Lincoln Electric Holdings Inc (LECO) 2008 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Lincoln Electric first-quarter 2008 financial results. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Vincent Petrella, Senior Vice President and Chief Financial Officer for Lincoln Electric. Thank you, Mr. Petrella. You may begin.

Thank you, Doug. Good morning and thank you for joining Lincoln Electric's first-quarter conference call. Results for the 2008 first quarter 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.

Our Chairman and Chief Executive Officer, John Stropki, is joining the call this morning and will provide commentary on the quarter in a moment. But first, let me remind you that certain statements made during this call and 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.

Now let me turn the call over to John Stropki.

Thank you, Vince. Good morning to everyone, and thank you for joining us. We had an excellent start to 2008, with strong sales, profitability and cash flow. Despite a very volatile domestic economic environment and rapidly rising commodity costs, we were able to continue to leverage the strength of our strong domestic and global market positions.

We remain focused on executing our long-term strategy, despite the softening in the industrial economic outlook, by continuing to capitalize on key global infrastructure development opportunities and expanding our value-driven welding products and service offerings around the world.

Vince will cover the financials in detail later in the call, but I will cover the high-level numbers and then review our operations and the economic environment as we move forward in 2008.

First, let me begin by reviewing a few key economic measures that we follow as indicators of the broad conditions of our business. Key industries that we serve show mixed results in terms of year-over-year comparisons. As an example, durable goods manufacturing, excluding vehicles, and fabricated metals were up in the quarter 4.5 and 2.4%, respectively, while heavy-duty truck manufacturing and motor vehicles were down year over year 19% and 10%. Overall, U.S. industrial production, excluding high-tech sector, decreased 0.2% in March from the prior-year March. And lastly, the U.S. Purchasing Managers Index continues to show contraction, although the measure increased slightly in March to 48.6%, up from 48.3% in February.

Turning to our Q1 results, overall sales increased 13% to $620 million for the first quarter 2008. Operating income increased 14.9% to a record $78.5 million in the quarter, and cash flow from operating activities increased 59% to $67.5 million.

Sales of the Company's North American operations rose 7.3% to $371 million in the quarter. U.S. export sales in the quarter increased almost 30% to $61.5 million. Sales recorded by our European subsidiaries grew 21% to $147 million, while other international subsidiaries recorded increases of 25%, totaling $102 million in sales for the quarter.

Those are the high-level numbers; Vince will again provide details in a moment. But I would like to cover the activity in the quarter for the regions and the sectors first.

First, looking at North America, despite a slowing economic growth trend and forecast, our overall results and demand continued to be positive during the first quarter in our North American operations, as sales increase was driven by a combination of both volume and price. We do, however, expect the overall economy to continue to show weakness and possibly some additional contraction in certain key sectors during the remainder of 2008. Any sector tied to automotive, heavy-duty trucks and housing construction, including HVAC and light construction machinery, continued to be soft in Q1 '08.

Sales trends in the first quarter of 2008 for our traditional U.S. welding markets remained consistent with those experienced in the fourth quarter of 2007, with the exception of light commercial equipment sales. Across most consumable product lines and our main distribution channels, we saw growth in the first quarter of 2008 compared with 2007 levels.

Pricing has been adjusted effective February 1 and again on April 1 to respond to cost increase in our key material groups like steel, copper and chemicals. Pricing and supply for key raw materials will present ongoing challenges in 2008 in all areas and all regions of our business. Continuing upward pressure on these input costs will necessitate additional pricing adjustments, and we anticipate additional increases in June as our costs continue to escalate.

U.S. sales growth -- export sales growth continues to be strong, where key global infrastructure development projects have preferred our higher-tech products versus other international and local competitive options. These large-scale, long-term projects associated with oil and gas and energy overall sectors continue to drive both the sales and expansion of our global brand, and we look for continued growth in this area for many years to come.

In terms of the short-term outlook for North America, we believe demand should begin to bottom out, with the longer-term landscape somewhat more positive as those industries already heavily impacted start to move in a more positive direction. However, overall results will be heavily driven by the key end-user market sectors.

Turning to Europe, the first quarter of 2008 European growth rates, excluding exchange rate impacts, continue to slow compared to the robust levels experienced in 2007. However, there continues to be growth in our base European business as the integration of past acquisitions and our manufacturing expansion efforts in Eastern Europe continue to benefit the region.

