period.

Net income for the nine months increased 42% to 92.5 million or $2.20 per diluted share, including non-recurring items of 9.9 million related to the favorable adjustments associated with changes in Ohio tax law, the resolution of prior year tax liabilities, and the settlement of legal disputes, partially offset by European rationalization charges of .9 million.

This compares with net income of 65 million in the same period last year, or $1.57 per diluted share.

Excluding non-recurring items, 2005 net income increased 29% to 83.5 million, and diluted earnings per share increased 26% to $1.98 compared to the prior year.

That is a high-level review of the quarter and nine-month results on a consolidated basis.

Taking a closer look at the regions, in the quarter demand improved across all of our operations in the United States.

Economically industrial activity represented in key measures, such industrial production and capacity utilization across the factories and the domestic market, provided a steady business environment despite the impact of the hurricanes in late August and September.

Capacity utilization, excluding high-tech, remained steady at approximately 79% over the past quarter, while certain industries continued to show healthier year-over-year growth, and while others are beginning to show some signs of slower sales.

For example, year-over-year heavy-duty truck manufacturing, mining and gas field machinery and the construction in agricultural sectors continues to grow faster than the overall industrial market.

However, we did seem month-to-month decline in rail car and shipbuilding sectors.

The hurricanes on the Gulf Coast had some positive impact on our sales revenue and contributed between 8 to $10 million in sales in the third quarter of 2005.

This increase is a combination of welder generators for power and reconstruction effort and lost consumable sales because of production shutdowns at key end-user operations.

In our primary industrial product channels we continue to see strong sales dollars.

Unit volumes improved over Q2; however, year-over-year pricing impact was lower in Q3, and the pricing impact on sales is expected to be significantly lower in the fourth quarter of 2005.

Looking forward, the North American steel rod market is again beginning to pass along increases.

And transportation surcharges are increasing on both inbound and outbound shipments.

As a result of these two factors, a general consumable price increase of approximately 2% is being implemented in North America, effective November 1, to help offset these cost increases.

We believe the industrial environment in the United States should provide a steady business environment through the next several quarters.

However, our growth rates will slow as our comparables become more and more challenging.

In Latin America third quarter 2005 was another positive quarter for Lincoln Electric's regions, which experienced total sales growth of 17% in the quarter versus last year's third quarter.

Particularly strong were sales in Mexico, Venezuela and Brazil, driven by stronger domestic demand and increased market penetration.

The Latin American region continues to benefit from increased global demand for commodities, which have driven pricing to historical highs.

Oil-related investments have greatly benefited in 2005, with an increased number of pipeline and platforms approved or executed.

Countries such as Mexico, Venezuela, Brazil, Argentina, Ecuador and Peru have seen largest positive impacts on the large-scale projects.

This has translated into larger retail businesses in our subsidiaries, as well as larger third-party exports to the region, mostly from North America.

The largest economies in this region continues to display strong GDP growth, as well as fiscal discipline.

The immediate effect has been the strengthening of domestic consumption, therefore leading to broad-based industry growth.

With the pricing of steel stabilizing throughout the region, we have been able to aggressively pursue our sales strategy and gain additional market share.

In the European market, third quarter results were solid with overall sales growth up over 8% year-on-year.

Consumable revenue sales dollars were slightly positive, and equipment sales delivered double-digit growth.

Strength in machine sales resulted from both successful new product introductions and sustained capital investment programs for energy-related projects throughout the regions and in the export markets.

Consumable sales reflected higher average selling prices, being mostly offset by lower year-on-year volumes.

The lower volumes in consumables partly relates to the dynamic created during last year's third quarter run-up in steel prices, which drove channels to build inventory during that quarter.

For the quarter the European region's profitability suffered modest decline.

The main drivers were negative production variances related to the lower than expected consumables volumes mentioned a moment ago, and with the higher selling expenses related to the Essen Welding Show held last month, a once every four-year event.

During the week long show in Essen, Germany the Company launched over a dozen new products for the European and export market.

This was a very successful event for the Company, Demonstrating both the solid commercial progress the region has made in the last four years, while also positioning Lincoln very well for the future progress ahead.

