Lincoln Electric Holdings Inc (LECO) 2008 Q3 法說會逐字稿

Greetings, Ladies and Gentlemen, welcome to the Lincoln Electric third quarter 2008 financial results. At this time, all participants are listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is my pleasure to introduce your host, Mr. Vincent Petrella, Senior Vice President and Chief Financial Officer for Lincoln Electric. Thank you, sir, you may begin.

Thank you, Ryan. Good morning. Welcome to Lincoln Electric's conference call for the third quarter of 2008. Results for the quarter and nine- month period were released this morning prior to the market's open. If you do not have a copy, you can obtain one from Lincoln Electric's website, or by contacting our Investor Relations office at 216- 383- 4893.

Lincoln's Chairman and Chief Executive Officer John Stropki will provide a review of the quarter and activity in our market regions 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, and good morning, everyone. Given the financial turbulence experienced in the United States and abroad we're pleased we were able to close the third quarter with such excellent results. We had strong revenue increases, good improvements and profitability and strong cash flow despite the ongoing, negative effects of the global financial crisis on several key geographic and market segments.

Given that the economic growth is slowing worldwide, we enter the fourth quarter with uncertainty regarding the full implications of the global crisis on commodity prices, customer purchasing patterns and specific geographic and market segment ramifications. We expect declining sales volumes and the impact of lower commodity costs to pressure margins in the fourth quarter of this year and into 2009.

However, against this backdrop, we will continue to execute our long- term strategy of global expansion and capitalizing on key infrastructure and energy projects. We also plan to utilize our strong balance sheet to gain market share through continued R & D investments and acquisition opportunities which leverage our value-driven welding products and service offerings. As for the results? Diluted earnings per share increased 39% to $1.60. Operating net income increased 33% to $90 million on a 12% sales increase to $633 million in the quarter. Cash flow from operations total $96 million in the quarter, and our third quarter- ending cash balance was $313 million. Sales for our North America operations increased almost 7% to $370 million. And our subsidiaries outside of North America recorded a sales increase of 20% to $262 million. Excluding acquisitions, and the effect of changes in foreign currency exchange rates, sales outside North America increased 7%. Those are the general results.

And Vince will return in a moment with more detail around the numbers. But for the next few minutes, let me give you an update on the quarter and a view of the market regions and outlook moving into the fourth quarter and early 2009.

First I would like to comment on Lincoln's position in the face of the current market volatility. The Company is well- positioned to withstand the current market turbulence. With $313 million of cash, untapped and available credit lines of over $250 million, and very strong operating cash flows, Lincoln will be able to continue to execute its long- term strategies and look for opportunities to leverage our strong financial position. While the markets will likely remain volatile in the short term, and some of our most important geographies, such as the United States are in the midst of an industrial recession, we main confident of the long- term growth prospects for our Company and for our industry. Our continuing strength in export markets reflect a strong demand for our high- quality products in developing markets, and will serve us well to diversify our business profile.

We have the welding industry's strongest brand, the broadest, high technology product portfolio, the largest and most efficient global manufacturing platform, and most importantly, a great team of over 9,000 dedicated employees worldwide. As such, we are confident that Lincoln Electric will emerge from the current market crisis in a better competitive position than ever before, as we continue to execute our strategies and take advantage of the global market position.

Now, turning to the regions, in North America, during the quarter, overall results continue to be positive while the overall economic environment was increasing challenging. We were able to capitalize on the strength of exports and manage effectively through dynamic commodity challenges. Overall, industrial activity represented in key measures such as industrial production and capacity utilization in the United States, have softened at accelerating rates compared to prior years. Excluding high tech, total manufacturing industrial production was trending 6.1% below 2007 as of September 2008 while capacity utilization was running approximately 74.3%. Levels not seen since early 2003.

In addition, markets impacted by housing and consumer sectors continue to fall. The significant volatility in the credit market and Wall Street has led to much uncertainty about the overall business levels in the fourth quarter and early 2009. Specifically, order trends in our traditional US welding markets continue to be choppy and downward in the third quarter. Providing much uncertainty in the overall strength of the industrial markets we serve in the US. Third quarter results from the region reflect decreasing volumes, more than offset by inflationary price increases. As you know, pricing has been adjusted numerous times throughout the year to respond to costs increase in key material groups like steel and chemicals. This could, obviously, represent an ongoing challenge based on the recent movements in key commodity prices. However, despite the negative economic data, the recently- held industrial trade show, FabTech in Las Vegas was very well-attended.

And our new end- user segment focus booth was well- received by participants and allowed for Lincoln Electric to clearly demonstrate our complete product line offering and application value- added selling focus. In Canada, the manufacturing sectors in Ontario and Quebec continue to show softness. But the recent decline in the Canadian dollar is expected to bring some longer- term relief.

High oil prices have continued in the development projects in Western Provinces and despite the recent drop per barrel, general fabrication and pipe mill activities remain very robust. Export sales growth to the key global infrastructure development projects, both from the United States and Canada continue to be very strong. And US and Canada exports increased 22% in the quarter to over $70 million.

Automation continues to be a growth sector for the region. And I am pleased to announce the grand opening ceremony for our new automation facility will be held tomorrow, October 23rd, here in Cleveland. The new state- of- the- art facility is greater than 100,000 square feet and will serve as a platform to support the continued growth and expansion of our flexible and hard automation offerings, moving into the future.

As the North America region continues to show signs of slowing, we continue to focus on cost control activities and key strategic capital programs aimed at improving productivities, efficiencies and driving cost reductions throughout all of our North America operations. Looking at Europe. Our Lincoln Europe sales grew 16% to $142 million. Excluding the impact of acquisitions and foreign exchange, sales increased 1% in the quarter.

