Lincoln Electric Holdings Inc (LECO) 2007 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Lincoln Electric fourth quarter and year-end 2007 financial results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Vince Patrella, Senior Vice President and Chief Financial Officer for Lincoln Electric. Thank you, Mr Patrella, you may begin.

Thank you, Latona. Good morning and thank you for joining Lincoln Electric's fourth quarter conference call. Results for the 2007 fourth quarter and the full year were released this morning prior to the market's open. Copies are available through the Lincoln Electric website or by contacting investor relations at 216-383-4893. Lincoln's Chairman and Chief Executive Officer, John Stropki, is joining the call this morning and will provide commentary on the quarter and the year in a moment. But first, let me remind you that certain statements made during this call and our discussion 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. Let me now turn the call over to John Stropki.

Thank you, Vince. Good morning, everyone, and thank you for joining us. We had a solid fourth quarter and completed our fourth consecutive year of record sales, record profit and record cash flow. Our global management and associate teams achieved these results despite challenging conditions in several key markets and geographies. Although there's still much uncertainty in several key sectors and markets, we believe Lincoln Electric is especially well-positioned to continue growing sales and market share. As such, in 2008 we will continue to focus our efforts and investments in the areas of higher growth potential and continue to build on the momentum of our record 2007 performance. Vince will cover the financials and details later in the call, but I will cover the high level results and then review our operations and the economic environment as we move forward into 2008. First, let me begin by reviewing a few key economic measures that we follow as indicators of the strength of our business.

First, U.S. industrial production increased 0.1% in January from the prior month, but increased 2.3% year-over-year. Durable goods production was flat in January compared with December and increased 4.1% over prior year. In January, U.S. purchasing managers index increased to 50.7, up from 48.4 in December. Mostly good news, but clearly less positive than in past periods. Returning to Lincoln, our overall sales increased 14.7% to $580.3 million in the fourth quarter. Operating income, excluding nonrecurring items, increased 29.8% to a record $65.8 million in the quarter. Cash flow generated from operations increased 236% to $45.7 million. Sales for the Company's North American operations rose 8.1% to $345 million in the quarter. U.S. export sales in the quarter increased 11.2% to $46 million. Sales from our European subsidiaries grew 25.2% to $142 million, while our other international subsidiaries recorded strong sales increases of 22%, totaling $102 million in the sales for the quarter.

Turning to the results for the full year, net income increased 15.8% to $203 million, or $4.67 diluted earnings per share on a sales increase of 15.7% to a record $2.28 billion. The Company's North American operations' sales increased 7.3% to $1.4 billion. U.S. export sales increased 26.2% to $194 million. Sales for the European operations increased 35% to $535 million, and excluding acquisitions in local currencies, the sales of our European subsidiaries increased 17.5% for the full year. Sales recorded by our international subsidiaries outside of Europe and North America grew by 22.6% to $381 million in the year. The 2007 sales reflect the success of our international expansion efforts, as 55% of our sales, including sales of equity affiliates, were recorded in destinations outside of North America. As I said, Vince will provide more details of the financials in a moment, but I would like to cover the activities in the quarter and for the year for the region and segments. First, looking at North America.

Despite a slowing economic growth trend and forecast, our overall results and demand continued to be strong during the fourth quarter for our North American operations. However, we do expect the overall North American economy to show some weakness and contraction in certain sectors during the first half of 2008. Order trends in our traditional U.S. welding markets remain strong in the fourth quarter and into the new year. Across most product lines and distribution channels, we saw good sales growth in 2007 fourth quarter, compared to the 2006 levels. Sales increases in our traditional welding markets were driven more by volume than by price. Equipment and consumable prices has been adjusted upwards effective February 1, 2008, to respond to cost increases in key material groups like steel, copper, aluminum and chemicals. Pricing and supply for key raw materials will present ongoing challenges during 2008 in all areas of our business.

U.S. export sales growth continues to be strong, where key infrastructure development projects have preferred our higher technology products versus other competitive options. These large scale projects associated with oil and gas infrastructure and the overall energy sector continue to drive both sales and expansion of our global brand. The softer portion of our North American operations were Canada and our JW Harris soldering and brazing business. Despite the positive economic statistics reported by Canada in terms of employment and GDP growth, the manufacturing sectors in Ontario and Quebec have been much more challenged. Additionally, we saw volume demand decrease year-over-year in our soldering and brazing products, driven largely by the slowdown in the U.S. housing and HVAC sectors. These volume decreases were partially offset by price increases associated with the rising metal markets.

During 2007, we have been actively improving supply chain processes, from our front-end planning process to our back-end manufacturing and distribution capabilities. These actions had a significant positive impact on the record cash flow generated from our North American operations. In terms of the short-term outlook for North America, demand continues to moderate, with the longer term landscape somewhat more uncertain and mixed overall results will be heavily driven by key end user market segments and our ability to continue growing market share. Turning to Europe. In Q4 several European economies lost momentum, growing 2.3% on an annual basis and down from 2.7% in the third quarter. The main drivers for the weakening growth rates of consumer spending and slowing export gross as the strong Euro continued to provide important constraints. Europe's fourth quarter performance paralleled this trajectory, showing positive by slower growth for the quarter of 7.8%, compared with a full year growth rate of 17.6%, excluding the impacts of acquisitions and in local currencies.

The full year results were somewhat aided by the acquisition of Metrode and SPAWMET. However, overall European operations contributed positive growth, particularly in eastern Europe, where sales grew by greater than 30% year-over-year. During the past year, the European region saw the initial benefits from the commissioning of our new greenfield consumable plant in Poland. The primary focus of this plant is to serve the shipyard and general construction markets with consumable products. It is also very well positioned to strengthen our manufacturing footprint for other consumable product categories and for serving other end user segments, as well. While the strong Euro appeared as an increasing challenge throughout the course of the year, European manufacturers were still able to show very solid growth in exports of capital goods as the global infrastructure build remains strong.

