Lincoln Electric Holdings Inc (LECO) 2008 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Lincoln Electric second quarter 2008 financial results. At this time, all participants in a listen-only mode. A question and answer 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. Vincent Petrella, Senior Vice President and Chief Financial Officer for Lincoln Electric. Thank you, Mr. Petrella, you may begin.

Thank you, Claudia. Good morning, and thank you for joining Lincoln Electric's second quarter conference call. Results for the 2008 second quarter were released this morning prior to 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 in a moment.

But first, let's review the schedule for today's call. In an effort to allow for sufficient time for questions, we will keep our prepared remarks brief. John will provide an overview of the consolidated quarter results, and review the performance of our individual regions. I will then review in greater detail the financial results of the quarter, and then open up for questions.

Let me remind you that certain statements made during this call and discussion may be forward-looking statement, and actual statements may differ from our expectations. Risks and uncertainties that may affect our results are provided in our press release and on our SEC filings on forms 10-K and 10-Q. Now let me turn over the call to John Stropki.

Thank you Vince. Good morning everybody, thank you for joining us today.

We had excellent results for the second quarter of 2008, with strong growth in sales and profitability and continued strength and cash flow. Our broad global footprint allow for significant sales growth and margin expansion in the quarter, despite a very volatile time in the metal market affecting both price and supply. In addition, slowing economic growth rates in both Europe and North America continued. We do remain focused on executing our long-term growth strategy, capitalizing on a global infrastructure and energy-related development opportunities, as well as expanding our value-driven welding product and service offerings.

Let me start by reviewing a few key economic measures that we follow as indicators of the broad conditions in our business. Total US manufacturing industrial production, excluding high tech, was trending two points below 2007 as of June, 2008. While capacity utilization was running 77% in June, down two percentage points from the beginning of the year. In addition, the market impacted by the housing and the consumer sectors continued to be very strained. However, despite the negative economic indicators in the US, global steel consumption in forecasted to grow 6.7% in 2008, and another 6.3% in 2009. This should be a positive factor in the overall welding consumption category.

Turning to the company's second quarter results. Overall sales increased 19% to $700 million for the second quarter of 2008. Operating income increased 22% to a record of $92 million, and diluted earnings per share grew 28% to $1.62 per share in the first quarter. Cash flow from operations totaled $53 million in the quarter, despite rapidly accelerating costs of raw materials.

Looking at North America, sales from the company's North American operations rose 10% to $401 million in the quarter. US export sales in the quarter increased almost 29% to $64 million. Despite a slowing economic growth trend and forecast, our overall results and demand continued to be positive during the second quarter in all of our North American operations. Our sales increase was driven by a combination of both volume and price during the quarter. We do however expect the overall economy to continue to show weakness and possible further contraction in certain key sectors during the remaining portion of 2008. As an example, any sector tied to automotive, heavy duty trucks, housing construction, and light construction should continue to be soft in the second quarter and through the rest of the year. Sales trends in the second quarter of 2008 for our traditional US welding markets were much choppier in the second quarter, suggesting uncertainty in the overall strength in the industrial markets, we serve in the US. However, despite the uncertainty, our US domestic welding business grew 8% in the quarter of overall negative industrial production numbers. These results clearly highlight the structural change in our business profile with increased focus and exposure to infrastructure, energy-related and high value added projects.

Consumable pricing has been actively managed throughout the year, with increases implemented in February, April, May, and most recently July 1st to address increases in steel and other raw material costs. Equipment prices has also required active management in 2008 as raw material prices increased, especially copper, steel and engines, led to price increases in February and again in July. Pricing and supply for key raw materials like steel and chemicals will present ongoing challenges during 2008 in all areas of our businesses. The continued upward pressure on these input costs could necessitate additional pricing adjustments, and we will monitor this situation and be very proactive. US exports for our high-end products continued strong in the quarter. This growth is being driven by increased demand from large scale infrastructure projects currently under way, especially oil, gas and energy-related in Russia, the Middle East, China and India. Our Canadian results rebounded somewhat in the second quarter, driven by both consumer demand and equipment demand. This recent change is a positive development as Canadian results had turned negative prior to the US demand softening.