The recently announced acquisition of Electro-Arco will contribute both a strong Portuguese commercial sales channel and expand our regional manufacturing capacity to support the overall European market for welding consumables. The additional manufacturing capacity will provide needed relief for key consumable products facing capacity constraints in the region. The integration of this acquisition is well underway, and the significant benefits should be realized moving forward in 2008.

Looking at the regions outside of North America and Europe, first focusing on Latin America, South America continued its 2007 strong growth trend in the first quarter of 2008, with greater than 30% sales growth. The oil and gas sector as well as the mining sectors continue to invest heavily as commodity prices remain at historically high levels and demand continues to exceed supply.

Our expansion efforts in Colombia and Brazil are allowing for our full participation in the increased investment levels related to offshore, mining and the pipeline sectors. This expansion provided significant volume increases throughout the region. The level of activity in Mexico also continued the positive growth experienced in the fourth quarter of 2007 as many related projects continued investing in expanding capacity and the political issues affecting project work seem to have subsided.

Turning to Asia-Pacific, Asia continues to be central focus point for our international expansion, and a significant progress was made in the quarter. The integration of our early joint venture executed in February of 2008 is providing the region with additional offering of high-quality submerged arc consumables. Additional investment continues in building out our manufacturing capacity and commercial distribution network in China, and construction continues on our first consumable manufacturing facility in India, which is scheduled to begin production in the fourth quarter of this year.

Economic growth in China remains strong. But tightened measures and stronger currency are expected to take 1 to 2 points off the GDP growth for the full year. We also expect some negative impact from the Olympics, as many industries and mines will be shut down in the Northeast China for several months before the games in order to reduce air pollution. This will likely cause raw material shortages across many industries. That said, strong infrastructure spending, especially in the energy field, will continue to drive our business growth there for the next several years.

These markets also continue to drive a significant portion of our U.S. and European export sales, along with the sales of our local subsidiaries. Our overall market penetration into China and India continues to grow as total sales grew by 83% and 39%, respectively, in the first quarter of 2008 compared with the year-ago quarter. Import sales volume supports our effort to develop the local commercial and manufacturing capabilities in these countries in Asia and in the region in general.

These strong Q1 results were also achieved in China despite a significant snowstorm in Northern China during late January and early February, which affected transportation and power supplies.

Looking at the Middle East and Africa, the Middle East continues very strong with energy-related projects, pipeline, offshore platform and power plants booked several years into the future. Standard welding machines and consumables, along with our newer technology, which improves efficiency and throughput, are still being ordered at robust and record pace.

Related energy investments are strong in shipyard, cement mills, aluminum smelters, petrochemical plants and steel fabrication plants all making demand for welding products very strong. The steel industry within the region plans for solid growth as mining, shipyards and infrastructure programs continue at excellent pace.

With the world's strong appetite for energy and natural resources, both the Middle East and Africa will continue their robust pace of welding activity. Many projects are planned and committed over the next several years.

That's a quick view of the Company's regional results and relative market conditions for the last quarter and year. Now Vince will go into the details of the financial results.

Thank you, John. The first quarter of 2008 represented our 17th consecutive quarter of strong earnings growth. As John mentioned in his comments and in our press release, you will note that our sales were up 13% in the quarter, with North America increasing 7% and sales reported outside of North America up by 23%.

To break that down, our foreign currency impact increased reported sales by 5%, volume increases contributed about 3% to the sales dollars in the quarter, pricing contributed about 3% as well year over year, and finally, acquisitions contributed an additional 2% to the top line.

The percent of gross profit in the quarter was 28.6% of sales compared with 28.8% in the prior year. This slight decrease in gross margins was primarily attributable to our sales mix.

The quarter also included a LIFO charge of $5 million compared with $2.8 million in the prior year's same quarter, reflecting inflationary expectations of raw materials.

SG&A expense was $99 million or 16% of sales in the quarter compared with $89.5 million in the first quarter of 2007 or 16.3% of sales. The lower SG&A as a percentage of sales was primarily driven by volume leverage. There were higher bonus costs and unfavorable translation impact of foreign currency exchange rates that drove the dollar increase in SG&A.