This pattern is clearly demonstrated by our Uhrhan and Schwill subsidiary, which makes high-end automated welding systems for pipe mills. Uhrhan and Schwill sales grew more than 20% in 2007 and entered 2008 with a full order book that stretches well into 2009. The increased sales and expansion of pipe mill capacity will present excellent opportunities for our submerged arc wire and flux products around the world. 2007 was a very good year for European manufacturers, including Lincoln Europe, with all segments and geographies experiencing solid growth, while 2008 looks to remain positive, but not to the degree of this past year. With 2008 GDP projections now standing at substantially slower, 1.8% to 2.1%, we expect the coming year to present a much more challenging demand environment in certain key market segments. However, the energy and process segments show no sign of slowing and are expected to be strong contributors in the coming years.

Looking at the regions outside of North America and Europe and focusing on Latin America. South America continued the year-to-date trend with sales growth approximately 50% recorded in the fourth quarter. The oil and gas sector, as well as the mining sectors, continue to invest heavily, as commodity prices remain at historically high levels. Our expansion efforts in Colombia and Brazil allowed for our full participation in the increased investment levels related to offshore mining and pipeline sectors. This expansion allowed for significant volume increases throughout the entire region. The level of construction activity in Mexico also increased in the fourth quarter, as many new oil-related projects began wrapping up for 2008, production demands, and the political issues affecting project work were resolved. Turning to Asia Pacific. Asia continues to be the central focus point of our international expansion and significant sales progress was made in the quarter.

The Zhengzhou Heli joint venture agreement was signed in the fourth quarter of 2007 and then executed in February of 2008, which will -- which will provide the region with high quality and large volume consumable manufacturing capabilities. Additional investments continued in building out our manufacturing capacity and commercial distributor network in China, and construction has begun and is well underway on our first consumable manufacturing facility in India. These markets also continue to drive a significant portion of our U.S. and European export sales, along with sales for other local subsidiaries. Market penetration into China and India grew by 35% and 100% respectively in 2007, compared with the full year of 2006. Import sales volumes continue to support our effort to develop the local commercial and manufacturing capabilities in these countries and the Asian region in general.

Australia recorded single-digit growth in the quarter, as the strength of the Australian dollar has affected our operation's ability to export into world markets. Currency issues have not only affected the sales of our Australian business but also the profitability of that business as our Australian operations export a large portion of their manufacturing production to largely U.S. dollar denominated regions. These issues are being addressed and we expect slow but steady progress during 2008. Lastly, looking to the Middle East and Africa. The Middle East continues very strong with energy-related projects, pipeline, offshore platforms and power plants, booked several years into the future. Heavy duty industrial welding machines and high-end consumables, along with our newer welding technology which improves efficiency and throughput, are still being ordered at robust and record pace.

Related energy investments are strong in shipyards, cement mills, aluminum smelters, petrochemical plants and steel fabrication plants all making demand for welding products strong. The standard year-end slowdown in the region was seen in December for sub-Sahara, Africa, but with strong order control dated into 2008. Again, energy-related projects involving renewable wind energy, as well as oil projects off the western cape, have kept the demand for welding products steady. The steel industry also plans for solid growth, and mining and shipyards, as the infrastructure programs continue at an excellent pace. With the world's strong and growing appetite for energy and natural resources, both the Middle East and Africa should continue their robust pace of welding activity. Many key projects are planned and committed over the next several years. That's a view of the Company's regional results and relative market conditions for the last quarter and year. Now, Vince will go over the details of the financial results.

Thank you, John. I will take a look at some of the details of the fourth quarter and the full year. As John mentioned in his comments, our fourth quarter consolidated sales are up 15% over the prior year, with North American sales increasing 8% and sales reported outside of North America up 26%. Foreign currency effects increased reported sales by 5% in the quarter and volume increases contributed 6% to sales dollars in the quarter. Pricing contributed 2% of the increase in sales dollars year-over-year. Acquisitions contributed about 2%, as well. The percent of gross profit in the quarter was 27.7% of sales, compared with 26.6% in the prior year's same quarter. The increase in gross margins as a percentage of sales was attributable to favorable operating leverage caused by increased volumes, partially offset by a shift in sales mix to lower margin geographies.

SG&A expense was $95.1 million in the quarter, or 16.4% of sales, up 160 basis points from the prior year. The higher SG&A as a percentage of sales was primarily driven by a prior year's nonrecurring gain associated with the sale of a property in Europe. Excluding this nonrecurring item, SG&A as a percentage of sales actually decreased 10 basis points in the quarter. Fourth quarter operating income was 11.4% of sales, down 30 basis points from the fourth quarter of 2006. Excluding rationalization items and the gain on the sale of the property in 2006, our quarterly operating profit increased 130 basis points from 10% in 2006 to 11.3% for the fourth quarter of 2007. The income tax provision for the fourth quarter reflected an effective tax rate of 28.8%, compared to 16% in 2006. The prior year's tax rate was affected by certain nonrecurring benefits. Now, turning to the full year results.