The growth rate during the quarter continued to slow, compared to robust levels experienced in 2007, due to the general economic slowdowns through most of Europe's regions. However, we continue to experience organic sales increases in our European business as a result of the integration of past acquisition, manufacturing expansion efforts in eastern Europe, and price increases driven by the increased raw material cost, primarily steel, during the third quarter. Our regional manufacturing restructuring efforts, and overall Eastern Europe expansion executed over the last several years combined with our more recent acquisitions should have us better positioned within the region as volume demand continues to soften.

Looking at the rest of the world. In Latin America, the rapid weakening of the region's currency sent a message the region may not be as insulated from the crisis in the industrialized world. Major concerns relate to deflation in commodity prices, the major source of revenue for most countries, as well as the potential decrease in foreign and domestic investment as the credit supply deteriorates have challenged many of these markets.

Mexico volume demand decreased as the US- driven automotive sector weakened and overall domestic demand moderated; however, Brazil, Argentina, and Colombia continue to grow sales in excess of 30% over prior year levels as we continue to capitalize on our agenda of greater investments in commercial infrastructure and increasing our geographical presence.

I am pleased to report that the integration of our recently acquired Brass Tech business in Brazil is progressing well. The local distribution network will be leveraged with our complete brazing, soldering, and cutting product lines, while the manufacturing platform will provide products for exports to the entire Latin American region.

Turning to Asia- Pacific. Economic growth in China has softened mildly for the last three quarters. China's government is focused on stable, long- term GDP growth rates of around 9% so that they can control overheating in certain sectors and push the nation's producers towards higher value output. The high growth and investment areas will continue to be focused around large-scale infrastructure projects, an obvious advantage for welding product sales. However, as we know, the country is very interconnected with the global markets. So, if serious GDP erosion starts because of export slowdowns, look for continued interest rate cuts, spending programs, and additional government support to augment growth.

We are progressing in our plans for additional investments in our Nanjing facility to provide for a more diversified project portfolio that will include expansions into more value- added semiautomatic consumable projects. We continue to invest and upgrade our Shanghai manufacturing campus which will enable us to expand out our product base with the wider range of welding consumables to address the fabrication, shipbuilding, and other market sectors that are currently only accessible with local products. We're also adding manufacturing capacity in our inner-Mongolia manufacturing operations to address growing export demands, especially in the Middle East. We have just launched an initiative to have all of our facilities in China compliant with ISO- 14001 Standards by the end of 2010, including our Shanghai headquarter operations, which are expected to be certified during 2009.

In India, the pipe mill sector remains very strong with virtually all major mills holding healthy backlogs of orders. And we expect to start production of our new plant in the first quarter of 2009. That's a view of the quarter and in the regions.

With the economic growth slowing worldwide, we're facing the fourth quarter with uncertainty, regarding the full impact from global crisis on commodity prices, customer purchasing patterns, and specific geographic and market segment ramifications. We remain, however, very bullish in the long term. Now, Vince will go over the details of the financial results.

Thank you, John. The third quarter of 2008 represented our 19th consecutive quarter of strong earnings growth. The quarter's consolidated sales were up 12%. With North America sales increasing 6.9%, and sales reported outside of North America up 20.3%. Foreign currency effects increased reported sales by 2.4%. Volume decreases reduced sales dollars in the quarter by 5%. Pricing contributed 11.5% of the increase in sales dollars year- over- year. Acquisitions contributed about 3% to the year- over- year growth in sales. On a product line basis, machine sales increased 5% and consumable sales increased 17%. Excluding acquisitions, consumable sales were up 12%.

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 31.1% of sales, compared with 28.3% in the prior year. The increase in gross margins as a percentage of sales was recorded across all geographies. Higher pricing, the benefit of selling lower-cost inventories, and improvements in operational effectiveness drove the higher margins. Year-to-date gross profit was 29.6% of sales, compared to 28.6% of sales in the prior year.

This year- over- year improvement in gross profit was primarily due to favorable operating leverage caused by increased pricing and improved operational effectiveness. SG&A expense was $107 million or 16.9% of sales in the quarter. The higher SG&A as a percentage of sales was primarily driven by higher bonus expense of $7.8 million, and incremental selling and administrative expenses of $4.5 million. Foreign currency exchange rates increased SG&A expenses by $2.6 million. SG&A expense for the first nine months was $319 million or 16.3% of sales, up 10 basis points from the prior year.

Incremental selling costs associated with higher sales volumes, additional SG&A associated with acquisitions and higher bonus costs were the primary factors driving the dollar increase. Foreign currency exchange rates increased SG&A expenses by $10.8 million for the first nine months of the year. Third quarter operating income at 14.2% of sales was up 220 basis points versus the third quarter of 2007.

As John mentioned, operating income increased 33% in the quarter. On a geographical segment basis, North America recorded EBIT margins of 15.3% in the quarter, Europe EBIT margins were 13.2%, and the other countries' segments achieved 10.8% EBIT margins. Second quarter of 2008 EBIT margins were 14.4%, 11.5%, and 9.5% for North America, Europe, and other countries respectively. Year- to- date operating income rose to 13.3% of sales from 12.4% of sales in 2007, an increase of 90 basis points. Operating income increased 23% for the first nine months of 2008.

The income tax provision for the second quarter reflected an effective tax rat of 25.5% compared to 28.7% in the 2007 same quarter. The year- to- date effective tax rate was 27.8% compared to 29.6% in the prior year. The effects of in the quarter of adjusting the year- to- date effective tax rate to 27.8% increased net income by $2.1 million or $0.05 per share for the third quarter.