First-quarter operating income at 12.7% of sales was up 30 basis points versus the first quarter of 2007. Operating income increased 15% in the quarter. The prior year's quarter did include approximately $400,000 related to the finalization of European rationalization programs.

On a geographical segment basis, North America recorded EBIT margins of 14.2% in the first quarter. Europe's EBIT margins were 11.8%, and other countries segment achieved a 4.9% EBIT margins in the first quarter. As a reminder, our fourth-quarter 2007 EBIT margins were 14.8% for North America, 10% for Europe and 1.4% for the other countries segment.

The income tax provisions for the first quarter reflected an effective tax rate of 32.3% compared with 30.4% in 2007. The higher effective tax rate was primarily attributable to higher income levels in higher-tax-rate jurisdictions.

Cash flow from operations totaled $67.5 million for the first quarter of 2008 compared with $42.3 million in the prior year's first quarter, a significant increase in operating cash flows.

The Company invested $12.8 million in capital expenditures in the first quarter compared with $15.7 million in the prior year's same quarter. We continue to focus our capital spending plan on our capacity expansions around the world, as well as continuing improvements in our cost base. Other uses of cash flows in the first quarter included the payment of $10.7 million of dividends to shareholders and share repurchases of $18 million or 298,000 shares.

Our weighted average diluted shares outstanding decreased to 43,090,000 shares for the first quarter compared with 43,349,000 shares for the 2007 first quarter, a 60-basis-point decrease in overall shares. Shares outstanding at March 31, 2008, were 42,722,000 shares. The Company has available 4.2 million shares under previously authorized share repurchase programs.

Our return on invested capital stood at 20.2% at March 31, 2008, and the Company closed the quarter with a $105 million net cash position on the balance sheet, including $238 million of cash.

Those are the extent of my prepared comments. At this point, I would like to open up the call for questions. Doug?

(Operator Instructions). Steve Barger, KeyBanc Capital Markets.

I would like to talk about steel first. Can you talk about what percentage of your bias is spot versus contract and how that has changed maybe since the '04-'05 timeframe?

I don't really have the knowledge or the data to go back to 2004-2005. I would say, Steve, that we don't have a very large percentage of our business in the spot buy market. We would only do that if we were in a situation where our capacity was stripping out any contracts, agreements that we had or any of our very long-term suppliers were having difficulty filling their commitments.

That being said, we have seen some of that, but I wouldn't say that it's a tremendous or significant portion, that we have traditionally relied on a good number of reliable, long-term suppliers, particularly in our North American market. And we think that long term, that's the best approach, and we intend to stay in that direction.

In the last week or two, there have been some stories out about steel vendors starting to talk about surcharges on top of fixed-price contracts. Have your vendors come and talked to you about that yet?

Well, I would just say that our impression of the steel market is right now that there is no such thing as a fixed-price contract. With the rapid acceleration of raw materials, what we're seeing is change around the world, and we're adjusting to that change. We do think, again, that the contracts that we have given us a better position than pure spot buys, because people know that we're committed to the volumes in these long-term relationships. But as their costs accelerate, we're challenged with that as they are.

Right. So I guess my question is, in '04' and '05, when we saw a similar kind of situation where surcharges came in on top of fixed-rate contracts, end markets in North America were accelerating, and you guys really did a nice job of going back to get pricing from your customers. Now we are in an environment where you have moderating end markets and potentially globally priced steel inputs. Can you talk about your expectation for your ability to get price in the environment now?

Well, my expectation is we will get the price increases that are required to meet our rapidly increasing costs. And I will tell you that I have never, at least in my career with Lincoln, seen so much equalization in the steel costs around the world. There used to be significant advantages, particularly in the Asian market, to the cost basis of steel in the more mature markets of Western Europe or in the Americas.

That doesn't exist today. And we're seeing, in many cases, the prices are higher in some of the emerging markets due to either fiscal restraints in China, as an example, where the government is trying to curtail the amount of exports for steel and energy cost inputs, and we look at it as being a very much level playing field at this particular point in time. There may be some short cycle spikes in one market or another, but in general, our costs for raw material are pretty level everywhere around the world today.

Okay. Are you seeing any distributors kind of build inventory in anticipation of steel price increases?

Again, that seems to come up on about every call, and quite frankly, no, I don't think so. I will say if we announce a price increase, which we will here shortly, we will get a little bit of a short-term spike. But it just doesn't carry over very long.