Full year consolidated sales were up approximately 16%, with North American sales increasing 7% and sales reported outside of North America up 32%. Foreign currency effects increased reported sales by 3%. Volume increases contributed 7% to sales dollars for the full year. Pricing contributed 4% of the increase in sales dollars year-over-year. And finally acquisitions added about 2% to the top-line. Gross profit for the full year period was 28.4% of sales, compared to 28% of sales in the prior year. This year-over-year improvement in gross profit was due, again, primarily the favorable operating leverage caused by increased volumes, partially offset by a shift in sales mix to lower margin geographies. SG&A expense for the full year was $370 million, or 16.2% of sales, up 20 basis points from the prior year. Again, the higher SG&A as a percentage of sales was primarily driven by the nonrecurring gain recorded in 2006, which reduced the prior year's SG&A cost. Excluding this $9 million gain, SG&A as a percentage of sales decreased 25 basis points for the full year.

The decrease was a result of increased sales volume leverage, offset by increases in bonus expense and foreign exchange losses. Full year operating income rose to 12.2% of sales from 11.8% in 2006, an increase of 40 basis points. 2007 included a European rationalization credit of $200,000, compared to a rationalization charge in the prior year of $3.5 million. Additionally the prior year results included the $9 million gain on the property sales. Excluding these items, operating profit margins would have been 12.2% compared with 11.5% in the prior year. The year-to-date and full year effective tax rate was 29.4% compared to 26.5% in the prior year. The higher effective tax rate was due to nonrecurring tax benefits recorded in 2006 and higher income booked in 2007. Now, to our cash flows and the balance sheet. Our fourth quarter cash flows from operations rose $32 million to $45.7 million, from $13.6 million in the prior year's same quarter.

This significant increase in our cash flows was driven by continuing improvement in working capital management, particularly inventories. For the full year period, cash flows from operations reached $250 million, a $131 million increase from the prior year's full year. Again, the solid improvements in income and working capital management drove this increase. The Company invested $62 million in capital expenditures in the full year period, compared with $76 million in the prior year period. The 2008 capital spending plan will continue to focus on our previously announced capacity expansions, as well as ongoing improvements in our cost base. Other uses of cash flows in the year included the payment of approximately $38 million of dividends to our shareholders. And finally, during the fourth quarter, the Company spent $15.5 million for the repurchase of 222,000 shares under the Company's previously authorized and announced share repurchase program.

In addition, the Company has spent $18 million during the first quarter of 2008 to repurchase an additional 298,000 shares. Weighted average diluted shares outstanding increased to 43.447 million shares for the fourth quarter. And our shares outstanding at December 31, 2007, were 42,961,679 shares. Our return on invested capital rose to 20.5% at December 31, 2007, compared with 19.9% at December 31, 2006. The increase in returns is reflectent of our higher operating income. The Company closed the year with $88 million of a net cash position in its balance sheet. That's the extent of my prepared comments. There's one other item that I would like to mention and that is that the Company is having -- conducting an investor day on March 7, 2008 at NASDAQ and those of you that have been invited or interested in attending, please do attend. We encourage you to see us in New York at NASDAQ on March 7th. For any further details on that, please contact our investor relations office and we will give you those details. So at this point, Latona, I would like to open up the call for any questions we might have.

(OPERATOR INSTRUCTIONS) One moment, while we poll for questions. Our first question is from Walt Liptak from Barrington Research. Please proceed with your question.

Good morning, Vince and John.

Good morning.

Congratulations on a nice end to the year. My first question is about the volume growth of 6%. It looks like it accelerated. I wonder if I could get the details of what volume was up in North America, Europe and other. I apologize if you went through that already, but I didn't catch it.

No, we haven't and by the way, Walt, we will be filing our 10-K on Monday or Tuesday, and you will be able to find these details in the MD&A section of our 10-K, but for the quarter, North America had approximately a 4% volume increase, Europe was about 8% and the other countries segment was roughly 13.5%. I mentioned that in the aggregate, for the consolidated Company, we were up in pure volumes 6%, but you can see that the breakdown would show that the rest of the world, including Asia, Latin America and Europe, are still putting up year-over-year volume numbers quite a bit better than North America.

Yes. So your volume in total went from 3.8% to 6%. So it improved. Was there something one time about the quarter in North America? Because it -- it picked up pretty substantially from basically down a little bit to up 4%. Did you do something to try and get the market to accelerate volumes.

No. Wer didn't have any -- no special programs or incentives or anything along that line.

Why do you think it picked up?

Well, I think, again, some of the sectors that we're historically strong in, were stronger in the quarter. As I said in my remarks, I think we are continuing to capture market share in those sectors that are stronger than our competitors are. And we position ourselves particularly well for those sectors that we view to be strong.

Okay. Are you -- we are seven weeks or so into the -- into the first quarter. Are you still seeing the same kind of volume trend? Or has something happened so far this year in North America?

I would tell you that through this week, that our volumes in North America are relatively steady with what we experienced in the fourth quarter.

So you are still growing that 4% or so?

I wouldn't say -- I can't give you a number like that but I would tell you mid to low single-digits type of volume growth.

Okay. I also wanted to ask a question about you mentioned the working capital accounts. The working capital in the fourth quarter was extremely good. What happened there to get the receivables down, the inventory down, et cetera?

I would tell you, Walt, that this was perhaps the first year that we really emphasized and put a focus on working capital management and particularly inventory management. And I think towards the end of the year, we started to see some traction in our supply chain initiatives and our working capital focus. And I think the -- the easy part of it, perhaps, is over now and it's going to be a little bit more difficult going forward to achieve the same kind of improvements that we achieved in 2007, but at the end of the day, the improvement is squarely the result of focusing on improving our working capital management.

Yes, Walt, and I would add that I think 2008 is going to be a very interesting year on working capital, because we are focusing on the supply shortages that are occurring in some of our primary imports of raw materials and we are just not going to take any risk in that area. So we are liable to bump up our inventories a bit until we get more comfortable in that area.