In the Middle East and Africa pipe mill and pipeline business continues to be robust, based on the increased demand and higher pricing for oil and gas commodities, which in turn is creating opportunities for sales of Lincoln consumables, along with engine driven welders for the energy sectors.

As an example, our new AC/DC power wave technology is being purchased by customers in demanding industries in this region to enhance productivity.

Other energy-related projects include liquefied natural gas storage tanks, LTG bottles and other pressure vessels that are driving demand for our consumable and equipment products.

General construction has also been active for steel buildings and plant infrastructures to support the oil and gas growth.

Construction-related equipment to support mining continues to drive welding activity in this region.

Finally, in Asia-Pacific.

In China strong industrial production continues to drive welding product growth.

China's third quarter GDP was reported at 9.4%.

Capital equipment order activity has increased significantly, with large orders being received in the energy-related and steel construction sectors.

We continue to build our human resource and manufacturing infrastructure in China, with the opening of a new sales branch in Jiang Guo in the Southeast part of China.

We're also continuing to expand our flex cord wire capacity at our Shanghai plant to meet the expanding customer demand in the local and export market.

In addition, we are in the final stages of bringing our welding machine operation online in Shanghai, and expect to start production of equipment in the first quarter of 2006.

We will continue to explore new investments within China in order to broaden the range of locally made equipment and consumables and expand our geographical coverage in this most important market.

In India, infrastructure projects in the oil and gas sectors continue to drive demand for Lincoln consumable and equipment projects, resulting in or sales increasing approximately 50% above last year's same quarter, with 2005 year-to-date sales up over 120% from last year.

Our Australian subsidiary posted very strong results in the quarter with demand being driven by the resource sector's demand for engine driven welders, particularly in the mining regions of Queensland and Western Australia.

Australia's domestic sales were up over 25% and export up 17% year-to-date.

Sales in the quarter were up over 23% than that of 2004.

Export demand in the Southeast Asia and the Middle East for our engine driven products produced in Australia also contributed to the positive sales results for that subsidiary.

Sales in the South Korea and Japan were up significantly in the quarter and year-to-date.

These orders reflect the fact that the LNG industry has experienced rapid growth worldwide, and LNG construction contractors in Japan and Korea have secured a number of these contracts.

Lincoln is working closely and successfully with them to secure current and future equipment and consumable orders.

To meet increased demand for electrodes, we're doubling our capacity of the Lincoln Indonesia facility, which has sales increased over 30% years to date.

That is the top-level review of the past quarter and activities at the subsidiaries.

So in summary, another solid quarter with strength in most key sectors and regions.

Now let me turn the call back over two Vince who will discuss the finances in more detail.

This third quarter of 2005 represents our seventh consecutive quarter of strong earnings growth.

The quarter's consolidated sales were up over 20%, with North American sales increasing 24%, and sales reported outside of North America up 12%.

Foreign currency effects aided reported sales by approximately 1%.

In addition, 8% of the Company's overall sales increase was attributable to our acquisition of J.W. Harris.

Pricing continue to have an important impact on sales for the quarter, contributing 7% of the increase in sales dollars year-over-year.

Volume increases were approximately 3%, excluding acquisitions.

Looking at purchases by customer location rather than our selling units location, North American customers were up approximately 23%.

As John noted in his comments, North American sales were aided by hurricane-related activity in September.

Russia, Africa, and the Middle East customer sales increased over 40%.

Latin American sales increased over 30%.

On a productline basis, machine sales experienced a very good growth rate, increasing approximately 20%.

Consumable sales were up 18%, or 6% without the acquisition of J.W. Harris.

Sales by productline were approximately 59% consumables, and 41% equipment, consistent with the prior year's same quarter.

The percent of gross profit in the quarter was 27% of sales, compared with 26.9% in the prior year.

North American gross margins improved 2.2 percentage points, while non North American gross margins declined 3.6%.

Gross profits have been positively affected by price increases implemented in 2004, offset by a shift in sales mix to traditionally lower margin geographies and operating units, including the effects of our recent acquisitions.

Year-to-date gross profit was 27.4% compared to 28.2% in the prior year.