The lower effective tax rate was due to the additional utilization of foreign tax credits from the repatriation of higher taxed foreign earnings as well as higher income in lower tax jurisdictions. The Company invested $53.5 million in capital expenditures in the first nine months of the year compared with $45.8 million in the prior year's year- to- date period. Other uses of cash flows in the first nine months included the payment of $32 million of dividends to shareholders, and the repurchase of shares totaling $23 million. Share repurchases in the third quarter totaled $5.1 million for 75,400 shares. Weighted average diluted shares outstanding decreased to 43,209,000 shares for the third quarter compared with 43,467,000 shares for the 2007 third quarter, a 0.6% decrease. Shares outstanding at September 30, 2008, were 42, 819,061 shares. Our return on invested capital rose to 23.4% at September 30, 2008, compared to 20.3% at June 30, 2008. The Company closed the quarter with $313 million of cash, and a net cash position after debt of $172 million.

Now, looking to the future. We expect volumes to continue to slide into the fourth quarter of 2008 and, perhaps, into 2009. Commodity prices including steel are falling, which will likely result in lower market prices for welding consumables. These factors combined with the liquidation of higher cost inventories will lead to a greater than normal seasonal decline in operating earnings in the fourth quarter of 2008. The degree of margin and earnings declines will be largely dependent on the magnitude and timing of commodity price declines and the related market prices of welding consumables.

We do remain optimistic that the Company's profit margin profile will outperform previous periods of declining sales volumes because of our broader geographical and market diversification. In addition, Lincoln has a very strong track record of good cash flow generation and profitability in slower economic environments.

At this point, I would like to open up the call for any questions. Ryan?

Thank you. (OPERATOR INSTRUCTIONS) We'll take a moment to poll for questions. Our first question comes from the line of Walt Liptak, Barrington Research.

Hi, good morning, Jonathan.

Hey, Walt.

Congratulations on a great quarter. But, I guess this probably, with the stock trading where it is, that's not the point. It's what's happening right now and what's going to happen in '09. I wonder if you could talk about what you're seeing in October? In terms of volume? Overall?

Well, I think both Vince and I touched on the volume issues, Walt, as we discussed what happened in the third quarter, and I would say the trend of that is pretty consistent.

Okay. It has not accelerated? It is down 5 percent volume?

You know, again, we're not going to get into that. I would just tell you that you could look at the industrial markets that we serve, I cited industrial production and capacity utilization, those are two very good metrics that we follow. And we haven't seen an acceleration of those metrics deteriorating, but they're surely at levels that we don't like and we expect them, quite frankly, to stay there for some time.

Okay. You touched on this in your commentary, with commodities prices coming down, the - - I wanted to clarify, are you going to adjust your pricing? How are you - - what's your pricing strategy for the fourth quarter? And as you go into 2009? And the environment that we're in?

I think our pricing strategy is pretty consistent, Walt, when commodity prices are increasing or decreasing. That we focus on protecting and improving our margins in both of those dynamics. I think we've got an extremely experienced and competent management and sales organization around the world to be able to adjust to these changes, and I will tell you that the changes are different in every market that we're doing business in today. And to do just that. Find ways to protect and improve margins. And that is what will be our focus as we go through this short- term volatility as far as the markets are concerned.

Okay. And, Vince, I wonder if you could talk about what the tax rate will look like for the fourth quarter and '09?

Well, the tax rate will approximate what we booked on year- to- date basis, Walt. The only discreet item that I would add to that is we have an expectation based on the R&D tax credit being renewed that we'll have a approximate $1. 4 million or $0. 03 per share benefit in the fourth quarter. So, in summary, we have a year- to- date rate reported at 27. 8%. That's the expectations for the year. And on top of that, a $1.4 million reduction for the R&D tax credit legislation.

Okay, got it. And then any view on 2009 at this point?

I think it is too early to --

Tell us not to get elected President.

Yes. Also, probably just as important is our view of what our earnings will be in the mix of those earnings, throughout the world of Lincoln. And I think it is too early for us to give any kind of view of 2009.

Okay. Thanks, guys.

Thank you.

Our next question from the line of Mark Douglas with Longbow Research.

Good morning, gentlemen.

Mark.

Good morning.

Nice work. Vince, first of all, can you give the breakdown of the volume price acquisitions and currency between the different regions?

Certainly, Mark. Starting with North America, volumes declined 5. 5%. Price contributed 11. 6%. Acquisitions contributed . 8%. Foreign exchange had a negative . 1%. for a total of 6. 9% improvement in sales year- over- year in the third quarter.

Europe had a 3. 3% decline in volumes, a 4. 2% improvement in price, and 8. 5% increase due to acquisitions. And foreign exchange contributed 6. 7%. For a total increase in Europe of 16. 2%.

All remaining geographies of the world that we refer to as other countries had a volume decline of 5. 8%. Price contributed 20. 3%. Acquisitions contributed 4. 9%. And finally, foreign exchange contributed 6. 1% for an increase year- over- year in the third quarter of 25. 5%.

Okay. Thank you. Looking at the other countries, I guess the volume decline of almost 6% is a little surprising. Where was that most manifested? I guess I should probably ask?

I would say the two big markets, Mark, that have that kind of impact. One was Mexico, which I commented on. As you know, the automotive industry, in particular, has moved a strong part of their sub- assembly operations to Mexico, either of their own or through the supplier- related - -

Right.

- - connections. And then, clearly, that's been very strongly impacted. In particular, that has a very strong focus on large automobiles, either vans or trucks. Versus small assembly- type of activities. So that would be number one. And I would say very significant component in the quarter. Not for the year, but for the quarter.

And then we saw some - - just traditional kind of volume reductions in Australia as the commodity impacts their -- particularly the mining, iron ore and other mining activities, based on the slowdown in the commodity pricing. Those would be the two biggest impacted ones. Again, we view that as being fairly short term. It's not unexpected, but it is what it is.