I would also add to that, Walt, not only the tightness in supply, but our view of the key commodity imput costs that we have in our business are likely to accelerate in 2007, more than what we have seen in the last two or three years. And so we think it will behoove us to perhaps have a better inventory and days in inventory position on raw materials than what we have had in say '05, '06, '07. And I'm sure you're reading all the same things that we are reading about ore costs and steel costs rising. So we are going to be a little bit more cautious when it comes to our inventory quantities throughout 2008.

Okay. Yes, that makes sense. And then I guess one follow on to that. Okay, so you are generating a lot of cash. You are in a net cash position. How big is the share repurchase? Can you refresh me on how much more stock can you buyback?

Oh, how much more? We have almost 10 million shares available.

Okay.

We have a lot of capability to buy shares.

Okay. Is that going to be the primary use of your cash going forward, because how aggressive will you be on that thing?

We hope the primary use of our cash is acquisitions. I think we've said that all along and we go into 2008 with a nice queue of opportunities that we are reviewing.

Okay. Okay, thanks. I will get back in queue.

Our next question is from James Bank with Sidoti & Company. Please proceed with your question.

Hi, good morning.

Hi, James.

Yes, Vince, I guess I caught the tail wind of that, you repurchased shares in this past quarter.

Yes, for the fourth quarter, we repurchased 15 -- we spent $15.5 million on shares for 222,000 shares. And then during the course of the first quarter, up to today, we have repurchased $18 million worth of shares and took out of the market 298,000 shares.

Okay.

So a total of about $33 million.

Okay. And there's 10 million shares left authorized.

Actually, I had that the other way around. We actually have closer to 4 million to 5 million shares available on existing authorization.

Okay. So 4.5 million left in the kitty?

Right.

What was the average stock price you are buying in at?

In the fourth quarter it was $69.50 and in the first quarter it is close to $60. So on average, since we started to reinitiate our share buyback, it's about $64.30 on average.

Okay. Perfect. And could you split Europe and other countries' sales absolute dollar for me?

For the fourth quarter?

Yes.

Total sales in Europe were approximately $142 million and other countries was approximately $102 million.

Okay. And then for all three segments, can I have operating income?

We report EBIT not operating. But for North America $54.8 million, Europe $14.2 million, and other countries $1.5 million.

Okay. So the margin erosion in other countries then continues?

It did through the fourth quarter. Okay. Looking at January, we're starting to see, in our opinion, a bottoming of that and we believe that we have some programs in place in our other countries segment that should start to turn that around as we run through 2008.

Okay. And the tax in 2008, should we still look for 29% on average?

I would tell you that we are going to be higher than that. We'll likely be somewhere over 30%.

Okay. And the uptick in the interest expense in the quarter, and I apologize if you had gone over that, I would have missed that.

I didn't go over that, James, but the uptick is two fold. There's some higher interest costs in our borrowings from non-North American business units. And also we have during the course of 2007, the amortization of some previously terminated interest rate swap agreements that is now running out on us. So we have credits that have been recorded through interest expense that are starting to disappear on some terminated interest rate swaps.

Okay.

And then we have, finally, thirdly, swapped out some of the existing debt for variable rate debt and that has actually gone up a bit this year as well.

Okay. And lastly, your optimism seems to be a bit on the sense, and I know you went over some macro data in your prepared remarks, John, in looking at GDP in the fourth quarter of 0.6%, you guys really are not at GDP plus, you are practically at GDP times eight, when just concerning North America. So I guess, if I may ask, what is it really that's kind of causing a bit of trepidation, where you don't want to kind of give overbearing optimism heading into '08, especially when you do have involvement in infrastructure and the energy sector in the capital spending that's going in those sectors.

I think you hit it on the nose. We don't want to be too optimistic. Our objective is to under promise and over deliver. I think there's just some uncertainty that is very difficult for us to predict. As we've said before, that I think the Company is a much different Company than we have been, as we went through other cycles like this that were not so tightly aligned to durable goods, as we have been in the past, and the global aspect of our business, as well as this huge buildout of infrastructure around the world as it relates to energy or mining or any of the other things that we talk about, is still very, very robust. So the challenge is trying to look at what the blend of maybe the down side of durable goods and the up side of that is and what does it end up being in terms of that blended equation.

Okay.

But I would also add to that, James, that if you have been following us during the course of 2007, we have seen a fairly consistent pattern of our year-over-year comps falling from first quarter of 2007 mid sort of teens double-digit volume improvements and dropping down in the second quarter and dropping down again in the third quarter. It has, as Walt pointed out, some of our volumes have been bolstered ever so slightly in the fourth quarter. We continue to see that stabilization in the first quarter of 2008, but I would describe ourselves as somewhat cautiously optimistic that the trend line of year-over-year volume comps has slowed and flattened out and we are hopeful that it stabilizes itself and actually see some improvements going through 2008. But we're speaking from some experience during the course of '07, where volumes continually decrease from a comp, a year-over-year basis, and only in the fourth quarter and starting into the '08 first quarter, we are seeing some stabilization.

Okay. That's helpful. And I understand, 2006 was a remarkable year in its own at 23% sales growth. So I understand that '07 might have given you a little bit of pause. Those comments are very helpful. Thank you both.

And the last thing I might add on volumes. We have been very focused on North America. Walt's questions and your questions, I think, have centered around that. If you look at our European business, the volumes there are continuing to fall. For example, in Europe the full year's volumes are up 15% in terms of the comps are falling. And the fourth quarter was up 8%. If you were to looked at the first and second quarter, the volumes would have even been higher from a European standpoint. And so when you look at the whole picture, we have stabilized in North America, Europe's volumes on a comp basis continue to come down from high double-digits to single digits. Our other countries, Asia and Latin America, seem to be holding up with some consistent volumes, but the mix is -- leads us to be a bit cautious in our outlook.