The year-over-year decline is related to increased product liability defense costs and geographical sales mix, including the effects of recent acquisitions, as well as the timing of product price increases.

SG&A expense in the quarter of $71.5 million was 17.4% of sales, down 40 basis points from the prior year.

Higher bonus costs, pension costs, selling and incremental SG&A associated with newly acquired businesses were the primary factors driving the dollar increase.

In addition, recent acquisitions reduced SG&A as a percentage of sales.

SG&A expense for the nine-month period was $210 million compared to $191 million in 2004.

As a percentage of sales, SG&A dropped to 17.8% compared to 19.4% in that prior year's first nine months, a 1.6 percentage point decline.

The increase in dollar terms was due to higher selling costs, bonus costs, and the incremental SG&A associated with recent acquisitions.

Again, the decrease in SG&A as a percentage of sales was aided by the effects of recent acquisitions.

Third quarter operating income at 9.6% of sales was up 50 basis points versus the third quarter of 2004.

Operating income increased approximately 27% in the quarter.

This increase was primarily attributable to better leverage created by higher sales levels and good cost control.

Year-to-date operating profit was 9.5% of sales compared with 8.8% of sales in the prior year.

The current year includes $1.3 million of rationalization charges recorded reported in the first quarter.

Excluding rationalization charges, operating profit margins would have been 9.6% compared to 8.8% in the first nine months of 2004.

Other income included $1.4 million pretax, or $900,000 after-tax, $0.02 per share of gains related to the settlement of legal disputes.

The income tax provision for the quarter reflected an effective tax rate of 10.9%, bringing the year-to-date rate to 20.1%.

The quarter included a onetime tax benefit of $7.2 million related to the resolution of prior years' tax liability.

Without this benefit, the quarterly effective tax rate would have been 27.7%, and the year-to-date rate 27.9%.

The prior year's third quarter was 29.2%, and the year-to-date rate was 27%.

The higher year-to-date effective tax rate, without the onetime benefit, is primarily the result of higher income before income taxes.

Depending on the level of full year earnings, as well as estimated tax deductions, we expect our effective tax rate in 2005 to approximate the year-to-date rate of September 30, 2005.

Reviewing the balance sheet, working capital needs grew less in comparison to the prior year.

Working capital turnover efficiency remained constant, with average operating working capital to sales at 32.7% compared to 32.6% of sales at the prior year's end.

As a result, cash flow from operations increased to $38 million in the quarter, compared to $11 million in the prior year.

Year-to-date cash flow from operations totaled $99 million compared with $54 million in 2004.

The Company invested approximately $15 million in capital expenditures in the quarter compared with $18 million in the prior year's third quarter.

Year-to-date CapEx was $36 million compared to $38 million in 2004.

Our 2005 capital spending plan will continue to focus on capacity expansions, as well as improvements in the cost base.

We continue to expect to finish the year investing approximately $50 million in capital projects, further expanding this capacity and improving our manufacturing efficiencies.

Other uses of cash flows included the payment of $7.5 million of dividends to shareholders.

Also, the Company contributed $11.5 million to its U.S. pension plans in the third quarter, and $31.5 million year-to-date.

The weighted average deluded shares outstanding increased to 42,336,000 shares for the third quarter ended September 30, 2005, compared with 41,778,000 shares for the third quarter of 2004.

Shares outstanding at September 30, 2005 were 42,043,000 shares.

Our return on invested capital rose to approximately 18% at September 30, 2005 compared with 16.5% for the prior year's same period end.

The increase in returns is reflective of our higher operating income.

The Company closed the quarter with $59 million in net debt and the $106 million in cash.

This cash will continue to support our continuing acquisition program, pay dividends and reinvest in our operations.

Looking to the future, we expect to experience steady volume in the fourth quarter of 2005.

The effects of Hurricanes Katrina and Rita will continue to benefit sales into the fourth quarter of 2005.

The impact of pricing will begin to diminish in the fourth quarter of 2005 and into 2006, as a significant consumable price increases instituted in the middle of the 2004 fourth quarter become part of our sales comparisons going forward.

Overall business levels remain solid.

