Lincoln Electric Holdings Inc (LECO) 2005 Q4 法說會逐字稿

Good morning.

My name is [Katie], and I will be your conference operator today.

At this time, I would like to welcome everyone to the Lincoln Electric Holdings, Inc. 2005 fourth quarter and year-end earnings conference call.

[OPERATOR INSTRUCTIONS]

Thank you.

Mr. Petrella, you may begin your conference.

Thank you, [Katie], and good morning, everyone.

Welcome to the Lincoln Electric Holdings' 2005 fourth quarter and full-year earnings call.

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

By now, you should have received copies.

If not, copies are available through Lincoln's website or by calling our Investor Relations office at 216-383-4893.

The announcement can be found on a number of financial news sites as well.

Before we get into any further discussion, let me 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.

Joining me on the call this morning is John Stropki, Chairman and Chief Executive Officer, who is going to cover the results for the quarter and year, and provide commentary on activities throughout our market regions.

Following John's remarks, I'll cover, in more detail, the financials for the quarter and the full year.

Now let me turn over the call to John.

Thank you, Vince, and thank all of you for joining us on the call and webcast this morning.

Lincoln has just completed a very positive quarter and a great 2005.

Record sales and record profit capped our 110th anniversary year.

To ensure our future growth, we continue to follow our strategy to further strengthen our global leadership position.

Our overall strategy of acquisitions, internal growth, developing and providing the best arc welding products in the industry, supported by superior service to our end-user and business partners, contributed to a very successful 2005 and provide a strong foundation for our continued growth and success in the years to come.

We're also very pleased that during the past 12 months, Lincoln has been recognized as an excellent investment choice by several major business publications such as the Wall Street Journal, Fortune Magazine, and FORBES, which listed us on the magazine's platinum 400 list honoring America's best companies.

Gaining this type of recognition is a direct result of the contributions and hard work of our employees, the support of our customers, and the continuing support of our shareholders.

During 2005, we were able to leverage healthy industrial economic conditions and good market opportunities into record fourth quarter and full-year results.

Let's look at the results.

Net income for the fourth quarter was up 90%, to 29.8 million or $0.70 per diluted share on record sales of 420 million, an increase of 20%.

Net income in the quarter included a net favorable tax benefit of 2.7 million, associated with the repatriation of forward earnings and resolution of prior-year tax liabilities.

These gains were offset by net charges of 2.1 million, related to European rationalization actions and the loss on the sale of a European business, [Sachet], which manufactures and resells an assortment of low-end non-value-added welding accessories such as goggles and gloves.

Sales in our major domestic markets were up with North American sales increasing 27% to 283 million.

US export sales rose 42% to 28 million.

Sales of our non-US subsidiaries were up 8.7% to 172 million, or 13% in local currencies.

Turning to the full-year, 2005 net income was up 52% to 122.3 million, or $2.90 per diluted share.

Net income included 11.7 million in net favorable tax benefits related to a change in the Ohio tax law, the resolution of prior year's tax liabilities, and the repatriation of foreign earnings, as well as a $900,000 gain related to the settlement of legal disputes. 2005 net income also reflects charges for the sale of the [Sachet] business and Europe rationalization charges mentioned earlier.

2005 sales exceeded $1.6 billion, a 20% increase and the highest sales lever in Lincoln's history with our North American operations producing 1.1 billion in sales, up 21% from 2004.

Export sales from the US were also up in the year, increasing 28% to over 98 million.

Sales outside North America increased 19% to 545 million in the year, and our non-consolidated sales from joint ventures were over 260 million, pushing our overall global sales to almost $1.9 billion.

Our record growth throughout the year was driven by volume, price, new product introduction, and acquisitions.

These results reflect our ability to capitalize on our global market, leadership position, and leverage increased sales into significant increases in profitability and cash flow.

Vince will provide the details later in the discussion.

Throughout the year, we continue to focus on product and geographical market expansion, cost control, working capital management, and the integration of new acquisitions.

Let's take a quick look at the regions.

In North America, as I mentioned, strong momentum translated into record sales and profit.

Strong economic fundamentals across most industry segments in the United States and Canada contributed to strong growth throughout our largest region.

We experienced sales improvement across all product lines -- consumables, automation, and machines -- and with the greater percentage of the growth from volume rather than price in the fourth quarter, a different scenario from the previous three quarters where price was a more significant contributor to sales increases.