Okay. No, I understand. Thank you.

Our next question is from Steve Barger with KeyBanc. Please proceed with your question.

Good morning.

Hi, Steve.

Morning.

I would like to dig into that Asian or other country margin a little bit more. Is it a function of less pull through, more competition, rising material prices? Can you just give us a little more color on what is going on there?

Well, I think it's a factor of all the things that you mentioned with the exception of volume. We really don't have a significant volume concerns at this point, other than we may be a little bit behind the curve in getting some of our capacity built out to engage in some of the ongoing growth in China, but I think we're rectifying that pretty quickly. I talked about the Zhengzhou Heli acquisition and we very quickly ramping up production of submerged arc flux into that market place. We are a little bit behind on mig wire.

We are addressing that as quickly as possible and I think we are well positioned on cord wire. We have the currency issue in Australia that we talked about. We talked about that in the third quarter. We had some changes that we could make in the fourth quarter that captured a little bit of momentum there, but we are being much more aggressive in that in 2008, to address those currency issues that we had. But as I mentioned, we will also be challenged that Australia, from an export basis, will be very challenged where they are selling in U.S. denominated dollars, because of the roll up of their currency issues that are associated with that.

Just from a competitive standpoint, are you seeing new entrants over there or more aggressive moves by some of the legacy players in China as they kind of jockey for market share?

Some of both. I mean, I think we said very early on that until the consolidation process becomes more mature in China, that there always is going to be the smaller local players that are fighting for survival and they fight for survival based on price dynamics. I think the other interesting dynamic that is taking place in China is the steel prices in China are ramping up at a pace that is even faster than that of some of the other world markets, as the Chinese steel companies try to capture some share and also as some of the lesser efficient operations are taken off stream. And then the capacity challenges it, pushes it there. So, there's going to be some give and take in that in terms of the timing, where people are on the steel price increases and when they implement consumable price increases to be reflective of that.

Yes, and you talked about potentially increasing your inventory position to offset some rising steel prices but is there anything else you can really do to hedge on a global basis? Or are you just kind of at the mercy of prices and then you have to pass through.

Yes, there's, other than buying forward in inventory, there is really no steel hedge market. There was some talk about it, but I think with what is going on now, nobody's going to enter into that at this particular point in time. If you are following what's going on in steel pricing, it's almost every day there's a new announcement of some other kind of an increase driven by, again, material costs. Just this week several of the large countries and/or companies settled on a 65% increase for iron ore and the talk is that coking coal will be a 100% increase. If you do the math on that, that will translate into anywhere from $150 to $200 a ton input costs increase for the steel companies and they are clearly going to pass that through.

Sure.

And be our ability to execute our price increases, both from a time and from a magnitude that will determine a big part of how successful we are. And I think we demonstrated the last time we went through a robust steel increase cycle that we were very effective of that. We plan to do the same thing this time.

I guess the difference would be that you have more international exposure, potentially with more competitive markets on that side, which potentially that hinders that process, or do you think that naturally that those local players will have to pursue the same aggressive tactics in terms of pricing?

We think that we are very well positioned from a steel price side of things because of our global spend and the relationships that we have built up over the years. We think that some of our competitors, both domestic and internationally, are not so well positioned. We are hearing of people having to buy in the spot market, maybe even have supply kind of issues and I think that that gives us a bit of an advantage. Obviously, we can't control what competitors do and the Asian market is by far the most competitive market and there's by far the most diversity in terms of the scatter of competitors in that market place. And I'm sure we'll see some irrational behavior in that market.

Okay.

Coming back to the U.S. market, are you seeing any increase in imported consumables from low-cost countries or low-share countries, I should say. And what is your sense in terms of the market share potential for those new guys, if any?

My gut reaction is we are seeing less of it, not more of it, because, again, as I said, steel which used to be a very low-priced commodity in places like China is now globalizing to more of a much more world view. We operate in China and we are seeing bigger and more frequent and rapid increases in the steel costs there than what we are seeing in our more mature markets. That obviously has a big impact on their capabilities there and I think we have said a number of times that welding consumables are not labor intensive kind of products. They are raw material intensive products. Transportation costs are becoming increasingly challenging from that part of the world and I think that some of the channels that were looking at those options have taken a look at the challenges it presents from a supply chain situation, and recognizing they don't want to be in a risk of putting their revenues at risk and their customer relationships at risk over unreliable supplier base.

Right. That makes sense. Okay. One last and then I will jump back in queue. Can you talk about inventory levels at your North American distributors right now, maybe sequentially or year-over-year, what is your sense of where those guys are?

Yes, my gut reaction is that it's a fairly flat line kind of situation. I don't think that we have any feel that the distributors increase or decrease inventories throughout the year for any particular reason. If we announced a big price increase, there may be a small forward buy. We may have gotten a little bit of that in January, but we already see that level off because they don't have the space or the cash or really the appetite. As long as they feel that they can raise prices in the market, and I think everybody is because everybody is going up, there's just not a lot of appetite for heavy inventory buildups. So I don't see -- we have been asked that question a lot of times and I would have no evidence of any kind of an inventory build or any kind of an inventory reduction on the part of the distributors either.

Okay. Thanks, gentlemen.

You're welcome.

Our next question is from Mark Douglas with Longbow Research. Please proceed with your question.

Good morning, gentlemen.

Good morning.