We believe the short term demand trends in North America will continue to be soft. Volume growth, which has softened since early 2007 will remain under pressure in through the remainder of 2008, material cost increases will continue to drive the majority of the year over year topline growth with comps becoming more challenging. Turning to Europe, third party sales for our European subsidiaries grew 29% to $171 million. Excluding the impact of acquisitions and foreign exchange, the sales increase was 6% in the quarter. The second quarter 2008 European organic growth rate continues to slow compared to the robust levels experienced in 2007. However we continue to experience 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. As an example. The acquisition of Electro-Arco in April 2007 contributed 9% of the region's sales growth in the quarter. We are very pleased with progress made with the integration of this important acquisition into our European operational structure. The leveraging of both the manufacturing operation and their capacity, combined with their strong Portuguese construction infrastructure will continue to benefit the Europe region for years.

Looking in our other country sector, international subsidiaries outside Europe and North America, recorded sales increases of 41%, totaling $128 million in sales for the quarter. In local currency and excluding acquisitions, the sales growth in the quarter was 21%. Latin America continued it's strong growth trend during the second quarter of 2008 with 20% sales growth in local currency. The combination of the region's strong end user sector demand in the energy and mining sectors plus the continued development of our regional manufacturing capabilities and commercial distribution network have allowed for our full participation in the region's economic growth. Our investment efforts and market share gains in the Latin American region should continue through the remainder of 2008.

Turning lastly to Asia-Pacific. Asia-Pacific continues to be the central focus of our international expansion and 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 offerings of high quality submergible consumables and major expansion plans are under way. Additional investments continue in building out our manufacturing capacity and commercial distribution network in China. The previous announcement expansion of our Nanjing welding consumable operation is also on track. Our overall China business continues to develop market share in the region and is growing profitably. Overall economic growth in China remains strong but the government is taking action to achieve a targeted GDP growth rate of 9% for the next two to three years, so that they can hope to control overheating in certain sectors and push the nation producers to more high-value output. Energy shortages throughout the country have affected industrial production results and illustrate the dramatic need for expanded energy capacity. This energy need favorable impacts the overall welding market as the government commits significant resources to these large scale and long term energy construction projects.

Lincoln Electric is well-positioned with the combination of a local presence and service capabilities and our high end equipment and consumable supplies for both the US and Europe to strongly participate in this sector growth. China's markets also continue to drive growth of our locally manufactured products, sales of our locally manufactured consumables, produced in our Shanghai facility, increased by more than 50% in the quarter. As we continue to invest increased production capacity to service the local market and the demand of shipyards. Our Inner Mongolia facility has also expanded their consumable manufacturing capabilities to better serve the local customer market needs. That is the view of the company's regional results and relative market conditions for the last quarter. Vince will now go over the details of the financial reports.

Thank you, John. The second quarter of 2008 represented our 18th consecutive quarter of strong earnings growth. The quarter's consolidated sales were up 19%, with North American sales increasing 10% and sales outside North America up 34%. Foreign currency, FX increased reported sales by 5%. Volume increases contributed 3% to sales dollars in the quarter. Pricing contributed 7% of the increase in sales dollars year over year, and finally, acquisitions contributed about 4% for the year over year increase.

On a product line basis, machine sales increased 9%, and consumable sales increased 26%. Excluding acquisitions, consumable sales were up 21%. Sales by product line were approximately 63% consumables and 37% equipment compared with 60% consumables and 40% equipment in the prior year's same quarter. The percent of gross profit in the quarter was 29.3% of sales, compared to 28.8% of sales in the prior year's same quarter. The increase in gross margins as a percentage of sales was primarily attributable to an increase in margins in geographies outside of North America and Europe. The quarter did include a LIFO charge of $14.5 million compared with $3.2 million in the prior year, same quarter. First half gross profit was 29% of sales compared to 28.8% of sales in the prior year. This year over year improvement in gross profit was due to the favorable operating leverage caused by increased volumes and improved pricing,

SG&A expense was $113 million or 16.2% of sales. The higher SG&A as a percentage of sales was primarily driven by higher foreign currency transaction losses and incremental selling and administrative expenses. Foreign currency exchange rates increased SG&A expenses by $4 million in the quarter. For the first half, SG&A expense was $212 million. Or 16.1% of sales, flat with the prior year. Incremental selling costs associated with higher sales volumes, additional SG&A associated with acquisitions, higher bonus costs and foreign exchange losses were the primary factors driving the dollar increase. Foreign currency exchange rates increased SG&A expenses by over $8 million in the first half. Second quarter operating profit at 13.1% of sales was up 30 basis points versus the second quarter of 2007. Operating income increased 22.% in the quarter. On a geographical segment basis, North America recorded EBITDA margins of 14.4% in the second quarter, Europe EBIT margins were 11.5%, and the other countries segment achieved a 9% EBIT margin. First quarter 2008 EBIT margins were 14.2%, 11.8% and 4.9% for North America, Europe and other countries respectively. First half operating income rose to 12.9% of sales from 12.6% in 2007, again, a 30 basis point increase, operating income increased 18% in the first half of 2008.