As you will recall, during 2005, we added to our product portfolio by adding braising and soldering alloys with the acquisition of JW Harris Company.

The integration of JW Harris is progressing well, and the business is contributing positively to the overall results.

This business presents significant upside for global growth in the future.

Our North American profitability was also enhanced by stabilized material pricing and availability.

We feel that our profit ratios are now normalized, and with the focus on cost control, we have seen steady year-over-year improvements in cost.

Looking forward, demand levels appear steady, and we expect good market dynamics in the first quarter of 2006.

Second half comparisons, however, are going to be more challenging than the first half as Q3, Q4 2005 results were very positive.

We continue to focus our efforts on cost control through a number of programs and initiatives including Six Sigma, just-in-time lead manufacturing, manufacturing rationalization, and supply change management.

Turning to Europe, our European business experienced good growth in all sales regions except the Northern region.

Overall sales in Europe increased 9% to $305.8 million US.

We continue to grow our business and expand our footprint in Eastern Europe.

As part of our strategy to expand our capabilities and capacities in Eastern Europe, we have recently announced the relocation of our gas apparatus and cutting products manufacturing facility from Ireland to Poland.

The facility in Poland is under construction and should be completed and operational by mid-2006.

In addition, we are starting the construction of a new consumable plant in Poland for the manufacture of flux cored wire.

Both the gas apparatus and the new consumable plant are located in the same facility as our Bester -- same vicinity as our Bester manufacturing plant in Bielawa, Poland.

The consumable plant is expected to come on stream in the fourth quarter of this year, and this initiative should provide a major boost to our competitiveness throughout Europe for welding consumables in 2007 and beyond.

In Western Europe, we launched a new sales distributor initiative, which produced consistently positive responses from the market and drove good distributor sales growth in Italy, Spain, and Germany.

We are also seeing an increase in our automated welding sales, which were up over 40% in the year, and our specialty pipe welding business, Uhrhan and Schwill, also had an excellent year with sales also up over 40% in local currency and a good backlog going into 2006.

In Latin America, the region continued to be very positive throughout 2005.

Strong market dynamics, including industrial output, remained robust.

During the fourth quarter, we made key strategic investments in Colombia and Brazil, and we continue with our internal expansion programs in Brazil and Torreon, Mexico.

Sales at Lincoln Mexicana increased 33%, driven by higher electrode volumes, strong equipment sales to the energy sector, including off-shore platforms, LNG, and pipelines.

In Venezuela, results were very strong in the quarter, rounding out a solid year for our business.

Argentina had sales growth of over 200% during 2005.

In the rest of South America, we experienced good growth with Chile and Peru, the two countries where we experienced the most sales with combined growth rates of over 35%.

So, good growth throughout the region, with a general optimistic view for the first half of 2006.

However, the specter of ten national political elections in the region during 2006 could have some impact and present some challenges moving forward.

Turning to Russia, Africa, and the Middle East -- in our sub-Sahara market region, we continued to experience strong growth.

Precious metals are all at near-record prices and continue to create robust economy in South Africa.

In the Middle East and North Africa, with the price of oil in the high $60 a barrel, the entire region remains highly active.

Key customers who are in the oil and gas-related sectors are projected to be busy for the next two to three years.

To increase our presence and to support this region, we are in the process of opening a new office and training center in Dubai.

Lastly, Asia-Pacific -- in Asia, we finished the year with strong sales growth and good progress with our Asian initiatives.

Sales for the region were up 27%, with Australia posting the strongest sales growth.

As we have discussed on previous calls, China is the largest and fastest growing market for arc-welding products in the world.

This market holds great potential and continues to be an area of strong management focus as we work to build a strong and profitable footprint in the region.

We continue to progress along key initiatives, including the development of our sales network and ramping up of production capacities for both equipment and consumables, beginning equipment manufacturing just last month.

Our headquarter building in China is completed, and we'll have the dedication of that facility in late-March.

This unique campus will hold our Asia headquarters, sales and marketing, services, and application engineering functions.

China does lead Asia-Pacific in terms of growth and growth potential, but other parts of Asia-Pacific also continued to contribute to our sales growth in 2005.

As an example, in Japan, the world's third largest welding market, we are making headway and growing sales.

Japan and Korea contractors represent over 80% of the LNG construction worldwide, and that is an area where we are building a presence in the market.