Hi. I have a question about the North American market again. It kind of went up of what I thought it would do. Exports did not grow as much as I thought they would have and the sans exports it actually did quite nicely. Any particular reasons you attribute to exports slowing in the fourth quarter?

Exports are still very strong. If there's any slowing, it's a slowing in the rate of growth that we had during the course of the first three quarters of 2007. We still have a very strong order intake and sales level going into 2008 from an export standpoint. So, we don't see them slowing per se, but we did, mind you, put up some very significant year-over-year comps during the course of '06 and '07 from the export line standpoint. So we are still optimistic that our export business will grow and grow rapidly in the double-digit type of pace arena for sometime to come. But admittedly, the fourth quarter was not quite as high from a year-over-year perspective as what we have been seeing over the course of the last two or three years.

Right. Did you think there was some timing?

I think it's always challenging on the export side around the holiday seasons, the lineup of containers and shipping and the holiday fell in the middle of the week. That would be the only thing that would be impacted from a -- from a timing side. It has been said we have a very good backlog of export orders and we expect that to continue throughout the year.

And I can say through the middle of -- tail end of February, for first two months, we are seeing a somewhat higher year-over-year growth than what we booked in the fourth quarter.

Okay. Okay. Good. Yes and the uptick in North America was quite a pleasant surprise. It's your seasonally weak quarter and sequentially you beat the third quarter. So at least -- not including exports.

And, again, I think those are, again, focused on those segments that are strong right now and the fact that we are stronger in those sectors of high technology products. Rental is still very strong. Again, oil and gas, those areas are things that Lincoln has a very strong competitive position in. I think, as other competitors have and will report their results, you will see that we have captured some nice share in the quarter.

Would you a lot of that is in submerged arc, because that certainly is one of your key -- .

I would call it more heavy fabricating than just submerged arc. It's clear we're -- submerged arc is part of that, but it's the heavy fabricating sector right now versus the lower end commercial or the retail sectors that are doing better and we're just stronger in those areas.

Right. Right. And secondly, on the Euro, your North American EBIT margin had a nice uptick. The European margin slid a little bit. Were you experiencing some cost price squeezes there that you didn't, say, in North America or -- because obviously it wouldn't be the same types of problems that you would have, say, in Australia, trying to ship to the dollar denominated places? Capacity expansions or --

Well, the -- Europe's fourth quarter tends to be its slowest with holidays occurring in the fourth quarter. So we would -- it's not unexpected that the third quarter would be a bit better from an EBIT margin standpoint in the third quarter or any quarters during the year running up to the fourth quarter.

Okay but --

Nothing of any -- .

Nothing really in particular. Great. Well, thank you.

Okay.

Our next question is from Greg Halter with Great Lakes Review. Please proceed with your question.

Good morning, guys.

Good morning.

I wondered if you had any input on what kind of impact currency may have had on your operating income or net income or both in the quarter.

Well, hang on a second, Greg. Let me look that up for you. For the quarter, operating income benefited by about $800,000 and net income by about $600,000, from the translation of the results this year compared to the prior year's rates.

Okay. And looking at some of the markets, specifically in North America, I wonder if you could provide any commentary you may have on the auto, construction, housing, things of that nature?

Well, I guess I would, and I covered this a little bit, but maybe define it as best as I can. The sectors that we see as doing quite well now and I think forecasted for 2008, ag equipment is booming. I've heard where Deere has very extended deliveries. They are adding capacity to address a growing market in a backlog type situations. Again, the pipe mills are extremely strong, running maximum capacity and expanding. Transportation vessels, ships and barges, are in the same kind of situation. And in anything that has to do with power generation, whether it's wind towers, LNG, power plants, again, it's all they can do to try and keep up with the demand. Steel building seems to still be relatively strong, although the trends look to be flattening, not growing, but still at a pretty strong paces.

And then on the weaker side, obviously, we have the automotive situation, which everybody follows and follows closer than us, I would say. Construction equipment, as it relates to retail or housing, is slow but construction equipment, as it relates to mining, commodities and big projects is still doing quite well. Commercial products, water heaters, anything that's tied to housing, HVAC, obviously is quite weak and I think it will stay weak throughout at least this year. And the retail side of our business is, I would say, somewhat flat, although I think we're doing much better than the retail sector in total is doing because we have a new product introduction there that's doing quite well. And sales are still fairly good.

Okay. And percentage of your business between equipment and consumables, is it still falling around a 40/60 split?

Yes, it is around 60/40. It hasn't changed much for quite sometime.

You may see some distortion of that again this year, if these steel prices continue to escalate up. Obviously, we will be accelerating the revenue side of the consumables at a much faster pace than the equipment side. That can move the needle a little bit, but it generally settles back in once that is rationalized.

In talking about price, you discussed a price increase on February 1st. Can you discuss the magnitude of that increase?

Oh, boy. On the equipment side, I would say it was in the 3.5% to 4% range. On the consumables it was much higher and much greater dispersed. Our welding flux, as an example, that is primarily chemicals, went up 15% to 20% and welding consumables were probably -- the other welding consumables were in maybe say the 5% to 8% and there's more of that coming.

On top of the February 1st?

Yes.

Okay.

I would expect something yet in the second quarter of the year, if not sooner.

All right. And what proportion of your -- your debt is at a fixed rate, than obviously, the other piece being variable and what is your average interest rate in the quarter?

I think most of it is fixed.

Yes.

And Vince is looking up the numbers.

Okay.

I think the blended average is somewhere around 6%.

Yes, actually the -- the weighted average effective rate on our debt after taking into account our swaps is approximately 6.4% for the year.

For the year. Okay.