Right. Right. And then on the currency what, are you expecting, to be pretty flat in the fourth quarter? Or maybe a little -- going against you a little bit in the fourth quarter?

Well, in terms of what happened in the quarter, Mark, on earnings, we did have a benefit, still, in the quarter from an operating income standpoint of $957,000, compared to the prior year's third quarter at about $1.4 million. So we lost over $400,000 of operating income profitability because of the currency strengthening of the dollar vis- a- vis most major currencies. I would expect based on numbers we've been seeing in October with additional strong and fairly rapid strengthening of the dollar this will continue to diminish into the fourth quarter and into 2009.

As far as where that ends up? I wouldn't comment on that. But I would say that the dollar has been moving very rapidly and pretty dramatically in a strengthening position. It's hard to say where it is going to stabilize. But it has been a very quick and rapid move.

Right. Okay. Thank you very much.

Our next question comes from Tom Hayes, Piper Jaffray.

Good morning, gentlemen.

Good morning.

Hi, Tom.

As you mentioned as you went through some of the volume declines. I think if you look at North America is down 5%, and obviously there's some extended weakness in that market, give us a little thought on where you - - where's a realistic level where margins can really decline to and what steps could be in place to hold those a little bit?

Let me first comment,Tom, I think that the quarter- to- quarter comparison is a very difficult one. If you recall, the third quarter of last year, we saw fairly strong escalation as far as volumes are concerned because the commodity prices were going the other direction. And people were worried both about availability and the cost of steel. So it's probably not a direct relation to that, other than it's a bad quarter- to- quarter kind of comparison.

And in terms of what we do to preserve that, I think there, again, are a number of things. I think Vince touched on this.

I think it would behoove everybody to go back and take a look at the record of Lincoln and slower economic times and how well we outperformed not just our competitors, but the industrial marketplace. That our variable compensation system has a real effect in the downturn opportunities as far as our costs are concerned. And our piece-work process is part of that.

Secondly, is how we managed the pricing in the marketplace that we, obviously, have to be competitive in the market, but Lincoln is well- known around the world for providing the absolute best quality and the absolute best service to our customers.

Right.

And they're willing to pay some premium for that. And it's our responsibility to be sure that we extract the maximum premium for that.

You told us a little bit on the pricing increases, could you remind us when your last - - at least on the consumable side, that the price increase was -- your thoughts on the percent that was actually obtained, the percent of the increase that stuck. And then lastly, have you started to see any pushback as far as, maybe - - some of your customers looking for price relief?

Customers are always looking for price relief. So we do that with all of our vendors and most of our customers do that with us, regardless of what the economic circumstances happen to be. That being said, as we said, as we were raising prices, all of our customers are steel buyers. And I think they're very much in tune with what is happening with steel prices when they're going up and when they're going down. And then there's a component of the cost that's beyond what the commodities are that we're responsible for. So, we expect pressure, absolutely. It would be unrealistic to think that that won't come and quite frankly, to expect that it hasn't already come.

Again, it will be our job, on a global footprint, not just in North America to manage that in a very proactive way as such that we do everything that we can, not only to preserve margin where possible, but to increase margins where possible.

Okay, I guess just lastly, if you look at what you - - as you guys reported, your Europe - - if it also includes a larger geographic footprint. I was wondering if there is any insight you could provide to some of the more separate markets that - - some outlook for that.

I don't quite understand your question.

Doesn't Europe also include your African and Russia footprint as well?

No. The reporting that I reviewed in terms of North America, Europe, and other countries, are on a legal entity basis.

Okay, all right.

So, those are our legal entities that are operating within Europe, North America, and other countries.

All right. Thank you.

If you are asking specific about what we're seeing in those markets, I would be glad to entertain the question and comment on it.

Yes, any insight would be great.

Well, I just returned from a trip from South Africa, which is really the major market that we have in Africa, or at least the platform for our African business, and I would say that things have been very, very strong there and we're quite optimistic. We're looking at additional expansions of our personnel and of our warehousing capabilities in that region. We've got some very good distributors that are expanding quite rapidly based on their opportunity to take significant share from what we see as a weakening competitive landscape in that marketplace. So, I'm quite bullish about Africa, in general.

Northern Africa, obviously, is strong in oil and gas reserves and we're doing a lot of things to improve our capabilities in that area and, again, expect that to be a fairly robust economy for quite sometime. I think in the quarter, we were up, 30%, 40 percent in Africa, on a very strong growth trajectory that's been in place for several years.

Okay.

In the Middle East, I would say is very much still the same. We have not noticed any slowdown or curtailment of any of the big infrastructure projects that are there. Obviously, as oil prices soften, that's a potential.

But I would go back to earlier comments that we've made in earlier calls that it is our understanding, and it's been confirmed numerous times by the people who are in that business, that most of these projects are pegged at $60 a barrel oil price. And as long as the prices are in that range, or they think they will be in that range, they'll continue to make those kind of investments.

Okay. Appreciate it. Thank you.

Our next question comes from the line of James Bank, Sidoti & Company.

Thank you. Good morning.

James.

Good morning.

In discussion of declining sales volumes, this is something that's global. I can assume from the 6% decrease in the volume in your other countries segment, or is this something a little bit more toward your industrialized nations? Such as Europe? Ours, and so forth?

Yes. I - - John covered in the previous question, the strength that we're seeing in Russia and Africa, the Middle East, those regions still have good volume. I think it is true that industrialized countries, United States, Canada, Europe, Australia, Mexico, are some of - - our bigger markets are in a declining format. China still doing well from an export standpoint out of the U S. And the base market is not shrinking there.

Now, do you think there will be any switch between equipment sales and, maybe some of your automated welding packages versus your consumable products?