The first half of 2007 did include European rationalization charges of approximately $400,000. Excluding these charges, operating profit margins would have been 12.7% in the prior year. The income tax provision for the second quarter reflected an effective tax rate of 26.3% compared to 29.6% in 2007. The year to date effective tax rate was 29% compared to a year to date rate in the prior year of 30%. The cumulative catch-up effect of adjusting the year to date effective tax rate to 29% increased net income by $2.6 million or approximately $0.06 per share. The lower effective tax rate was due to additionally utilization of foreign tax credits from the repatriation of higher taxed foreign earnings. The company invested $31 million in capital expenditures in the first half, compared with approximately $30 million in the prior year's first half.

Our 2008 capital spending plan will continue to focus on capacity expansion as well as our continual improvements in the overall cost base. Other uses of cash flows in the first half included the payment of $21.4 million of dividends to shareholders and the repurchase of shares totaling $18 million. Weighted average diluted shares outstanding decreased to 43.173 million shares for the second quarter, compared with 43.461 million shares for the 2007 second quarter. A 0.7% decrease. Shares outstanding of June 30th, 2008, were 42.845 million shares. Our return on invested capital stood at 20.3% at June 30, 2008. And we closed the quarter with over $117 million of a net cash position on our balance sheet.

That is the extent of my prepared comments. At this point, Claudia, I would like to open the call for any questions.

Thank you, ladies and gentlemen we will now be conducting the question and answer session. (OPERATOR INSTRUCTIONS). Our first question is coming from Walt Liptak with Barrington Research. Please state your question.

Hi. Thanks. Good morning, Vince and John. Congratulations on a great quarter. I wonder if we could just kind of quickly go through the geographic segment data in detail, I know John touched on some things, but the exact numbers of things like volumes, foreign currency, acquisitions, price by those geographic regions.

Sure, Walt, North America, volume 1%. Acquisitions 1%. Price, approximately 8%. And foreign exchange, approximately 1%. For a total of around 10% based on rounding. Europe, volume was up 5%. Acquisitions about 9%. Price about 1%. And foreign exchange, approximately 15%. And finally the other countries, geographical segment volume up 6%, acquisitions 11%, price up over 15% and foreign exchange contributed about 9%.

Okay the things that jump out at me first, the Europe up 5% versus up 4.2 in the first quarter. And on a tough comp. And people worried and I worried during the quarter about Europe's slowing, and how dramatically. You talked about choppiness, I think, John, you were talking about North America. But I wonder if you could talk a little bit about what you were seeing in Europe, maybe how things trended during the quarter, and what you think the environment might look like in the third quarter.

I think part of our volume growth, Walt, in Europe is based on the expansions that we have put into place as far as capacity, particularly in our Polish Flux Core plant, we've been talking about the growth of the European economy, and particularly the shipbuilding industry, which is going very strong there, and we focused a lot of our energy on lining our resources to be able to participate in that growth, as mature countries have slowed a little bit. That strategy has worked quite well for us. The other element would be, I think it is representative of what we continue to see in the US to some extent, is that even though the overall European economy is slowing, those industries that are part of the energy and infrastructure sectors are doing exceptionally well, both in the domestic markets, wind towers, things like that. But also for exports of energy-related projects. And again that is a sector which we have put a lot of energy into and one which we are doing quite well in.

Okay, it looks like in Europe you are able to raise prices again. Are you expecting more price increases for the back half of the year?

I would say in Europe, in particular we were probably a little bit behind the price to cost curve there versus the North American market. I think they caught up a little bit later than what we see in some of the other markets. Obviously it is a very volatile situation. We see steel continue to be volatile, both on a supply and on a cost side, and we're seeing it at a period of time where the economic conditions don't seem to support it. But yet steel consumption numbers are very strong, and the interesting dialogue is what happens if the core base comes back and the impact on the market is concerned. So we don't have quite the pricing leverage in the European market that we have in some of the other markets because there's not quite the consolidation and there's a lot of local players, but I think our guys did a great job there. And they clearly understand the fundamentals of what needs to be down.