We're optimistic that strong earnings growth will continue through the end of 2005 and into 2006.

At this point I would like to open the call for any questions.

(OPERATOR INSTRUCTIONS). (technical difficulty) with Sage Asset Management.

Fritz von Carp (ph), Sage Asset Management.

Two questions.

Just first let me clarify something, I think you said, and I want to get it right.

You said the hurricane impact was positive 8 to $10 million net generator sales on the one hand and lost consumable sales on the other.

Did I get that right?

Yes, it is impossible to get an exact number.

That is our best guess of the overall results without doing an absolute detailed account by account analysis.

Now if we were to think about the hurricane and the results of the destruction and things that will have to be demolished and rebuilt, is that something that your products will be used in, and how do you see the size of that potential market?

Clearly they will be used.

As an example, there was significant damage, and I think it has got a lot of publicity into the oil rig and oil drilling platform side of the equation, as well as other infrastructure-related buildings and things like that.

And then welding will play a big role in that reconstruction effort.

I think it will go on for quite some time.

Again, it is very difficult to gauge the overall extension of that, but we do view it as being positive for the foreseeable future.

Have you started to see that, or is the reconstruction -- demolition/reconstruction is it not getting started to the point where you would start to see significant sales, or have you stated to see significant sales for those purposes?

We have seen some good orders going into that region.

First off, there is existing industrial sites, some of which had significant water damage, and those people are replacing their equipment.

And again, while that is positive, they have also been out of production for some period of time, and until they replace the equipment, can't get back into production.

You mean their welding equipment, when you say equipment.

Yes, it is more than just welding equipment.

Everybody who had fabrication sites had metalforming and joining type of equipment, as well as other industrial equipment within their facilities.

But there were some significant end-user accounts that do need to replace their equipment.

And they are in the process of doing that.

On the infrastructure side, particularly in the oil and gas sector, you have read I am sure about some of the damage to the refineries and the production facilities.

And those are being repaired and will be repaired I would say over the next 12 to 18 months.

Do you think that there is more demand -- as you look at the state of reconstruction and the amount of stuff you have sold for that purpose so are, is there more of this to come, do you think?

It sounds like this continues on for a while, do you think?

I think there will be some increase in steady demand.

I don't think you'll see the kind of spike that we saw in this quarter that really drove a huge initial shock of demand, some of which we still have on back quarter because the orders were larger than we were capable of filling out of the stock type of position.

But you'll see some trickle-down effect on the equipment side.

And then we should start to see some trickle up effect on the consumable side as these people replace their equipment and/or they start in the repair projects.

On a different topic, just large the diameter pipe, is that a market that you would sell stuff into for -- when they make a new pipeline and --?

It is a very large sector for us.

And it is one of which we have a very significant share of.

Holden Lewis of BB&T.

Can you all comment a little bit on the gross margin?

I was a little bit surprised to see that it actually eased back from the Q2 levels as it did, and frankly that year-over-year it was flattish given that last year I think that Q3 is when I really began to see some digging in from the raw material price increase.

I was a little bit surprised that there wasn't at least stable sequentially, but certainly some improvement year-over-year.

Could you comment as to what moving parts are in there?

From a sequential standpoint. we generally don't see third quarter gross margins equivalent to second quarter purely because of volume related issues.

As you know, our second quarter is traditionally the best quarter of the year from a volume standpoint, and so the third is traditionally slightly less than the second.

Secondly, our margins can be explained best by a geographical mix.

North America margins did increase pretty substantially because of the higher volume and capacity utilization in our North American business.

By the same token, we lost a similar amount of gross margin in our non U.S. business, particularly Europe, where consumable volumes were down compared with other parts of the world.

We had a very positive impact in North America, offset by non North American margins declining almost a equivalent amount.

I assume that this quarter obviously the seasonal volume impact probably wouldn't have applied because volumes were so strong,, which is why it is surprising to see sort of the ease back.

But can you also talk perhaps to the sustainability of what you saw regionally, both in North America?

And I guess maybe talk about what impact, if any, the hurricanes had on your mix or margins, but then whether the absorption issue non U.S. is something which is related to your restructuring and still going to continue, or what the sustainability of that is?