Our automation business is up over 30% this year. So, it continues to be a very strong growth arena for Lincoln. And we expect over the longer term that we will continue to grow that business rapidly.

What about the consumable side? I'm just trying to figure it. It seemed like there was a heavier weight to consumables in this quarter than their had been in previous quarters. Since that one gives you better profit margin, I'm just wondering if there's going to be a heavier weight toward that, as people continue to purchase consumable, not necessarily will invest in equipment - -

Well - -

- - just to maybe give you guys some padding going forward?

James, you have to be careful on the consumable versus equipment increases. Although consumables grew in absolute sales dollars, faster and to a greater proportion than machines, the reason for that is really pricing. Pricing went up much faster for consumable products and to a much greater degree than machines. So, the whole of that disparity in growth in sales dollars is really pricing.

Okay. Also, you guys mentioned, I think in the Press Release in addition to this call that this decline in sales are sort of your - - this near term pessimism outlook is really early 2009 which you referenced. So I just wanted to have an idea of what's supporting a conference that the back half of '09 might be a little bit better?

My comment, James, is that we're talking more about visibility than anything. I think that with the turmoils that we've seen in the last 90 days, I think it is very difficult for anybody to predict much out beyond a quarter, if you're lucky to be able to do that. I think we have huge uncertainty as far as the election is concerned, and how people are going to react to whatever the outcome of that is concerned is.

And, then, are the bailout and/or stimulus programs that are being proposed, not just here in the United States but around the world, going to have the kind of impact that people expect? So, we're just saying that visibility is pretty clouded. If is uncertain. And we're going to do whatever we need to do to get results based on what the circumstances that are dealt with.

Okay. I understand you guys don't give guidance, but then is it reasonable to even assume there won't be growth next year?

I don't think anything is reasonable for next year. It can be difficult to predict what the outcome of all of these global initiatives are going to be. And we've said many times when people ask us, what are we most concerned with? My answer has always been, we can't control what the economies of the world are doing. We get paid to perform with the economic models that exist. We've demonstrated that we have great capabilities of doing that. And I have no doubt that we will continue to demonstrate that.

Okay.

I would add in terms of looking at probabilities and what we've experienced in the third quarter and certainly based on what's been happening in the marketplace in the fourth quarter, there is a higher probability that we will continue to experience at least into the fourth quarter and likely into 2009 declining volumes. So, looking out beyond the fourth quarter and into the first quarter would be difficult to predict.

What - - one follow- up point, James, is that I think people need to understand is that as we liquidate our higher cost inventories and replace those with lower cost inventories, the margin compression risk will be eliminated and we'll have good opportunities to get back on track for any deterioration that we've seen.

And that will be cyclical based on each individual markets, based on the inventories that we have and how strong those markets are, and our ability to sell our products in whatever the declining market conditions are. But we're quite optimistic that phenomenon is fairly short term.

Okay. Thank you. The - - Vince, I'm sorry if you already brought this up, interest expense. What was the reason for it being a little bit elevated? Versus the first half of the year?

We have some higher foreign borrowings at higher rates than what we have for our domestic borrowings, position our capital structures. And our foreign exchange risk. And in countries outside of the U S, for example, Latin America.

Okay. And, then, the priority on your cash? Well over $7 per share now. Is that going to be still acquisitions?

Yes. Our priorities haven't really changed much. We're going to continue to look for good opportunities and in the acquisition front. We will continue to invest in our strategic initiatives around the world and we will, also, be opportunistic and judicious in our share repurchase activity.

Okay. Terrific.

I would just comment on it, James, is that we do think that with the financial constraints, that there will be some excellent acquisition opportunities that could surface and we've said all along that that was our priority and we've had a list of companies that we're interested in and will obviously keep a very close watch on those situations.

Okay. Now, that's terrific. Thank you very much.

Thank you.

Our next question comes from the line of Steve Barger, KeyBanc Capital.

Good morning.

Good morning, Steve.

Good morning.

This question is probably going to be hard to quantify, because I know you distribute through gas suppliers. But just thinking about your general fabrication, your process and heavy fab customers in North America and in Europe where it's applicable, are you seeing a bigger slowdown in volume from large customers or small? If we kind of call large customers as publics or tier ones?

I would say that the trend that we discussed a little bit in the last quarter has really kind of continued. Our large industrial machine sales are still very good. Which is reflective of heavy fabrication industry. Both domestic and international. And I think, again, many of those projects are heavily- weighted towards infrastructure, energy- type of activities. I mean, that's where the heavy steel is used. The contrary to that, as we discussed last quarter, we see soft sales in small machine products, be they through our retail outlets or through the industrial gas people. And the industrial gas suppliers have confirmed that pretty much across the board.

So, it is a little bit upside down from what we've seen in traditional- type of recessionary environments where it was the little guys who hung on there and the big guys who crashed and burned very early in the equation. I don't really look for that to change much. Because I still believe and I think maybe even moreso, that infrastructure will become of greater focuses of governments around the world. Even here in the United States. A lot of talk about what the investment should be to rebuild infrastructure and the need to do so. And that not only is a good stimulus for governments to focus on, but it also employs a lot of people, which gives it a compounded benefit. And we think that that will continue.

I talked about the Fab Tech show out in Las Vegas, I was extremely bullish to see the number of large fabricators that were out looking at equipment at that show. I really expected very small attendance- kind of numbers. And I was very positively or pleasantly surprised. And these people are investing and they expect to continue to invest in projects like pipe mills and wind towers and power plant- type of construction. And even under the economic times that we see now, I have never seen so much activity of that taking place not only again outside of the US, but within the US. I think that that trend is very positive. As we said, the traditional markets will rebound. That will be a pile-on impact over this strong base of infrastructure activity that's out there in the world that we're taking very strong advantage of.