And we also -- we have limited capacity in consumables, and we can't just go out and make double or triple in short order to allow people to offset those pending price increases. So our supply will be pretty consistent. And what we don't ship within the deadline -- remember, our prices are priced, in effect, time of shipment. So there's really not a big advantage in being able to do that.

Okay. Your inventory -- was the increase more a function of finished goods, work in progress or raw material?

Well, I will make my point and then allow Vince to answer. Again, if you look at what's happening in steel costs, if we've got the same amount of steel, and steel costs are up 30% to 50% to 100%, depending on which product you're talking about, we're going to see an increase in the dollars of our inventory driven by that alone. And then, again, in anticipation of pretty robust demand and accelerated costs on steel, we have done some forward buys where those opportunities presented itself.

Steve, the increases have been largely across the categories of raw WIP and finished goods, with the largest dollar increases between March 31 and the end of the year being in WIP and finished goods.

Mark Douglass, Longbow Research.

Good job. Vince, can you break out the FX acquisition price volumes on EU, then rest of world and North America?

On the sales side?

Yes.

Yes. For North America, the increase in volume was 2.2%. Price was 3.5%. Acquisitions were 40 basis points and foreign exchange was 1.2%. Europe, volume was 4.2%, acquisitions 1.4%. And the favorable impact from foreign exchange was 15.4%. All other countries, volume was 2.2%, price was 7.8%, foreign exchange was 7.7%, and finally, acquisitions were 7.0%.

Great. Some healthy price increases in rest of the world. Can you talk a little bit about your automation group? I assume that growth is still healthy. And are you seeing accelerating growth or decelerating growth in particular markets? It looks like robot growth -- just overall, robot industry has been pretty healthy.

Yes, I would describe our automation and environmental services business as being, from a percentage increase year over year, our strongest product line. It certainly has the smallest base, but it continues to be robust and growing at a very rapid clip.

So above average.

It's above our overall growth rate for the business.

Corporate average growth rate.

Yes, and I would just add to that that -- you ask the question about that as on an international basis, because traditionally our robot automation business was very much focused on the U.S. and Canada. But clearly, that is spreading around the world.

And we are extremely excited about the new relationship that we formed with FANUC Robotics in Japan and in Asia in general. And just at the Japanese Welding Show, which is only held every two years, we had a major exposition of our new welding and FANUC's new robotic platform that was very well received, and we have booked some very nice orders just right out of that show. And we're quite enthusiastic about the growth opportunities, both in Japan and in China in particular, for robotics.

So you are already establishing orders with the international relationship with FANUC.

Yes, yes.

Okay. And just finally, can you give an update on other facilities that are coming online in '08? How is the flux line coming in Euclid? Any other facilities around world?

Well, the flux capacity at Euclid is ahead of schedule. We should be in full production late second quarter. And we are quite excited about that, because it has some technology upgrades. It's going to, I think, further differentiate our sub-arc consumables from our competitors, as well as have the capabilities of improving our cost position there.

The other flux capacity expansion that's going on is in China with our joint venture company Heli. That's been a fairly rapid expansion. The market for submerged arc products in China is growing quite rapidly, and we have a very significant share of that market with our joint venture partner. So we're growing that business quite rapidly.

We're still looking at what we need to do to expand flux in Europe, and we have a number of options that we are exploring, but we'll be making that decision this year and should get some capacity increases into that market marketplace early next year.

In terms of other consumable expansion programs that are underway, I think you know that we are expanding our Mentor/Cleveland facility, 120,000-square-foot facility. That's not pure production, but will improve our production capacity by giving us a better flow of materials with the same amount of production equipment. We think that will be a nice cost advantage. And we are expanding consumables in China for flux cord wire, because that market, particularly in the shipbuilding and the energy sector, has grown quite rapidly, and those expansions will be online yet this year also.

James Bank, Sidoti & Company.

I know you keep mentioning contraction in certain key markets in North America, but seemingly you outperformed again here in the quarter. I just want to know, where is that contribution really coming from?

Well, I think it's fairly broad. I mean, I think, again, we continue to focus on the infrastructure buildout opportunities around the world, because again, we think those opportunities are very much in line with what our strategy is of high-value, high-technology products that aren't subjected to a pure commodity view as people invest billions of dollars in these important projects and want to be sure they have the right technology to support it, and also are looking for productivity improvements, because they are facing labor shortage and timelines to get these projects done.