And so the bulk of it is still fixed, but we have swapped out a fair amount as well.

Okay. And on your balance sheet, I know historically you've had long-term investments. You just have a selected balance sheet data here. Do you have anything in the long-term investment category currently?

Yes, we do. We have long-term investments that are of a nonoperating nature that -- in that long-term, other asset category.

Okay.

That -- the income or the gains that are generated off of that are reflected in other income, below the operating profit line. So that does not aid or serve as a detriment to our operating profit.

Okay. And last one, you had mentioned the capital spending for '08, but I'm not sure you indicated a range that that may fall into.

Our range to start out the year is going to be a fairly broad one of between $60 million to $70 million.

Okay. Great. Thank you very much.

And, Greg, I think I realized on your question concerning Europe, appreciate that the European geographical segment did have the $9 million gain on the sale of property in the prior year.

Okay.

And so that's what you might be looking at from a year-over-year quarter basis in terms of Europe's EBIT profit was aided by almost half of that associated with the gain on the sale of property.

In the prior year?

In the prior year. And so if you review that from an apples-to-apples basis, actually European EBIT has risen a bit on a year-over-year basis, excluding the gain on sale of property.

Okay. Great. Thank you for clarifying.

All right.

Our next question is from Seaver Wang with Utendahl Capital Partners . Please proceed with your question.

Good morning. Just wanted some details on what's going on with European rationalization (inaudible) quarters, you have certain projects, I guess, you guys are completing. Details there and then, I guess, the second question is just about retail in general. It's coming back, a little bit about the new product you mentioned, if you can give me a growth rate.

All right. Seaver, this is Vince. To start on the rationalization program in Europe is all but been wound down with the finalization of our move from Ireland to a new plant in Poland for our cutting apparatus business. And you see a small credit in the quarter, because we recognize the partial settlement on a pension scheme that we're winding down in Ireland. We have no other programs that are active from a European rationalization standpoint. That Irish to Poland rationalization has been going on now for the better part of two years and the Polish plant is up and running and the Irish plant has been sold as attest to our gain that we recorded in the prior year. So we still need to completely wind down the pension program. So there might be some additional credits that we book during the course of 2008, but everything associated with that rationalization program has been completed, except for finalizing the pensions, and there are no other active programs that we are working on or have been approved to move forward currently in Europe.

Okay. And the -- just the details on retail?

I didn't quite understand your question when you say the details on retail.

We refreshed our machine product line in the retail group.

Home Depot, Lowe's.

Yes, I think that's been stated. We had had a product line that had been for both of them on the shelves for probably close to five years and we totally redone that product line and modernized the look and the feels and the features of that. We have added some additional products and some cases gained additional space in the larger more active stores and we are quite optimistic that that will give us a pretty good result.

Okay. But, I mean, you attribute the lack of new product as the reason why it kind of faltered a little bit.

Well, I wouldn't say that it had faltered. I mean, we had the great run up and while retail sales in total were doing very good, we were doing quite well with it. When retail sales started to slow, we were fortunate that we were ready with this new product line and that stopped any slide and held us, I would say, equal with where we had been versus continued growth.

Thanks.

Our next question is from Holden Lewis with BB&T. Please proceed with your question.

Thank you. Good morning. Going back to last time raw materials were spiking, the way we say. Give us a little history lesson and what we can expect this time. If I remember correctly last time, obviously it was good for revenues because you could accelerate your pricing piece and you kind of indicated that is going to happen. On the other hand, it tended to erode the gross margin, just as the math worked out, so dollarwise, it was largely unchanged. Can we expect to see the same things but in percentage terms, the gross margin comes under pressure as the revenue accelerates? And do you think that you can fully offset the raw materials stuff pretty quickly or is there going to be kind of a meaningful lag as I believe there was last time.

Actually, Holden, your memory is fairly accurate. What we did have happen -- and first I would have to say that our compression in margin will largely be dependent upon two variables. One, the significance of the raw material price increases on their own. Now you might recollect in 2004, the price of the steel that we purchased went up in one year approximately 80% to 100%. And in that particular year, '04, we saw almost monthly price increases from our steel vendors and we were behind the trend during the course of 2004. So we did lose certainly a bit of margin and quite a bit more from a compression stand point as raw material prices rose dramatically and we tried to keep up with it, with quite a few price increases, as well.

So it wasn't until fourth quarter '04, or running into 2005, that we believe we caught up and were able to deliver the same gross profit dollars to our bottom-line that we were able to deliver on a consistent basis prior to the dramatic increases in steel prices. Now, we do have a bit of experience under our belt. It wasn't that long ago that we went through 2004, so I would tell you that the organization is better prepared and poised to more rapidly raise our prices as steel costs rise. However, it's remains to be seen how rapidly those steel costs may rise and how often. If we get into a situation where steel prices are rising again on a monthly basis, it will be a challenge for us to keep up with that, but we are certainly experienced in that dynamic running out of 2004 and '05. But to remind you, we had a margin compression in '04. We estimated of upwards of 300 basis points, simply by grossing up the P&L, if you will, by raising prices to try to match and stay on top of raw material cost increases.

And if memory serves, I think that you had price increases back then of like 8% to 9% annually. I mean, you wouldn't expect something of that magnitude at this point and so any sort of weakness of the gross margin obviously wouldn't be of that magnitude either?

Well, we had price increases far exceeding 8% or 9% on our consumable side of the business. We rose -- we raised prices double-digits a couple of times during the course of that year. But, again, Holden, it all -- it's -- the variable it is dependent upon our price increases or what will raw material costs do and we plan on being fairly active and aggressive in passing those costs through to our constituents.