Yes. I think I agree with you over the longer term in terms of infrastructure build. But as we've gone through this earnings season and we're early into it, some of the steel companies have said they don't have lot of visibility into the order book for fourth quarter. So do you think that's the supply chain de- inventorying? Or are your customers, is it your sense, that they are already pretty lean and you're just seeing slower production across the board?

I think there are two elements of that. I think there was an inventory correction. I think if you remember what our position was, going even into the last quarter, we talked about the availability of the steel and the fact that we were inventorying heavy because we couldn't take any risk of shortages in that area. So, there is some inventory reductions taking place. And I think the other element is, is that people are kind of waiting to see where the pricing is going to settle in.

If you follow scrap and pig iron pricing, it is taking some very significant drops and people know that will drive the manufacturing costs of the steel manufacturers and they don't want to buy high and sell low. So, what you're seeing is the steel industry, almost in a uniform, consolidated manner, is beginning to take capacity offline. As they reduce that capacity you will see a stabilization in the price. And that will allow people to kind of get back into the market when they recognize they're not taking that kind of risk.

Okay. And to that inventory point, Vince, can you give us the numbers for raw material, work in progress and finished? Do you happen to have that with you?

Yes. Steve, our total inventory at the quarter end was approximately $420 million. Raw material was $115 million. Work in process was $59 million. And finished goods inventory was about $245 million, $246 million.

So not a big change sequentially?

It's up. We look at year end as well where it's up.

I'm sure year end is up, right.

Yes.

Have you slowed your own production yet below your sales levels to kind of work out inventories from your own system? Or has this slowdown been fast - - rapid enough that you're still in the process of kind of trying to right size demand?

Well, our consumable production is very responsive. I mean, we can increase or decrease that very quickly. I would say more of what we're doing will be depleting the strong inventory position we had on the raw material side and that flushes through pretty quickly. On the equipment side, I would say we, again, pretty much match our production to incoming order levels. We become responsive on that side of the business. And we track orders on a daily basis and adjust our schedule according to it. So you could - - you should expect some slowdown in our production schedules, yes.

Okay. One last question, I know your revenue growth is leveraged to the cycle, but can you - - you talked in your Press Release about new products and your R&D effort, and it seems like this could be a pretty good opportunity to get further penetration into the contractor base. Any thoughts on how new products in this environment allows you to do that? Or what your ability is to take share in a downturn to support volume and maybe make those gains permanent when volume returns?

I think if you go back and track history, and I would say that the third quarter is a good precursor to that, we are very, very good at taking share in downturns. You know, we don't have all public companies that we compete with, but I've looked at others that have reported their results for the first quarter, third quarter - - excuse me - - showed declines in sales, dollars. And, obviously, that's driven by declines in volumes at a much greater extent than what we had. So where we were up, plus 6% in the quarters, others have reported declines in the quarter. That has to be a result of market share gains. We have a very committed and aggressive R&D program. I think we know better than most of our competitors what products will capture share. And what's needed to support the contractor market. And I can tell you that we have a portfolio of products that are in line and will be rolled out to do just that.

Thanks very much, gentlemen.

Our next question comes from the line of Holden Lewis, BB & T.

Good morning.

Good morning.

Can you - - talk a little bit about your ability to sort of ratchet in, I guess, the SG&A and then try to, in a weakening environment, try to limit sort of the underabsorption that might take place on that line. You're kind of talking now, I guess, about the production and costs, that would be sort of a hit on gross margin, but you, obviously, have a unique employment model. Is that going to be an issue in terms of - - in terms of leveraging or deleveraging SG&A? And in terms of your investments overseas, I mean, you clearly said that you want to continue those. I mean, is there any sort of ratcheting up or ratcheting down at some level those investments in an effort to sort of defend margins and that sort of thing? Just give us philosophically where you are there.

Well, I'll allow Vince to comment . I'll make a general comment. He can talk about maybe more specificity. Obviously, the variable compensation bonus program has a huge SG&A component associated with that. And if you look at our SG&A expansion in aggregate dollars, this year, year- on- year, a big part of that has been the tremendous success that we've had through the third quarter, driving increased bonuses.

If we see reductions in profitability and order levels and everything that's associated with that, that's the first item that quickly comes off the table. And it has a big impact. I mean, a lot of our compensation is tied to that.

Secondly, we will look at all elements of our business, to control SG&A and match it to the volume levels that we have. I will say, though, is that we're focused on the long- term, and we're not going to make radical cuts that would impact our ability to execute our long- term strategy of capturing larger and larger and larger shares of the global marketplaces.

And where we think we need to invest, in places like Asia, the Middle East, or Eastern Europe, Russia, we will continue to make those investments as appropriate, because we want to be ahead of the curve of the market rebound, not behind it. I think we've demonstrated our capabilities to do that time and time again.

I would add, Holden, back to SG&A first, as you know, a fair amount -- a significant amount of our SG&A cost structure is fixed in nature. We will be looking at - - and are presently looking at all opportunities to ratchet back what we would consider to be discretionary spending. We will slow hiring of replacements and be very careful on the human resource side.

And, John touched upon the biggest variable in SG&A, which is the global bonus and incentive compensation programs. On production side, certainly we will be looking at being much more measured and careful in adding productive capacity. Where, perhaps, a couple of quarters ago, we were looking at bigger hunks of productive capacity additions in our international markets.

We will likely be more careful in adding smaller hunks of capacity in different parts of the world, as some of our productive base frees up with these capacity - - or these production and volume declines. And so we're carefully reevaluating all aspects of our spending from SG&A to capital expenditures. To be a little more conservative in how we're spending our resources going forward.