So that's very much an important part of our element. In those sectors that have been slower, and I touched on them, and I think most of you know what those are that have been depressed for quite some time, like automotive or heavy-duty truck, we continue to look for opportunities where we can capture market share. And when we see those opportunities, I think we have a very good strategy as to how to adjust to those. And I think we have evidenced over the last quarters, with the slower North American/U.S. economy, that we have continued to be able to demonstrate that market share growth.

Well, terrific. I would say you have done more than evidenced.

I would just add some color, James, on the geographical side. Certainly, Latin America and Asia-Pacific continue to be very strong markets for us. You might recollect, in the fourth quarter of last year, our exports out of the U.S. did dip down to low teens. I think they may be 11%, and this quarter our export sales reaccelerated to approximately a 30% increase on a year-over-year basis. And so our export markets are very strong, and our regions in Latin America and Asia-Pacific continue to be fairly robust.

One follow-up point on that, James -- I touched on our acquisition in Portugal, but I think that this provides the same kind of model that we have demonstrated in other markets, is that the company Electro-Arco has a very nice share of the welding consumable business in Portugal and has a very broad and experienced distribution network, which will now be tapping into the Lincoln products from around the world to either add to their product portfolio or to displace competitive products that they currently sell.

And time and time again, as we've made acquisitions in these international markets, which might be niche markets that had certain products, we've been able to broaden their participation of those companies across our total platform and really get the leverage out of those. And we're quite optimistic and excited about that opportunity in Portugal.

Right. I appreciate the comprehensive insight. I was just kind of focusing on North America. But just is it fair to assume, with the infrastructure or maybe even energy-related buildout that you guys are seeing here domestically, should be able to offset further softening in some more of those other areas such as Canadian automotive or HVAC?

Well, I mean, that's our optimistic view. I would tell you that if we were in the economic model that we are in today five years ago, we wouldn't have seen the same kind of good results.

Clearly, our position globally is greatly enhanced, and the infrastructure element of the overall global economy is very robust and we think is going to continue to accelerate, particularly in the oil and gas sector, an example of which would be the number of pipe mills that are making investments to manufacture steel pipe in the United States.

There are six new mills under construction, which will add over 2 million tons of steel pipe capacity in the North American market in short order. And so if you go do the math of that, of the amount of welding consumables and equipment that will be needed to make the pipe and then to install the pipe in the ground, it's a big number. And we're seeing that happen all over the world, and it's a sector of which we have a very dominant share in.

Sounds good.

I would emphasize the point, James, that I think the story here is the continuing transformation of the Company from a North American-centric market enterprise to a truly global enterprise, an enterprise that is taking advantage of the opportunities in overseas markets.

And if you were to roll the calendar back to the last time we saw the kind of softening that we've seen over 2007 and the beginning of 2008 in the industrial markets of North America, our earnings stream and pattern would not have held up and expanded at the robust pace that we're seeing now.

So it's true that the North America has slowed and softened, but there is a continuing strength and acceleration in our international expansion and our margins from the non-North American standpoint.

Okay. Thank you both for that. Could I have -- I think you gave the volume and pricing earlier. Could I just have the sales and operating income or EBIT split-out from Europe and other country?

Europe's sales were $154.4 million. The EBIT was $18.2 million. Other countries were $103.2 million of sales, with EBIT of $5 million. And North America is $398 million of sales, with EBIT of $56.5 million.

Okay. Great, thank you. And I'm sorry, Vince, how many more shares do you have left on your buyback program?

Approximately 4.2 million shares.

Okay. And your interest expense, I was a little bit -- not that it was alarmingly high, but higher year over year. And I was just a little confused, because I thought the two notes that you had remaining were variable notes. I would only assume that those rates would have come down.

Well, actually, the interest cost is about 6.2% of the effective rate on the notes, as well as the swap. Interest rate swap impact puts us at about 6.2%, James.

The reason for the higher interest expense, as I noted in a previous call, was that we terminated some interest rate swaps in a previous year a few years ago. And the accounting for that requires an amortization of the gain. We had a $10.8 million gain from terminating previously held swaps. Those have been amortized against interest expense for a number of years, and that amortization period has run out now.