In 2006, we are also relocating our offices in Japan and developing a demonstration facility and improved applications and services port, and in April, Lincoln will take part in the Japan International Welding Show, and I have been invited to be the keynote speaker for the opening of this major event and discuss our global success and strategies.

In Southeast Asia, looking at the full-year, overall sales were up 40% year-on-year.

Our sales to India increased over 100%, and combined, Indonesia and Philippine sales were up over 15% over prior year.

Our Australian operations ended the year with sales up a little over 20%, and we are positioned strongly in the domestic Australian market, and our export opportunities are increasing.

Domestic demand has been steady, driven by sales of engine-driven welders, as well as the gains in export sales for engine drives.

So, good results and growth throughout all global operations.

That's a quick overview, and we can expand on any of the regions if you have questions during the Q&A.

Now, Vince will cover the details of our financials for the quarter and the year.

Thank you, John.

The fourth quarter of 2005 represents our eighth consecutive quarter of strong earnings growth.

The quarter's consolidated sales were up 20%, with North American sales increasing 27% and sales reported outside of North America up 7%.

Foreign currency effects reduced reported sales by 2%.

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

Volume increases contributed a robust 11% to sales dollars in the quarter.

Pricing had a minor impact on sales for the quarter, contributing 2% of the increase in sales dollars year-over-year.

Now, looking at purchases by customer location, rather than our selling units location, North American customers were up 26%.

North American sales were aided by the continuing effects of hurricane-related activity.

Russia, Africa, and the Middle East customer sales increased over 35%;

Latin American sales increased 25%.

In local currencies, Europe was up 10%.

On a product-line basis, machine sales experienced a strong growth rate, increasing over 20%.

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

Sales by product line were approximately 58% consumables and 42% equipment, approximating the prior year's same quarter.

The percent of gross profit in the quarter was 27% of sales, compared with 24.3% in the prior year.

North American gross margins improved 4.2%, while non-North American gross margins declined 1.8%.

Prior year's gross profits were negatively impacted by a $10.6 million LIFO valuation charge to cost of sales resulting from significantly higher raw material costs in 2004.

Full-year gross profit was 27.3%, compared to 27.2% in the prior year.

An increase in product liability defense costs and the effect of recent acquisitions negatively impacted 2005 gross margins.

SG&A expense in the quarter of $75 million was 17.8% of sales, down 90 basis points from the prior year.

Higher bonus costs, selling costs, the incremental SG&A associated with newly acquired businesses, and a $1.9 million pre-tax charge related to the sale of a business were the primary factors driving the dollar increase.

In addition, recent acquisitions reduced SG&A as a percentage of sales by 60 basis points.

Fourth quarter 2004 SG&A included $4.5 million of compensation costs related to the retirement of the Company's former CEO.

SG&A expense for the full-year was $285.3 million, compared to $256.6 million in 2004.

As a percentage of sales, SG&A dropped to 17.8%, compared with 19.2% in the prior year, a 1.4% 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 effect of the recent acquisition.

Fourth quarter operating income at 9% of sales was up 410 basis points versus the fourth quarter of 2004.

Operating income increased 121% in the quarter.

The quarter included $2.5 million of pre-tax charges related to European rationalization efforts, as well as the loss on the sale of the business.

Excluding these charges, fourth quarter operating profit margins would have been 9.6%.

The prior year's quarter included the previously discussed $4.5 million charge related to the retirement of the Company's former CEO, as well as the European rationalization charges of $2.4 million pre-tax.

Without these charges, prior year operating profit margins would have been 6.9%.

Full-year operating profit was 9.4% of sales, compared with 7.8% in the prior year.

The current year includes 1.8 million of rationalization charges and 1.9 million related to the sale of the business.

Excluding rationalization charges and the loss associated with the sold business, operating profit margins would have been 9.6%.

Excluding prior year's rationalization charges and the charges related to the retirement of the CEO, 2004 operating margins would have been 8.3%.

Full-year 2005 other income included $1.4 million pre-tax, or $900,000 after-tax, of gains related to the settlement of legal disputes.

The income tax provisions for the quarter reflected an effective tax rate of 21.8%, bringing the full-year rate to 20.5%.

The quarter included a one-time tax benefit of $2.7 million related to the repatriation of foreign earnings and the resolution of prior year tax liabilities.

Without these benefits, the fourth quarter effective tax rate would have been 27.3%.