First of all let me just comment on Vince's point.

One of the things that he talked about in his prepared remarks is the product mix and the acquisition activities.

J.W.

Harris is a good example.

It has significant sales dollars.

The margins there are traditionally -- gross margins are traditionally lower than Lincoln's historic margins, but also their SG&A numbers are traditionally lower.

The combination delivers a good operating profit performance.

But if you throw those sales in on the gross margin line you're going to see some change.

The same applies, to even a greater extent, with some of the acquisition activities in China.

The gross margin levels in that market are significantly below a North American model.

And as we continue to expand there, while we get incremental margins, you're going to see some shift as far as the overall gross margin impact on the overall Company.

Those are fairly important factors to consider in that equation.

What about the likely sustainability of the under absorption that you saw in Europe?

Does it relate at all to your restructuring activities?

Does it appear that the consumable issue was more of a near term -- I guess it is because you talked about last year being a tough comp, but that doesn't necessarily relate to your production in Q3 being any more or less than it was in Q1 and Q3 of this year.

But it sounds like you're saying that your production dropped off in Q3.

Particularly on the consumable side.

The consumable side of Europe, we made a very conscious decision that we would prefer not to chase low end business, and to try and keep the price points up, and with that our volumes have suffered a bit versus giving up the aggregate margin of the higher end side of it.

Secondly, and again in the third quarter comparison, while you're right, the overall sales of the Company fared very favorably driven heavily by the success in North America.

Whereas in Europe because of the big run-up in steel prices last year in the third quarter, the demand for welding consumables was very, very large.

And we commented in the remarks about inventory build in Europe to try and offset what were price increases in the neighborhood of 20 to 30%.

So we are operating I would say at a much more stable level now than what we saw in the third quarter last year, which was just a very, very high level of utilization.

And I think now things have stabilized.

We will start to focus on gaining back or increasing shares in markets where we can be profitable with the sales.

And then last on the gross margin.

Because the engine driven welders I think are higher margin, did that meaningfully impact in sort of a nonsustainable way that North American margin improvement at all, or was it not that big a number?

I would say it is not that big of a number.

Again, if you look at that number that we talked about, the 8 to $10 million, that is a small percentage of the sales overall.

You are correct, those are nice margin businesses, but if we are correct, and again the jury is still out, we lost some consumable business because plants were shut down.

Those would also be high margin type consumable sales.

I would say that it had some -- a positive impact, but I would also say that we were forced to run an exorbitant amount of overtime to meet this big increase in demand, and that comes and as an expense too.

Do you think there were some inefficiencies in you were producing above capacity?

I wouldn't call them inefficiencies, I would say there were some additional costs that was associated with them.

Walt Liptak with KeyBanc Capital Markets.

Nice quarter.

I guess I would like to ask a couple of questions about the European volumes too.

You released your Q2 today, and it looked like the volumes that you reported were up sequentially.

Unit volumes up 2.9% versus down 5.2%.

That is -- I'm reading this correctly, right?

A lot of the increase is in price though, year-over-year on consumables.

Volumes are actually down.

Sales dollars are up, but we had significant price increases in the intervening period that aided our overall sales dollars.

I may be reading this wrong.

I'm seeing volumes -- unit volume, which would exclude price, in your Q showing up 2.9%.

And that is because our machine volumes are up double digits in Europe.

That leads to my question, which is in which sectors -- are you seeing a pick up in Europe?

Obviously with machines you're seeing a pick up.

What sectors is that going to -- is that something that is sustainable?

I would say, again, the European model is less driven by the sectors as it is the geographical shift of traditional businesses from Western Europe to Eastern Europe.

And it is our focus on positioning ourselves to capture business in Eastern Europe where we think the market will eventually gravitate to, where the market is growing significantly faster than in Western Europe, that give us the upside opportunities in that region.

And today we do not currently manufacture consumables in Eastern Europe, but we are positioning ourselves to be able to do so, which will lower our production costs, but also greatly lower the logistics costs of delivering the products to key customers in that area, because of the transportation issues that we face.

On the consumable side it is your competitiveness.