I thought you had 1.7 million left.

Yes, there's a little bit left. But one of them has dropped off -- dropped down that credit coming through interest expense at this point in time.

And tax, back up? No more R&D credit?

Yes, that's one of the reasons why the effective tax rate is up, is that we haven't been able to accrue for and take the benefit of the R&D credit until our legislatures extend that again. So that drove up the rate, as well as the mix of earnings towards higher-income-tax-rate countries in the quarter.

Do you think that this fourth quarter might look like the fourth quarter from '06, where I guess the legislation finally went through and you kind of took the credit all in one quarter as opposed to levying it through the year?

Let's all write our letters to the Congressmen.

I believe that's it. Thank you both.

Walt Liptak, Barrington Research.

I think we covered North America pretty comprehensively, but I've got one more question for you about the North American operating margin last year. What was that number, Vince?

In --

In the first quarter of '07.

It was 13.3%.

And this quarter it was 14.2%.

Right, 90-basis-point improvement.

Well, congratulations on a great quarter, and that's phenomenal, given what's going on in North America.

My question has to do, or two questions -- one with, John, your commentary on the China Olympics and the shutdowns. Is there a timing, do you think, to your year in China in that your revenue and profitability flows stronger in the first three quarters or the first half? And then what kind of a hit do you take later, during the Olympics?

I would first respond, Walt, to say we haven't developed a pattern in China at this point in time. Our businesses there are still in a developmental stage, where we're adding capacity. We've talked a few times about how we're building our business there through manufacturing capacity, bricks and mortar now. As John pointed out, we're putting more flex cord wirelines in our business there, the SG&A build.

And so as you know, if you follow our other countries' EBIT margins, which China is a significant part of, we have had, I would describe, fits and starts where we've made progress and then we've added costs or brought down production levels and added more capacity. So I wouldn't say that there is any particular pattern that's going to play out over the next year or two in China, even after considering the Olympics in Beijing. So it's going to be volatile and choppy. But at the end of the day, we have great confidence that the trendlines should remain upward.

Okay. So the 4.8% other country operating profit, we've seen most of the expenses that we saw in the third and fourth quarter last year. I mean, are we more solid now in this mid-single-digit level for profitability?

I wouldn't say -- again, I would not say that that's going to be linear. In other words, I would like to think that we have some of those issues behind us now. But again, we are in a very early stage of developing our market in China and Asia-Pacific in general. And I would like to be able to tell you that the EBIT margins will continue on an uptick, but there will be future challenges and future developmental execution strategies that will continue to make, in my opinion, that line volatile.

Okay. Are there any major spending programs that you can see right now that you can talk about that would impact your margin, or is it -- are those behind you?

I would start and let John add. I mean, we are planning on starting our production of our Indian plant by the end of this year. That will add more costs and potential volatility to our model in Asia-Pacific.

As John pointed out, we're adding flex cord wire in our business in Shanghai. During the course of the past year or so, we built a completely new facility there, Walt, that is currently mostly empty. And so we will be adding capacity there and then adding the capabilities from a selling and distribution standpoint to satisfy the productive output that we will be building on the manufacturing side.

So there is a fair amount of investment that will continue, as well as building our flex business there on the back of our Heli joint venture that we signed and closed this year. So there is a great deal of investment going on in all product categories in that region. And so it's likely our greatest investment requirement going forward for some time.

Okay, got it. And the last question is, on the 30% export growth, is that consumables or machines, or is it both?

It's primarily equipment. As you know, most of our manufacturing facilities around the world are consumable factories, where we think it's important to be close to the markets. And with the logistics costs today, it's just not economically attractive to be shipping product from places like China into the U.S. or vice versa. We think that that's really going to catch up with some of the global competitors that have targeted the U.S. market and give us some significant advantage.

That being said, in certain areas of the high-end consumables, submerged arc and flex cord wire in particular for these infrastructure projects like pipelines and energy-related stuff, we still export out of the U.S. into those marketplaces, where we've continued to develop those products and manufacture those products here in Cleveland.

Okay, great. Well, congratulations again.

Greg Halter, Great Lakes Review.

Just wondering if you could comment on the M&A pipeline as you see it today.

Greg, we've said in the past that we have some optimism in terms of our M&A pipeline. We've also said in the past that we view that as a very important component of our strategic plan for Lincoln Electric.