Okay. And, did you have any LIFO issues, LIFO charges this quarter? Or unwinding some LIFO charges this quarter from prior ones?

We actually booked an additional LIFO charge on the quarter of $3. 5 million. Compared to the prior year's third quarter of no LIFO charges. In the - - but in the context of the full year, that $3. 5 million boosted our LIFO charge for the nine months, Holden, to $23 million. It gives you a perspective of the rapidly accelerating and increasing costs of our raw materials and particularly steel in the first half.

And then the third quarter was a greater moderation in what we forecasted our inflationary impact on our LIFO inventories in the US to be. So, $3. 5 million to boost our year- to- date to $23 million. Compared to a prior year year- to- date in '07 of $5. 8 million.

Would you expect to unwind any of that in fourth quarter? I mean, raw materials have been coming down, maybe not your particular stuff, but what is your expectations into Q4?

I don't have estimates for the fourth quarter, because it, obviously, depends on LIFO accounting on what your final inflationary impact is at the end of the year. But in looking at what steel prices are doing, and other commodity prices from copper, to silver, to - - you name the metal, what we're seeing in the marketplace is some fairly substantial declines in pricing as you are tracking in your weekly industrial reports as well.

So, I would expect there to be some continuing declines in our LIFO charge. At this point, too early to estimate what the fourth quarter might be. Because we need to know the year end inflationary impact, as well as what our quantities might be at the end of the year. But certainly it is on the down side.

Okay. Then, can you comment, also, the impact of the hurricanes on your business, pro or con? I guess the engines and the welders are usually beneficiaries there?

We had some minor beneficial impact in the third quarter. But it is not a material impact on our top line in the quarter.

Okay. So not meaningful to that volume number?

No. It was a few million dollars, not a significant number.

All right. Thanks, guys.

Thank you.

Our next question comes from the line of Jason Rodgers, Great Lakes Review.

Good morning. I apologize if you gave this out, but do you have the foreign currency impact on net income for the quarter?

Yes. In the quarter, the foreign currency translation benefited the third quarter by $888,000, about $900,000.

Versus what last year?

Last year it was, approximately,$1.1 million.

Okay.

$1,064,000.

And what was the average rate on debt in the quarter?

It was about 8. 8%.

Okay. And I was wondering if you could comment, if you're doing any in the fiber- laser area? Either seeing that as an opportunity or a competitive threat going forward?

Well, Jason, we look at all emerging technologies, excuse me, on a regular basis. We view some as being appropriate for us and some as not. I would say generally we would shy away from the ones that are extremely capital intensive, and focused on unique niche kind of markets. And yet we would look at ones that would present growth opportunities in areas that could expand in the future.

We're familiar with laser technology, both for cutting and welding. We see some opportunities for expansion in that. But I would say, generally, we don't view it as being a challenge for our existing markets as much as it might be growth opportunities for other markets.

Okay. And, Elliott Schlang had a question as well for you.

A few quick questions, if I may? As far as the cash and cash equivalents, is that truly cash and equivalents? Or what is it invested in?

It is truly cash and cash equivalents. It's very short term and liquid. If we wanted the money today, Elliott, we could ring up our banks and have it sitting here at Lincoln Electric today.

And there's no currency in there?

Most of those cash and cash equivalents are in the U S. The bulk of it, there are foreign jurisdictions that hold part of that $313 million. Some of those foreign jurisdictions hold a significant part of the - - their cash in dollars. But there are - - the bulk of it, a substantial portion of our cash is in dollars and in the U S.

On your accounts receivables, any comment that as to the quality? I assume the quality is high, I don't know whether that's - - whether you've taken any additional reserves above and beyond what you would normally take in view of this environment?

No. Elliott, we're very proud of the quality of our receivables on a global basis. We have very good experience. Very low bad debt and allowance experience, historically. On $379 million of receivables, we have about $8. 5 million of allowances for doubtful accounts. That's up about $1 million from the year end, but our receivables are also up about $35 million.

So, we're - - we feel we're in very good stead on our accounts receivable. We carefully evaluate on a global basis, our aged receivables and take reserves where agings or the condition of our customers warrant them. But, we don't feel that we have any issues at this point with our accounts receivable at September 30, 2008.

Any comment on your capital expenditures budgeted for '09? Or fourth quarter '08 and especially whether you have made any adjustments to those original figures?

Well, we've spent $53 million for the ninth months, Elliott.

Right.

Expecting to be somewhere in excess of $65 million for the full year. It's too early to give you a projection for 2009, particularly in the face of uncertainties that the marketplace is working through presently. And in terms of probabilities? I would say it's likely that our CapEx in 2009 would be less.

It will be less because of two reasons -- one, some of our major majors we've been working on the last couple of years are coming to fruition now with the development of the automation business in the US, the building out of our India plant the expansion of our Chinese plants. Some additions to capital in Latin America. So, some of our big ticket CapEx projects are starting to wind down. But will run into 2009. And, also, - from today's viewpoint, we're going to, as John stated, I think, a few times on the call today, we're going to be a bit more careful until we have a better view of what the future might hold. In the marketplace from a global economic perspective.

Talking about the future, have there been any significant infrastructure projects that have either been canceled, or reduced? To your knowledge? And in your conversations?

Well, you know, I don't - - I'll let John comment on this. He travels a fair amount more and is reviewing these things on a global basis. From my perspective I haven't seen a major shift. There are the anecdotal stories you hear, I'll let John comment on additional color he might have.

No. I think I commented on that earlier, Elliott. That you know it would be my expectation, quite frankly, that you may see some acceleration of these government funded projects as they look for ways to prop up the economy and keep the people at work. And you know the reality is, is that the world is going to run out of energy if we don't continue on the track that we're on. And I think most countries, United States might be an exception to that, recognize that and are very much committed to it.