You need to lower your cost base.

That seems to be the case.

I wouldn't absolutely agree with that.

I think we've got a very competitive operation.

Primarily we are talking about our MIG wire operation in Italy.

We think the cost basis of that is very, very good.

That being said, we have competitors, particularly now some import competitors, that just have a lower margin appetite than we have been willing to accept.

So we've got to focus on what we can do.

And we think, again, geographical location will help dramatically of allowing us to offset their lower margin appetite, not necessarily our lesser efficiencies.

And then if I may with a second question.

You mentioned that you're going to have some positive impact from the reconstruction in the fourth quarter, and maybe in 2006.

Any guess as to what that might be -- if you were at 8 to 10 million, what it might be in the fourth?

That is a very difficult question to answer.

I would say that the third quarter is certainly the high watermark, and it ought to trend down from the 8 to 10 million that we think incrementally we achieved in the third quarter.

So it would be somewhat less than 8 million.

That make sense.

Thank you.

Gary McManus of JP Morgan.

I'm just looking at your 10-Q as well.

You have got European profit of -- I think it is 4.7 million.

Should I add back the 1.4 million in pretax rationalization charge to get a truer indication of the profitability in Europe?

Yes, that relates to Europe, so I would add that back.

You're doing about 8 or 9% margins in Europe.

You did about 12% in North America.

I remember a year ago you had that big inventory -- LIFO inventory impact.

So normally just seasonally the fourth quarter is a bit strong stronger than the third quarter, is that fair?

Generally the fourth quarter is weaker.

We've got easier comps because I assume you're not expecting the kind of inventory hit like you had in the fourth quarter a year ago?

No, that is not going to happen again.

We're doing about 12% margins in North America for two quarters in a row.

Is that number sustainable over the next few quarters?

Is there any reason why that number will change?

I think it is, at least barring any material changes in volumes, we ought to experience something similar going into the fourth and into the first quarter of next year.

You didn't do -- I don't think you did much in share repurchase in the third quarter.

I took a quick read, I could be wrong.

But I'm just wondering your thoughts on share repurchase right now.

We didn't.

But our thoughts are very consistent with what we have talked about in the past.

Our approach has been to take advantage of significant discounts in our share price to what we think the worth of the shares are.

Very opportunistic.

There are some quarters, for example last quarter, second quarter, we repurchased 12, $13 million of shares.

And we didn't see the significant discounts in the third quarter to take that opportunistic view.

We still have an active program with significant amounts of shares that continue to be utilized from a Board authorization standpoint.

But at this point we haven't exercised that option.

And again, as we have said a number of times, our primary focus would be to use the cash on our balance sheet to continue to grow the Company with strategic acquisitions, either with geographical expansion or new product expansion, i.e., J.W. Harris.

That is my last question.

What kind of acquisitions of the size of J.W.

Harris do you think is out there near term that would be available?

I don't think we see anything on that size available near term.

But we do have what we would consider to be a pretty good pipeline of things that we're looking at that we view as being very positive and strategic.

Unfortunately, they're not of that size, but that could change too.

We've got a good list of companies that we're interested in.

And we're pursuing those as they become available or as new opportunities exist.

Okay.

Thanks very much.

The other thing I would mention, aside from acquisitions, is we do have a relatively significant internal investment and development plan.

We plan on continuing to invest heavily in Asia-Pacific and in Latin America, and John mentioned Eastern Europe.

If you look at our CapEx, I think we have demonstrated particularly heavy spending on growing our businesses in the more developed and developing -- underdeveloped and developing parts of the world.

So that is going to continue for some time ahead.

But I see your CapEx is relatively flat year-over-year.

Yes, last year was a relatively heavy year, you might recollect.

(OPERATOR INSTRUCTIONS).

Fritz von Carp of Sage Asset Management.

Just help me out.

You said that you've gotten a lot of orders on back order, because you just couldn't put it all out that quickly.

Is there a number for your backlog that you have disclosed?

Is that a meaningful number for you guys?

It really isn't.

Our book to bill time frame is very short.

When John talks about a backlog, we're talking about something in the neighborhood of days, if not only a couple of weeks.