But aside from that, I don't think we can make any kind of predictions over how much in revenue or how much we may spend in the next year or so. We did close the Electro-Arco deal. It will contribute $40 million to sales on an annualized basis in 2008. And other than that, I would simply leave it at there's a lot of activity, and we're hopeful that we can bring some closure to some of these transactions.

Okay. And last question -- I wondered if you could provide the volume growth in China and India.

We don't provide that kind of detail. But I would give you some guidance in that those two countries are some of our biggest volume increases of any of our end market geographies in our world, and it certainly would be in excess of 20%.

I would just add, Greg, that the India opportunity is one that we're quite excited about, that that market is growing very strongly, and also that the profit in that marketplace appears to be pretty attractive because of the lack of large, sophisticated competitors. So we really think that our export sales into that market demonstrate the size and the magnitude of what the growth potential is for us.

Okay, and one other quick one. On your EBIT in North America, that includes the export sales. Is that correct?

Yes, that's the legal entity, North American business' reported sales and EBIT margin.

Great. Thank you, and congratulations on the fine results.

Jason Rodgers, Great Lakes Review.

I had a question on the price increases you talked about April 1. I wondered if you could talk about the magnitude of what those would be, and the same thing goes for June.

Yes, they were -- in April, in our North American business, on the consumable side, because they've been focused on the consumable side of the business because that's where the bulk of the raw material costs increases are coming through, we would estimate that it will have an impact of between 3% and 4%, the April 1 increases.

And I would anticipate that the June increases would be larger than that in magnitude. I think the best way to kind of track the forward-looking view of that is to track what's happening as far as steel costs are concerned, which is pretty readily available information. And I think that these surcharges that I think Steve asked about have accelerated and become more prevalent in terms of the industry standard, and obviously we have to adjust to that.

And the share repurchases in the quarter, do you have the number of shares bought or the average price paid?

It was 298,000 shares. $60.40 in the quarter, average.

And the foreign currency, what impact did that have on operating income in the quarter?

In the quarter, it had $1.8 million impact on net income, compared to $900,000 impact in the prior year.

Okay. And the tax rate for the quarter, around 32%, is that what you think the tax rate may shake out for the remainder of '08?

Well, one of the biggest drivers, as we've discussed in a previous question, is this R&D tax credit, and that is close to 0.75 basis point on the effective rate. So if that gets approved and renewed and extended, we can expect a fairly significant reduction on that basis.

I would also expect our mix to perhaps change a bit as we run through the course of the year. And so I think that this 32.3% is likely on the high end of what we should expect for the year.

(OPERATOR INSTRUCTIONS). Holden Lewis, BB&T.

The affiliate income looked like it was down a bit in Q1 from a year-over-year. Can you give a little bit of color there, since those affiliates seem to be in areas that are performing reasonably well?

Yes, the primary reason for the decline in our equity income, Holden, was our results in our Turkish joint venture. As you know, we've talked in the past about our transition into a new facility, and we're still ramping up our efficiencies and our costs there.

Probably the biggest detrimental impact to that business has been the strength of the Turkish lira during the past several months. And our Turkish joint venture is a significant exporter of product in the region and to the Middle East, the old CIS countries and Russia. And many of the exports are in hard currency-denominated U.S. dollars or euros. And so they've been under a fair amount of margin pressure because of the strength of their local currency. And so the bulk of that decline is attributable to those factors affecting our Turkish joint venture.

Okay. And then secondly, can you give a little bit of color on kind of what you're expecting, I guess, particularly for the pricing? I know it was about 300 basis points for the quarter. Doesn't seem like a real big number, particularly given what you are facing on the raw materials side.

When you go forward into Q2, Q3, Q4, since you have some sense of the timing of these hits, is that 3% number kind of a good go-forward, or do you kind of expect that to step up in out quarters? How should we be viewing some of that?

I think I would just reiterate what John said to an earlier question, and that is, our expectations would be that it's likely that those percentages will escalate. Based on what we're seeing in terms of world steel prices and some of the indications that we're getting three to six months out, it's our expectation that if those hold, I would agree with you; the 3% to 4% is going to look a lot less than what we might expect in the second and third quarter of 2008.