What I would also say, Holden, that, as I mentioned earlier, all of our domestic and international competitors are faced with the same or worst situation and we are seeing evidence all around the world of primary competitors increasing their selling prices, which we didn't see the early evidence of that back in the earlier period that you were talking about, the 2003/4 period.

All right. Great. Can you also comment, I guess, about -- you -- in your writing and in your dialogue, you sort of mentioned how you are going to focus on investments with higher returns in 2008. I mean, I guess -- I presume that you are always focusing on investments at the highest returns, of course. So I guess I'm curious about, since the statement is there, are you changing how you are looking at any of these projects?

No.

Have you sort of taken some off the table, changed the mix of what you want to do? Any sort of changes in what you have been -- how you have been approaching it so far?

I think what I said was we were going to continue to focus our efforts and investments in areas of higher growth potential.

Got it.

And not necessarily the higher returns. And we recognize what markets are growing and we're taking a very long-term view towards those and making the strategic investments in those. It goes back to our story that we tell many times, is that we have to build the infrastructure in those growth markets in order to capture the long-term return and that's where our focus is. And to that point, that's why I am kind of asking is that just kind of a boiler plate statement or does it reflect that you have made, like I said, taken some stuff off the table, given what you are seeing in the macro? Is there any changes in your investment sort of philosophy given what you are -- . We haven't taken any good investment opportunities off the table.

Okay. And then I guess lastly, can you give a little bit of color, you referred to steps you are taking to improve the Asian margins. Can you give a little bit more color of sort of what those steps are and how quickly they should begin to bite and move the margin up again?

Well, I would say there's two or three primary initiatives that we're working on in our Asian theater. And the first is better price realization and we have taken actions to raise prices on certain product lines that we have strength in market share and strength end user markets. We are working at balancing our production requirements better against our market needs. And the third is we continue to look at areas of cost reduction and improvements and efficiencies to help our cost profile in the region as well.

But as I have mentioned in the past and certainly in our third quarter conference call comments, we are going to continue to be expanding our manufacturing and our distribution and our selling capabilities in the region. So we will clearly for sometime to come be faced with the headwinds of adding costs ahead of a pricing and a margin dynamic that will deliver the kinds of returns that we have come to expect in other parts of our business. But I would put at the top of the list, Holden, the managing of a pricing a little more aggressively and actively than what we have seen in the third and the fourth quarter. As far as your question on timing, as I said in some of my earlier comments, I think we are starting to see what I would view as a bottoming out of the decline in EBIT margins from this region that we experienced during the third and fourth quarter. And I think we will start to see during the first half of 2008, a restoration of somewhat slightly higher margins in that other countries segment.

Okay. And then just lastly, the -- the better pricing you are referring to, that's obviously -- you are expecting that to be above and beyond what you need to do from a raw materials standpoint?

Yes.

Great. Thank you.

You're welcome.

Our next question is from Walt Liptak from Barrington Research. Please proceed with your question.

Oh, thanks. I'm glad I made the cut , we are running a little bit long.

Walt, this is your last question, Walt.

All right. Can I do a last one and then a follow on? Let me take a shot at this. About Asia, what -- for the full year, what was the EBIT margin? We know that it was 1.5 for the quarter.

I'm sorry, could you ask that again?

Oh, for the -- in other countries, what was the operating profit margin for the full year?

Okay. Hang on.

And then the question for you and for John is given the pluses and minuses, the expansion, et cetera, in Asia, how many basis point improvement can we expect or would be reasonable to expect in 2008? 200 basis points? 300 basis points of operating profit improvement?

The answer to your first question, the other countries segment delivered 4.9% EBIT margin for the full year.

Okay. And can that get up to 7% or 8% or 9% in 2008?

I'm not going to make those kind of forecasts.

Okay, I thought I would try.

Yes, try and try again. But what I will reiterate and what we have said on a number of occasions in the past is that we have a track record of strategically penetrating geographies where Lincoln has little or no market share. We have a track record of building our infrastructure, importing our products into those markets and steadily but surely gaining market share and margins as we grow our footprint. And deliver to the market place a full suite of Lincoln products across the consumables and machine spectrum. So I -- as much as I would like to make predictions, I can't say when that may occur in the other country segment or Asia for that matter or China, more specifically. But we are confident that our model works and we have shown and demonstrated over our history in penetrating Latin American markets, European markets and last of which Asia and the subcontinent, that we are able to gain share, fill our complete product portfolio out through end users and distribution, and drive that operating profit margin up to what you see in the rest of the business.

Okay. All right. Sound's great and then if I can do a follow on to an earlier question.

Last one.

Cash -- with the cash on the balance sheet, what kind of interest income can we expect? What kind of rate are you getting on that?

Right now, I would say it's around 4.5% is what we are getting.

Okay. All right. Thank you.

Our next question is from James Bank with Sidoti & Company. Please proceed with your question.

Hi, guys. I have a real quick one. If I could take a cumulative absolute dollar for JW Harris and the soldering and brazing that goes into HVAC, more of that residential area, as well as the products that go into the Canadian automotive sector, could you give us a ballpark as to the breakdown percentage of revenue that those two items are on a cumulative basis?

Well, we don't report that publicly, James. I would be remiss to provide you with those types of figures, but I would say that it's clearly less than 10% of our aggregate business.

That's perfect, thank you.

There are no more questions in queue. I would like to turn the floor back over to Mr. Patrella for closing comments.

Thank you very much, Latona. We do appreciate your participation in this fourth quarter and full year call. We look forward to seeing those of you that are coming to New York for our NASDAQ conference on March 7th and hopefully if we miss you there, we will talk to you on our next call for the first quarter 2008. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.