It is not something that we have talked about in the past.

We usually don't have much of a backlog, but it is worthwhile noting that we weren't able to satisfy completely the demand needs that came our way in the third quarter.

There will be some trickle along effect of a few days of billings that we weren't able to produce product for going into the fourth quarter.

Isolated to just a handful of products where the demand dramatically outstripped normal order levels or production capabilities.

We're catching up quite quickly in that area.

We are talking about millions of dollars and not tens of millions.

How long to you see that type of -- how long do you think you need to sell these machines before that bubble is all the way behind you?

I would say maybe another 60 days we should be -- unless there's some -- another big surge for some unknown reason, we're whittling into it quite rapidly.

Just as an example, in certain of the engine driven areas, just procuring the engines, which have long lead cycles presented a bit of the challenge for us, and that is being resolved now.

I would say that we will clear that quite effectively by the end of year.

Seaver Wang of Sidoti & Co.

Kind of a -- I just wanted a progress report on what you have done with J.W. Harris.

And then, if you could, regarding China, can you give us a dollar number for sales runrate there, and then what would be once the equipment facility is up and running, and for a first-year kind of expectations for that?

Let me talk first about J.W. Harris.

We think that the integration of J.W.

Harris is going exceedingly well.

We will be converting their IT platform to SAP very shortly.

That has gone very well.

The sales integration of J.W.

Harris into our Harris Calorific subsidiary where there is great synergies between the brazing and welding equipment, and the brazing and welding consumables of J.W.

Harris has gone very, very well.

So we are quite pleased with the way that whole transaction has worked for us.

And we continue to look for the kind of synergies that we identified in the acquisition.

As an example, they were sourcing between 8 and $10 million a year of welding consumables from traditional Lincoln competitors.

We have converted all of that business to one or more of the Lincoln facilities around world, which is a very positive type of result.

We're looking at how we will utilize their assets at a greater level than they were utilizing those assets, and that is going quite well.

So I would say overall very positive.

Are how the integration of the IT SAP system -- is that a significant cost of any kind or --?

No.

When we upgraded our SAP platform here last year, which was a fairly significant upgrade, we built in additional seat licenses into our portfolio in expectation of doing acquisitions or converting other Lincoln facilities around the world.

So it is not going to be a big expense cost, and there will be some savings by eliminating the maintenance contracts on the platform that they have in place.

What is happening with expectations for China, if there's any kind of sales dollar sales number you could throw out at us?

The Chinese businesses that we now control will probably give us in excess of $40 million of sales during 2005.

Our expectations will be that that business will grow at a continuing double-digit pace over the long term, as we have experienced with our joint venture activities in China and Taiwan.

So we expect a relatively rapid growth rate.

Now those sales numbers do not include what we experience from an export standpoint out of North America and other parts of the world.

And those sales numbers are in excess of $20 million, and again growing at a very rapid pace.

The equipment facility coming online -- does that add (multiple speakers)?

I would say in the first year of that it will be fairly modest.

Our intention there is to get a facility up and operational that allows us to participate in what is a very, very large domestic market.

And we're building the infrastructure to be able to do that, which includes building the distribution network to be able to access that market.

So the impact of that for the first half of next year I would say would be very modest.

The long-term impact could be very significant.

But we've got to execute well.

We are confident that we will.

But short-term the impact is going to be pretty modest.

What is the initial capacity, or is it going to be -- are you going to be add on very easily do that, or do you just want to kind of get it up and running?

We have the ability to expand that facility to meet the foreseeable needs of the marketplace for a three to five-year period.

So it is a large enough facility that we're not going to require a lot of capital from an infrastructure standpoint.

We would have to add people and add some production equipment, but we've got a facility that meets a big demand.

Is that through a joint ownership too, or is that solely Lincoln?

We own 85% of that machine business.

At this time you had no further questions.

Do you have any closing remarks?

Thank everyone for joining us, and your continuing interest in Lincoln Electric.

We look forward to having you join our call in early 2006 to review our fourth quarter and year-end results for 2005.

Thank you.

Thank you for participating in today's conference call.

You may now disconnect.