The 15% price in other countries, was that the main reason for the nice operating profit that you had in other countries?

Walt, it is a combination of both pricing and volume. We did have a -- a nice volume increase in the other countries. And we have taken the opportunity to catch up a bit on pricing, and particularly in Asia-Pacific, where the latter half of last year we fell behind. So we have caught up on some of our pricing management during the course of the first quarter of 2008.

Yeah, Walt, just as a follow up to that, as you remember we had some issues on the US currency related pricing, particularly of exports out of places like Australia, where their currency accelerated substantially versus the US dollar, yet our contract was in US dollars. And we fixed that, and I think that is normalized, and clearly have a better concept of focusing on the market.

Okay, thanks very much guys.

Our next question is coming from Michael Cox with Piper Jaffray. Please state your question.

Congratulations on a very nice quarter. Thanks for taking my question.

Thank you.

In terms of the North America business holding up better than we expected, I just wondered if you could comment on the specific end-market strengths you're seeing out there that is keeping that business trending the way it is.

Well, I think it is pretty consistent, big infrastructure energy-related kind projects. I saw Caterpillar's results, their export business is very strong. I think that's true of other companies in the heavy duty construction equipment kind of business where they're using their domestic capacity to fill international orders and export demand. And that is where the play is. And the big question mark is how bad can the domestic economy get, and that continue to offset it? The overall economic news it doesn't appear to be getting any better in terms of the overall durable kind of goods stuff. And it's a question of how much business we can gain in those sectors and how efficient we are, and how quickly the turnaround comes about in the other sectors.

Okay that is very helpful. I was wondering if you could update on the plans to open a facility in India, any timing on that?

Well, the construction is well under way. We're probably a little bit behind our very aggressive schedule for that. The biggest bottleneck is in the water treatment facility, where we're installing a state of the art environmentally friendly environmental system there, and the technical expertise within county to do that is not what we would like it to be, but we're optimistic that we'll be near the schedule of late fourth quarter or first quarter next year in producing the product and moving it in the market place.

Okay, that is helpful. In terms of price increases, been successful through the course of the first half of the year, do you anticipate further pricing as you move through the balance of the year?

Well that will be predicated on the cost input. We're not in business to just raise prices to the long standing customers, but we are passing through the cost increases that we receive from our suppliers. So we'll be watching that. We're doing everything we can to mitigate our costs, including a lot of investments and efficiency improvements in driving productivity. But with the steel input costs with what they are as a percent of our overall business, if we get continued increases in steel and other raw materials, obviously we're going to watch that very closely.

Okay, and my last question on the tax rate, should we be thinking of the second half tax rate being more in line with the first half tax rate in the 29% range?

Yeah our effective tax range estimates for the year now stand at that 29% which we booked year to date.

Thank you very much.

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

Good morning gentlemen.

Good morning.

Nice quarter. Back to some of the steel price issues. You obviously -- North America got ahead of the curve there. Will you see the -- the costs of pressuring you more in the third quarter becoming head winds for your margins?

Well as you might know, in the US, our largest operating segment, we used the LIFO accounting convention for valuing inventory cost flow. And so we're taking charges based on our current inflation activity and assumptions. And so from a P&L standpoint the matching is pretty good for our largest business unit. So I would say that we're not -- based on where we stand today there are no expectations to have a deterioration That will be subject to future cost input increases and our continual pricing management vis-a-vis the cost increases.

What were the LIFO charges in the quarter?

We took $14.5 million of LIFO charges in the quarter.

I think you said that.

Okay. Well, $20 million year to date. And just to harken back to 2004, the last time we saw the steel and commodity cost increases that we're experiencing this year, we took a $20 million charge this year, so we're half way through this year and we already have a $20 million charge recorded. So the inflation from a steel and commodity standpoint, it is obviously escalating at higher levels than 2004's experience.

Right, right.

And that is our expectation that we are going to see some deceleration, hopefully leveling of that, which will get rid of a lot of the distractions in the marketplace.

Right. Any indication of other customers moving to other products with the strong pricing?