Excluding the one-time tax benefits recorded in the fourth quarter, as well as an additional $9 million of tax benefits recorded through the third quarter, the full-year effective tax rate would have been 27.8%.

The prior year's fourth quarter rate was 16.8%, and the full-year rate in 2004 was 25.2%.

The higher effective tax rate without the one-time benefits is primarily the result of higher income before income taxes.

Depending upon the level of full-year earnings, as well as estimated tax deductions in 2006, we expect our effective tax rate to approximate around 30%.

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

Working capital turn-over efficiency improved with average operating working capital to sales of 31.3%, compared with 32.6% of sales at the prior year's end.

As a result, cash flow from operations increased to $20 million in the quarter, compared with a use of cash of $3 million in the prior year.

Full-year cash flow from operations totaled $117 million, compared with $51 million in 2004.

The Company invested approximately $14 million in capital expenditures in the quarter, compared with $18 million in the prior year's fourth quarter.

Full-year CapEx was $50 million, compared to 56 million in 2004.

The 2006 capital spending plan will continue to focus on capacity expansion, as well as improvements in the cost space.

We expect to invest approximately $50 million on capital projects in 2006, further expanding our capacity and improving manufacturing efficiencies.

Other uses of cash flows in the quarter included the payment of $7.6 million of dividends to shareholders.

Full-year dividends paid totaled $30 million.

The Company contributed $31.5 million to its US pension plans for the year, compared with $33.2 million in the prior year.

Weighted average diluted shares outstanding increased to 42,539,000 shares for the fourth quarter, compared with 42,052,000 shares for the 2004 fourth quarter, a 1.2 percentage increase.

Shares outstanding at December 31, 2005, were 42,181,000 shares.

Our return on invested capital rose to 17.7% for 2005, compared with 14.1% for the prior year.

The increase in returns is reflective of higher operating income.

The Company closed the year with a $58 million net debt position and $108 million of cash.

Now, looking to the future -- we expect to experience strong volume growth in the first quarter of 2006.

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

Our overall business levels remain solid, and we are optimistic that strong earnings growth will continue into 2006.

At this point, [Katie], I would like to open the call for any questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Holden Lewis with BB&T.

Thank you very much.

Good morning.

Good morning, Holden.

Can you speak a little bit to the pricing outlook?

Obviously, conditions are not as good as they were a year and a half -- even six months ago, but are you seeing any ability to raise prices on consumables as you enter the year and what’s your expectation, and then are -- are you also increasing or doing your traditional beginning-of-the-year increase on machinery?

Can you just give a little more color on the pricing outlook?

Yes, Holden, we have put through a published price increase to the market.

I think the effective date was February 15, or thereabouts, and that would have been our traditional model, which was a price increase of both consumables and equipment, with a larger percentage on the equipment side than on the consumable side, which really has stabilized from the previous years considerably, I would say.

Any sense of -- can you give some order of magnitude on those?

I think the equipment price increase is in the neighborhood of -- again, varies by equipment -- 3.5 to 4%; consumables would be slightly below that.

I would say maybe 2.5 to 3%, somewhere in that neighborhood.

Okay.

And the outlook for the balance of the year on pricing opportunities?

I would guess that unless there's some major change on the steel dynamic, I think that those prices will be fairly firm through the remaining parts of the year.

Okay.

And then, can you also comment on the litigation?

I guess, specifically, what kind of costs you incurred in 2005, or the impact from those, and what you expect to see in 2006, especially since it seems like you have had a few victories here of late.

Yes, let me just first address the MDL hearings, which are taking place in Cleveland, and then I'll allow Vince to talk about the cost side of it.

As you know, we had a sanctioned motion before Judge O'Malley, and it applied to two cases, Morgan and [Landry], of which the plaintiffs have now moved to dismiss both cases.

However, the larger, and I would say more important part of the motion involves the questionable nature of the remaining cases in the MDL, and we are extremely pleased that the judge has taken our arguments around this issue under consideration.

And, at the conclusion of the hearings last week, the judge stated that she was not satisfied that the plaintiffs' screening process was sufficiently careful, and she was not willing to simply let these cases run their course based on the screening process alone.

And, in fact, in the judge's own words, "There still needs to be more differentiation, or separation, of the wheat from the chaff.

Despite the screening process there are cases in the MDL that clearly shouldn't be here."

So, we're quite optimistic of her effort and commitment to craft a remedy that will address the glut of seemingless, meritless cases that are now a part of the MDL proceeding.