Okay, fair enough. And then if I'm looking at the math right, and I may not be, but it looks like you saw some slowing in sort of the rest of world markets -- I mean, North America at 7%; Europe I think was still north of 20%, which means some of the deceleration must have come out of other. Is that right, or am I just not doing the numbers right?

No, I think you're right. I don't see the numbers that you're doing, but that is true, Holden, that the other countries' volumes have moderated in the first quarter of 2008.

Is that a comp issue or are there specific markets that may not have been as positive as China/India, or how should we view that?

Well, there are some parts of Latin America have been very strong for us, but have been offset by some other parts of Latin America that we've been bringing the volumes down. In particular, Venezuela is one of those countries that we are mitigating our risk of the end markets there by selling more direct out of North America.

And so from an other country standpoint, you will see some lower sales in parts of Latin America like Venezuela, where we are selling more direct to mitigate our foreign exchange exposure. And other parts of the world have been very strong from an end market standpoint. The mix has been stronger on exports into China as compared with some of the locally produced products that we're making there as well.

And I would just reemphasize one point that I made and add one other. Remember, the Easter holiday was in the first quarter of this year versus the second quarter of last year. And in Latin America, that is a big, big event. It's not a day; it's multiple days of celebration for that holiday.

And secondly, in China, from a domestic market side of things, not the import, the snowstorm had a major crippling effect in several of our facilities and several of our end-user customers. And I would say again, that was not a day, but multiple-day events in the quarter.

Okay. And then going back to a comment you made earlier, you talked about how your export sales picked up pretty sharply in Q1 versus Q4 in terms of rate of growth. Then you were talking about maybe Venezuela doing more shipping direct from the U.S. instead of producing it. Is there a conscious decision to move more of your production into the U.S., given the currencies, or anything like that that is sort of causing those two pieces maybe to move in opposite directions?

No. What I would say is the exports are very much product focused, and we don't move that product around. It's generally just where they are. So the Venezuela thing is a conscious decision because of the currency exposure, where we would sell through our subsidiary and we're direct exporting now. But in the scheme of overall size of the Company, it's a relatively minor event.

The other comparison that I think would be important, again, is that exports into other parts of the world in the fourth quarter are dramatically impacted by the Christmas/New Year holiday season in comparison to the first quarter, where we don't have that.

Okay. So your feeling is that the rest of world markets haven't changed in terms of tone and end market demand in any way. There just seem to be some holiday and weather factors.

Yes. I would say maybe the one exception to that is, and again, if you follow this as well as we do, we've seen a little bit of a slowing of growth in the Western European market, the traditional Western European market and economies of Italy and Spain in particular. But the heavy picture infrastructure kind of stuff, which could be export or locally manufactured, still remains pretty strong just in the traditional markets.

Okay, and then just one little piece. You didn't give price for Europe, the price component for Europe. Is that because there is none?

Right. Pricing was flat year over year in Europe.

Great. Thanks, guys.

Mark Douglass.

I think most of my questions have been answered already. So I will just kick off then.

Greg Halter.

You just answered it on the European pricing being flat. But I'm just wondering if that's something you look at seeing an increase down the road here.

We expect to be raising prices in all markets.

Okay, well, Doug, if there are no more questions, we thank everyone for joining us today.

We do have a follow-up question from Holden Lewis.

Okay, we'll take that.

Thank you. We haven't even done a full hour yet, so I figured I could get in.

Hurry up. (laughter)

You had referenced light commercial being a little bit weak in North America. Is that your term for the retail operation, and if not, can you comment on what retail has been doing?

Yes. I'd say light commercial would be retail as well as over-the-counter kind of sales out of the industrial distributors, more discretionary kind of spending geared towards, I would say, light commercial kind of construction projects. So it's the guy who's putting a welder on the back of his pickup truck or putting something into his garage or either private use or small end-user kind of products.

Okay, so retail, obviously, I think that's been a bit softer. Does that get worse, or is that just kind of stable?

In the quarter, it was down a little bit, but we're seeing a little bit of an uptick of that as far as an order pattern is concerned.

Great. Thank you.

There are no further questions at this time, gentlemen.

Thanks again, Doug. And as a reminder, we do have our annual meeting of shareholders this Friday in Cleveland, the 25th. We look forward to seeing you at our annual meeting and reporting our 2008 second-quarter results in late July. Thank you for joining us today.

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