No, we don't have any indication of that. Obviously that is something that we have to be receptive to. But I would say that one of the price pressures that existed in the marketplace were coming from imported products, and with the high transportation costs and a much more normalized steel price around the world, I think all that pressure is evaporated. So I think we obviously have to keep the continuous focus on that. And if the markets continue to decelerate or get worse than obviously, there could be some free capacity, and obviously we'll have to keep an eye on that, but I think the utilization numbers are high.

And final question, on share repos, there weren't any in the second quarter, were there any in July, thus far?

No we haven't purchased any shares in July.

Do you anticipate -- doing any the rest of the year? Are you holding off to -- invest in acquisitions?

What we have communicated in the past is that our share repurchase strategy is one of opportunistic repurchases. It is not a top strategy of the company to buy back our shares on a systematic and continual basis. We would put at the top of the list investing internally in growth strategy. That is both building plants in India and China and also eastern Europe and Latin America. But also taking the opportunity selectively to buy companies like Electro-Arco in the first quarter, that extends our geographical reach or the product portfolio. So we're very focused on the long term growth and profitability expansion of our business. And if we see the opportunities in that pipeline not requisite with our balance sheet and cash flows, and the share price is attractive to us, we'll enter the market from time to time and take shares out.

And one question on CapEx, do you think that what you spent for this quarter would be more of a run rate for the rest of the year?

Yeah, we're estimating that we're going to spend for the full year between 60 and $70 million.

Okay, thanks. Good quarter.

Thank you.

Our next question is coming from Steve Barger with KeyBanc Capital Markets. Please state your question.

Good morning. Some of the goals the company reported this week have talked about the weakening picture in North America and western Europe as you did a little bit. And you've been raising prices to get effect, but in the back half, do you think you can get price realization in excess of material costs in a moderating demand environment?

First I would say we haven't had a very aggressive posture of trying to do that. We tried to walk a conservative line, not be opportunistic. We think long term in regards to this. And we surely haven't looked at large volumes in trying to accelerate price because of that. Again as I said earlier, we will be very proactive in looking at the market conditions and being very responsive to the market conditions, and we have a very good cost base all around the world, and we can be reactive to cost pressures that exist if we need to do so.

Well well yeah in the context of not being aggressive on price, you got 8% in North America and 15% in other. In other I think that may have been some catch-up. But for 1% volume growth and 8% in the domestic market, is that kind of dynamic sustainable?

It's going to be predicated on what happens on the cost. If the cost input change versus what our price interest was, you would see they're very much alive. If the cost base goes up, if the steel market stays tight as it has been, then we will be reactive to that. If we see some leveling, which we're hopeful of, we won't be pushing that envelope.

All right, and so we're seeing the US and North America slow down a bit. And it sounds like the rest of the world, the emerging economies are staying pretty strong. But do you think there are back logs or to some of the longer lead time segments in those markets like shipbuilding, or some of the constrained heavy machinery markets, given higher steel and energy prices? Are you seeing any kind of demand destruction and are those customers talk about the concerns of the back logs?

Not in those sectors, we see continued investment in the construction sector particularly in China, Caterpillar, Deere, Kamatsu and also the local Chinese manufacturers investing very heavily in growing capacity in that marketplace. Caterpillar announced a big expansion of their plant in India which is in line with what we're doing. Ship building, I have seen nothing but acceleration as far as shipbuilding sectors are concerned with the existing markets, trying to add capacity, acquire land, buying equipment to be able to expand. And I think again the forecast of these are pretty positive within the industries, and quite bullish.

Great. Can you talk about -- go back to your comments on industrial production in North America? Maybe talk about what your expectation is for the back half? Do you expect a continuation of some of the declines we've seen or do you expect a bottoming?

Well I think the economic forecasts that I'm looking at, Steve is becoming more mixed. I think the general consensus at the start of the year was the second half would be stronger than the first. And I think what happened was the first came in a little bit stronger than what people thought. And I think people are tempering their expectations for the second half of the year. This has been a fairly weak economic model. We're not totally immune to that model. If that model deteriorates further, obviously there is some consequence to us. And it's our ability to off set that that determines how successful we are. At some point in time there is going to be a big upside to that too. The US market rebound, the North America rebound would be on top of some of the great strength that we have and we would stay focused on that.