And then, Holden, from a cost side, the fourth quarter, we were relatively flat on total product liability cost that ran through our costs of sales line.

From a full-year perspective, we had a cost increase in cost of sales of approximately $5 million, and looking forward, our best guess, estimate, at this point in time is that we shouldn't have material increases in charges through costs of sales from the baseline that we have in 2005.

Okay.

So you are expecting similar rates of spend in '06, from what you saw in '05?

Yes, barring any unforeseen turns of events.

Alright.

Great.

Thanks.

You're welcome.

[OPERATOR INSTRUCTIONS]

Your next question comes from Craig Stone with Kayne Anderson.

Could you talk about the energy field as a customer of yours?

To what extent -- what percentage of your revenues does it generate?

The persistence of oil above $60 a barrel, does that -- does that speak to a continuing strength in that business for you, or is this a situation that the strength in energy prices have created a one-time demand?

Well, my personal opinion is the $60 a barrel price is not the threshold that's going continue to drive investments in oil, and again, the high price of natural gas -- investments in natural gas.

It's not only a pricing issue, it's also a -- a supply issue that, at any price, there's a tremendous demand being created by the growth in countries like India and China, and even shortages in certain markets of the United States under a strong economy and personal demand for those products.

So, if the threshold would drop even into the $40 a barrel range, I think you're going continue to see pretty significant investments into that area.

We don't really track the sector individually.

We roll it more as an overall construction sector, and right now, that market is very, very robust around the world, and as I commented on my statement about the Middle East, which is obviously a large resource for both those products, the projects that have been committed are carried out over a three to five year horizon, and we're actually seeing more projects being initialized, not less.

So, I think the window there is considerable and expanding, not declining in any way.

Your margins are down still from peak margins.

Do you believe that you can get back to the profitability that you have had in prior periods when your gross margin was above 35% and your operating margin was double-digits?

Craig, I think we're going continue to move that operating profit percentage up.

As we have discussed in previous calls, we do have some continuing headwinds on the pension expense side.

From those days in the late '90s and early-2000 era, our pension costs are up probably 20, 20-plus million dollars, which is reflective of lower discount rates and lower returns on investments, and we're starting to see that abate a little bit as returns have improved, but we still have a bit of a headwind on pension costs.

The other factor that we have talked about quite a bit in terms of ratios and what our operating profit percentage will look like going forward is our strategy of expanding our business from a geographical standpoint, and as we have talked before, our expansion in the developing markets like China and other geographies that have a lower profit margins, will put pressure and create a headwind as well on profit percentages.

Having said that, we think that our initiatives to lower our cost space, improve our market share participation in these developing markets, and maximize our price realization should continue to bump that operating profit percentage up in the intermediate and longer term.

Is the lower profitability of international markets start-up related or it is permanent due to the fact that you don't do piece-work compensation there?

It's actually a little bit of both.

There's a fair amount of start-up costs associated with entering new markets and -- and gaining market share, but I -- I don't think it's really an issue of the piece-work philosophy versus the cultures of the business -- of the geographies that we're doing business in.

One other item that I should mention that has been very important, Craig, in the last -- since 2004, on percentages, is the significant run-up in raw material costs.

When we have, on the consumable side of the business, steel prices increasing 80 to 100%, and then, covering those cost increases with price increases, that tends to have a compression effect on our margins, and that's been very important as well.

So, if you take into account all of those factors, of the pension costs, the compression in margins caused by a very significant increase in costs, as well as pricing, and finally, our geographical expansion strategy, we're really not that far from where we were in the early-2000 era.

And getting back to the -- the cost increases from raw materials -- have you been able to just recover the cost increase, or your cost increase plus restore your margin?

Our strategy has generally been to recover our cost increase, so largely, the effect of the cost increases have been a grossing up of the P&L, with higher prices pretty much equivalent with the higher costs.

There could be some slight improvements from pricing in -- in different product sectors, but overall, our strategy has been to recover the cost.

Thank you.

You're welcome.

You have a follow-up question from Holden Lewis with BB&T.

Thank you.

Can you also give a feel -- you are doing all of this expansion into Poland and expanding capacity in Asia and just doing a fair bit of capital-type work -- can you also comment on what you expect the incremental impact in '06 to be on the P&L from a lot of these expanding initiatives?