Sure, so in that context, on the 1% domestic volume growth, what were some of the end markets that were significantly up and down in this environment?

Well, I think I commented on that in my opening statements. Clearly automotive, light construction, light construction equipment, heavy duty truck has been hit very hard, and have been for quite some time, so you would think from a historical perspective they would near a bottom or rebound kind of cycle. Those activities that have anything to do with energy, the wind tower expansion, I read an article in the Financial Times yesterday, the US is the largest producer of wind energy. And there has been a huge acceleration of that and a lot more of that planned for the US, not only from an installation but from a manufacturing platform basis. We're still seeing a lot of expansion in the pipeline industry to get some of the resources to the marketplace. And we're optimistic that the Congress is going to finally going to wake up and recognize that they they have got to tap into some of the resources that we have available. And reach some kind of compromise in that area that should be positive.

And lastly, I think the agriculture and construction equipment manufacturers in the US are using their imbedded capacity to service the export markets . And even though their domestic markets are weak, they're getting a big bang up for that based on a weak US dollar and again, the imbedded capacity to service those international markets.

That is great background, John, thanks. Thanks, and if I could ask Vince, of the SG&A increase you saw, can you talk about what is permanent versus non-recurring, should we expect a similar absolute number in 3Q and 4Q?

Good question, Steve. The way I look at it, the half of the dollar increase I would consider not to be related the increasing of the cost base, in other words, we had fairly significant foreign exchange losses in the quarter of about $3.5 million. And there was a $4 million translation impact. And so also -- a fair amount of the increase was associated with the incremental selling costs associated with the higher sales volumes, but there's also an acquisition effect. I wouldn't consider that to be a base cost increase. So the most obvious item that we don't expect to recur would be the foreign exchange losses that occurred in the quarter.

Very good. Thanks gentlemen.

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

Hi, good morning. Sorry if this has already been asked. I was actually on line with the operator earlier in the call fixing a technical problem. But ultimately could I have the sales absolute dollar breakdown for Europe and other countries?

Yes, James, that wasn't covered. But the sales total for Europe was approximately $171 million.

Okay.

Other countries? Was -- Actually it is in the press release, the final page.

Oh.

The last page, we added was segment highlights by North America, Europe and other countries.

Great, 128. Okay, got it.

And the third party sales I gave you initially. And there is obviously intercompany obviously.

What would you say was the main driver to driving the COGS as a percentage of sales in the quarter?

Oh -- you mean improving our gross margin in the quarter?

Yeah, considerably.

AI would put at the top of the list the other countries segment had a fairly dramatic expansion in gross margins and operating profit, and my prepared comments I pointed out that the other countries segment had an EBIT margin of 9.5%, roughly a doubling from the first quarter. And that was largely driven on the backs of some of the strongest volume improvements we have had in the world as well as the biggest price increases. John commented on Australia but we also had -- in the rest of that geographical segment, a double digit price increases in an effort to catch up on some of the input cost increases that we had at the tail end of last year and the beginning of this year. So there is one factor that really drove the improvement in the quarter, I would put it on the backs of the other countries' segment.

Okay, I did see that. Because I guess historically, the pricing environment in that group has been difficult. But at this point should we assume this is a normal run rate? Because we're back to where that region has been in 2006? And can we also assume that the start-up costs, the problems that you hid in the back half of '07 and somewhat the first quarter somewhat of this year are mature and/or gone?

Well, I would emphasize to you what we said, a number of calls over the past two or even three years. And that is that we're in a long term building process in the other countries segment, led by Asia-Pacific. And we have said that -- there will be volatility in that region. It is a very dynamic process to build our businesses, we add costs, we build factories, we hire and build our selling distribution infrastructure. We are very gratified by the results in the first quarter, the dramatic improvement that we have you seen vis-a-vis compared with the last two or three quarters. But we will also caution you that we will continue to have volatility in this region as the market sorts itself out. As fragmentation works its way through as the market matures. As we build our infrastructure. So we're optimistic that we will continue over the longer term to drive operating profit, EBIT margins up to create stability in the region and to build a more mature business model. But we're a fair distance off from that in our opinion.

Okay, that is helpful, thank you.

The next question is coming from John Walthausen with Walthausen & Company, please state your question.

Yes, thank you. A quick question. First of all congratulations on the excellent price management to get prices up to -- so effectively, particularly with the margins against the LIFO accounting in the US. But the question then would be, has it been necessary or has it been expedient to step back and lose a little bit of market share to effect that. Or is the competitive nature of the market good enough to allow this?

Well, I would start out, John, by saying in our largest and most important profitable market being North America, we have seen the major competitors follow our lead. And a significant part of the market is a handful of competitors. And we have been able to raise prices at the same time our competitors are raising prices in line with us.

Now that -- that may break down a bit as we move to Europe. And certainly Asia-Pacific, and Latin America where markets may be more fragmented. But we're very conscious of that. We're managing that very cautiously and diligently. And there certainly are opportunities for smaller competitors or more aggressive competitors to try to take competitive business by not raising their prices to maintain their margins. But overall, I would tell you that we have not seen a market shift away from us. As a matter of fact, we believe that we continue to gain market share in the regions of the world that we participate on the high end of our welding and portfolio. So we're very much in tune to that, but we don't think that there is market share shifting away from Lincoln Electric.

I would also add, John, that we think that the market on the raw materials impact all of our competitors. That we are well aligned globally on the steel market. We have access to a fair number of high quality suppliers that can service our needs, and we can move that capacity around to different suppliers around the world because of our sophistication of our purchasing organization and our ability to manage large cash flow, international transactions and shipments. And as I said earlier, we think that our overall cost base is very competitive. So in a -- rising cost basis, rising material cost basis, we don't think that we're at any disadvantage. And the fact that competitors have had a raise price is surely as significant the cost increases equal to or greater than that that we have had.

Okay if I understand what you have been saying, on steel side you have been able to -- by negotiations with mills, hold back the price increases a bit, , compared to what a smaller guy would be able to do?

long standing relationships, we buy steel on a global basis, so we have access to steel companies around the world. Some of the smaller players that you categorize them, they might more locally and are forced to buy on the spot market are obviously going to be at a disadvantage.

Okay, that is a good explanation, thanks.

Our next question is coming with Jason Rodgers of Great Lakes Review. Please state your question.

Good morning, looking at the quarter, I was wondering, just based on the information you provided in the press release, it looks like EBITDA markets improved in other countries but off over a year over year basis in Europe. I was wondering the reason for that.

Yeah I think I mentioned earlier in looking at the price increases in Europe that we were behind the cost curve of that. That was not done unintentionally, but it was more responding to what the market conditions were. And as we commented, it is a much more fragmented market with a lot of smaller players. So we were I would say more cautious and conservative in looking at that, going back to the earlier question of not allowing the market position to deteriorate, so I think we have taken a more aggressive posture on that, we're hoping that we'll be able to implement those cost increases or price increases based on cost in the third quarter. And we should catch up there, the volumes staying in line.

We also have some unfavorable mix effect in the quarter as well, moving from higher margin products to some lower margin products in Europe. That could abate itself in future quarters as well.

Okay, and what was the impact on net income for -- as far as foreign currency is concerned in the quarter? In the year ago period.

The impact was a $2.4 million increase in the quarter from the foreign currency impact of --

You have that for last year? The --

You know, I don't. I can get back to you on that.

That's fine. What about the average rate on debt for the quarter?

5.1%.

Okay. And looking at the receivables, they're up pretty significantly just looking at the first half of this year. I just wondered if you could comment on that.

Well, those increases are largely in line with increases in sales. And then also, a bit of a mix shift to longer receivables on the international front. As we grow more rapidly internationally, those terms tend to be longer than traditional 30-day terms in the US market. And so we're adding sales in the Middle East and Asia that could be 60, 90, even 120 days in some cases.

And finally, if you could make any commentary on the acquisition environment.

Well, you know we have commented for the last several quarters that we have seen a fairly good pipeline of opportunities there. And we expect that to continue, particularly in the emerging market areas of the world where there are great opportunities for consolidation, smaller companies look to divest their businesses and move into retirements or those companies that are so diversified that welding doesn't make sense to them in terms of their long-term picture. So it is an active negotiations and we're expanding our resources in that area to be able to cast a broader net and participate to a greater extent.

Okay, thank you.

Our next question is coming from Seaver Wang with Utendahl Capital Partners.

Hi, good morning, I was just wondering if you could comment on how you're managing the JW Harris business with housing down, also maybe a quick update on the retail, and automation?