Well, I would start by saying on the Pole -- on the -- on the Polish initiative, I don't think we're going to see a whole lot in 2006, because we won't have that plant built until mid or later in the year in operational.

So, we'll start seeing the benefits of that in 2007, and I would estimate that the payback will be between two and three years on that investment.

Okay.

But when -- I mean, you -- you were obviously busy expanding capacity and things like that in 2005, and though there are the capital components of that, I'm guessing, there also is a P&L component to that as well, in a variety of ways.

I'm just curious, in '06 -- not just Poland, but also what you are doing in Mexico or Asia, when you look at just expanding your capacity in general, do you expect the cost burden in '07 to be greater to do that than it was in '06 or lesser, or how should we view the expansion activities?

Well, I mean-- you have a real apple and orange configuration there.

In Northern Mexico, as an example, where we're expanding, some of that is to meet local market demand, other of it is to take advantage of the lower wage costs that exist in Mexico versus our traditional North American facilities, but particularly, as it relates to equipment.

So we see, I would say, relatively immediate gain as we expand that operation, assuming we have the facility to do the transfer work.

In the case of -- of Poland, where we're moving a plant from one location to another, as Vince said, that's going to take a couple of years to get up and rolling, but we expect a relatively quick payback.

The flux cored plant in Poland will give us new capacity at a much lower cost to address Eastern Europe.

So, that would be a much quicker payback.

So, it's a combination of a lot of factors that drive our strategy in regards to where we think we can get the best return for our capital investments.

Okay.

And then, lastly, can you talk about -- you talked about your volumes were up 11-ish percent or so, that's, obviously, an acceleration.

Is that acceleration driven both by consumables and machinery, or was consumables the primary driver?

And, as you look into 2006, what do you think the impact of mix between those two businesses will be on the margin?

Consumables, Holden, really drove some of these volume increases in the fourth quarter of 2005.

I think, as you know, the first three quarters of 2005, we had some challenges from a volume standpoint on consumables, but the fourth quarter, we saw an acceleration in consumable volumes over prior years in -- in most regions of the world.

Equipment sales have been, and continue to be, very strong and -- and the fourth quarter was no exception.

So, I -- I would say that the -- the change in the fourth quarter compared to previous quarters in '05 was really consumable-driven.

Okay.

And if -- if consumables are relatively stronger than -- than machinery, are they contributing more than they did in '05?

Is that something which should be good for the margin at the mix or compress the margin in terms of mix?

Generally, as we've talked about in the past, our consumable margins are a bit higher than equipment margins, so the more rapid growth in -- in consumable margins can do nothing but help our gross margin.

Okay.

Alright.

Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS]

Your next question comes from Eugene Fox with Cardinal Capital Management.

You guys have touched on it earlier -- the pricing policy you have in place -- what is keeping a lid, if that is, in fact, an issue in terms of your ability to increase prices at the moment?

Thanks.

Well, we have a fair amount of competition in the marketplace, and we have to be responsive to that competition.

We -- we think that we have been the price leader on the upward side in our marketplace.

We sell by promoting the value of the relationship and the quality of our product, and it's our intention to continue to do that, and we are in this for the long-term, in terms of our relationships with our end-user and distributor partners, not for the short-term.

I think that strategy is working quite well for us.

Thanks.

Thank you, Eugene.

Your next question comes from Godfrey Birckhead with SBK-Brooks.

Yes, good morning.

Can you, Vince, help me on the depreciation and amortization estimate for this year?

You gave us a CapEx at 50 million.

Yes, we came in at D&A for '05 of roughly 43 million -- 42, 43 million -- and I would expect that, Godfrey, to be right around the same amount in '06.

Okay.

Thank you very much.

And, in reference to one of the previous questioners about the potential for margin improvement and the 30% or more of this you got back in the late-70s -- I have been thinking that you could get to 28%.

That's the way I have been looking at it from a longer term point of view on -- on the gross margin.

Is that doable over time?

Godfrey, certainly 28%, from a gross margin standpoint, is very doable.

Okay.

That's what I thought.

Thank you very much.

You're welcome.

At this time, there are no further questions.

I'd like to thank everybody for joining us on this call, and we look forward to reporting our results and discussing those at the end of the first quarter in -- in April of this year.

Thank you very much.

This concludes today's Lincoln Electric Holdings, Inc.'s 2005 fourth quarter and year-end earnings conference call.

You may now disconnect.