Well, first, JW Harris, you're right, JW Harris had a significant portion of their business tied to the housing market, HVAC and plumbing kind of markets. But when we acquired the company, we said remember they were a domestic business. And we thought the growth opportunity lied there on the export side. And I would say our management team has been an exceptional job in growing their business internationally in an area where we had little or no market share. And we surely see more opportunity on the international side for the braising business. And we're quite optimistic of that. And again we think the housing market at some point in time will rebound and will obviously be well-positioned with those customers that we had. So we took a family business that didn't focus on international, didn't have a very aggressive sales and marketing organizations. We're beefing that up and we think we're capturing share both domestic and international to off-set the weakness in the traditional kind of markets.

The retail sector, our business in the DIY business is clearly reflective of what is happening in the consumer market. And there is significant softness in that sector. And we don't think that that is going to rebound any time soon, based on the forward-looking views of consumer sentiments and unemployment rates and the traditional kind of metrics that drive that business, so we'll have to stay tight, we've got some new products that we've introduced into that market, We have added a few new distributors in that market but the overall sector is quite weak and we think it will stay weak. And the last question was?

Automation.

Automation continues to do well, not only in the US but globally. I think we mentioned to you our global agreement with [Fanik] and how that would impact our automation business worldwide, with great expectations in the Asian market in particular. And I would say at this point our expectations have been exceeded in the Asian market with the support that we have received in the great global partner into that marketplace. Our expansion plan here in Cleveland is right on schedule, we'll be moving that business into an expanded facility in the third quarter, and we think that's going to give us an opportunity to demonstrate our long-term commitment to that market, and one in which we continue to be very bullish on.

One last question, John in past conference calls you had mentioned the plant shut downs for the Olympics, which they're starting to do now. Have you seen any kind of change in buying behavior by customers.

We're up 50% in the quarter in China or somewhere near that. So obviously the impact of that has been minimal. And if I had grown much more we wouldn't have been able to service it, because we're still on the building side of the capacity side.

What's interesting, what we're seeing now, and I think you have probably seen some articles and I talked a little bit about it, where the Chinese government, because of energy shortages throughout the country, is taking off line, certain percentages of capacity of these bigger energy consumers. That would be like a steel mill, we have seen some impact on the aluminum smelters. Those industries do two things: consume a lot of energy, and also contribute disappropriately contribute to the pollution challenges that they have.

The impact to that, our business has not been felt, as I said. And I also commented, I think one of the things that is going to be on the horizon as far as China is concerned is this massive rebuilding effort that has to take place in the earthquake areas. When you look at 0.5 million plus people losing their homes, the structural changes that have to take place, to rebuild the infrastructure in that area and find more permanent housing for them, would be a huge driver for I would think the foreseeable future, and I think will come on top of all the other things that we talked about, including a massive energy sector build-out that is taking place within the Chinese mainland.

Great, thank you.

On the question on -- the impact of foreign exchange movements on net income, the favorable effect this year again was $2.4 million compared with the prior year of $1.6 million. So the favorable impact grew by about $800,000.

Thank you, our final question is coming from Walt Liptak with Barrington Research, please state your question.

John you mentioned wind power twice, once in Europe. And the demand in the US. And I wonder if you can provide some color, what percentage of revenue, if you had to develop new products, specifically for the wind power market, what kind of growth are you seeing, et cetera?

Well, we're seeing substantial growth in that sector, Walt. I don't have any details as to how big it is as a percentage of our overall business. But I think it will become a major sector based on what we're seeing. Most of the major companies that build the towers are expanding quite rapidly, and they're expanding all around the world as people try to off set, both the cost element of oil and the CO2 emission issue that is continuing to surface around the world. And it will be a significant sector. I saw an internal report the other day that indicated that the amount of welding consumables that go into a wind tower range somewhere between 5,000 and $8,000 per tower, depending on the thickness of of the tower and the height of it. And I think that is all sub-arc welding. And if you look around the world and determine who has the biggest share of the submerged arc business in the world I would think that Lincoln would stack up nicely against that. And in a welding power source technology, I would say we are substantially ahead of our competitors in that category for that type of equipment.

Okay, great, thanks have a great day.

That concludes the question and answer session. I would like to turn the floor back over to Vince Petrella for closing comments.

Okay, thank you very much for joining us today. If there are no more questions I would like to close the call. And we look forward to giving you an update of our third quarter in late October. Thank you very much.

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