So, we expect, you know, where there may be slowdown of projects, but I've, also, heard, quite frankly, there may be new projects that come into play because labor will be available and, also, some of the high costs of the steel that was of concern on some of the availabilities of these projects is coming back into play.

And do you have an R&D expense for the third quarter?

Hang on. Elliott, I need to look that one up.

Okay. Well, you're doing that, if I could ask two more quick ones?

Sure. The - - Before you ask the questions.

What is your balance?

R&D number for third quarter, was approximately $6. 9 million.

And - - - - And that I think you alluded to the fact you expect to keep a relatively high budget there?

Yes, our R&D expense on year- to- date up over 4% from the prior year.

And corporate repurchase? What is your balance that's authorized to buy?

3,920,000 shares.

Lastly, I'm embarrassed to ask this, I will anyway. In view of the all of the corporate insider calls that we've seen, I have - - have there been Lincoln individuals of any significance that have had any significant calls?

Are you referring to the margin issue?

Margin calls.

No.

On your own stock in the company?

No.

Good. I'm not surprised. And, congratulations on a great quarter.

Thanks, Elliott. You know, we've - - next - - we've run over about 10 minutes. I'll entertain two more questions, if we have them? In queue?

Our next question comes from the line of George Tall with [Burrell Capital]

Hi, Vince. Every new analyst that's looking at the stock is assessing whether - - what are the probabilities of revisiting the 1993 or 2003 margins? And while - - , I don't anticipate guidance on whether - - what troughs look like, tradeoff of billing out for the long- term, building out your infrastructure for the long- term opportunity versus the near term comfort level, is essentially the debate that's going on in the stock, is there any way to give confidence building about whether trough is more or less likely to be either 5% or 9 percent? Something in that range?

Yes. From - - and I had this in my prepared comments. I believe John had it in his prepared comments. But, we believe that we're better positioned than ever before to deal with downturn in industrial economies. Certainly today, we are much more diversified from a global standpoint than we ever have been in the history of the Company. Our exposure to the North America marketplace is significantly lower than what it was in the previous cyclical downturn.

The margins are still the highest in the world which will affect our global delivery of operating profit margin. But from a probably standpoint, we think we're much better positioned today than we ever have been by our diversity of geographical exposure and our market segmentation exposure today. Vis- a- vis - - or compared with previous cycles. Trying to predict to whether it's going to be 6. 7% or 9% is dependent upon, as you well know, George, many variables, including the debt of volume declines. Whether or not the volume declines become synchronized in the same fashion in all geographies in the world. As you see early on, trying to give color during the course of the call, some industrialized and larger economies of the world are having declines in volume.

We still see bright spots in some of the developing parts of the world, including Latin- American countries of Brazil and Argentina and Asian countries, including China, albeit slower rate and greater decline that what we've seen in previous times. But our export business as we reported in the quarter, still up over 25%, which bodes well for the diversification of our portfolio on a global basis. And it remains to be seen whether the likes of China and some of the other Latin- American and developing countries of the world start to go into negative territory. But what the early signs are, we're better positioned now than ever before.

The bouncing act, you probably also have the best opportunity set for further growth and your question really is how far out would you defer the harvest. Are there - - too many missed opportunities in the next - - during the downturn to maintain a higher level of trough margins? Should you just take the pain now and get paid off in three or five years?

I don't think we're going to walk away or turn our back on any opportunities that we see. We're trying to emphasize is that we're going to be a bit more careful. We're going to recalibrate, tighten up the tolerances, if you well, in terms of the investment and spending. And simply not raise that risk level as you described it, to an inappropriate level in the face of a lot of uncertainty in the marketplace. We're still committed to investing and growing our business in markets like China, India, Latin America, Eastern Europe and Russia. I don't think you're going to see us table what we believe to be strategic imperatives for the business and company. We're trying to emphasize today we're going to be a little more cautious.

Thank you. One last point on the - - you mentioned share count change? Difference between, I think, October 16 and average for the quarter? Could you amplify on that? Have there been share repurchases either after the quarter's close or end of the quarter?

Yes. After the - - during the quarter, my prepared comments, I highlighted that we purchased 75,000 shares, George. After the quarter's end, and before we had to shutoff the share repurchase program because of the quarter's results, we did purchase another 222,000 shares.

Okay. Thank you.

After September 30.

Thank you.

Our next question from the line of Fritz von Carp with Sage Investment Management.

Fritz, the last question.

I don't deserve the honor. All my questions were asked. Maybe I could just ask you for more color? I mean, I mean, you said that you seen that the emerging markets are holding up, ex- China. Can you give us color on what slowed more? Than your expectation of sector- wise? Anything like this that? What's going on there?

China, specifically?

Yes.

I mean, well, again, I think people need to take China's slowdown in context. I mean it has had, I know, pick the number. I have to go back and check the records, maybe four or five years of consecutive double digit quarter on quarter kind of growth rates. And I think that the last three quarters have been closer aligned, like 9%. But you know 9% on compounded growth rates in the magnitude and scale of what China is now, versus what it was four years ago, is an impressive, impressive number. As example, I would - - read in the Wall Street Journal, just early last week, headline article saying, China Import Growth Slows. Guess what? It grew to - - slowed to 21% growth. So - -

Right.

I think this is semantical in regards to these kind of numbers. 9% growth on the size of Chinese economy as it relates to welding is phenomenal number and one of which we're bullish about. As I commented in the earlier comments, what they have specifically said is that they're going to shift the focus into infrastructure spending versus non- value- added kind of activities. And I think, again, bodes well for the welding industry in total. And where there's a slight dip, it is there. Long- term will be a fantastic market and opportunity for us.

Just - - so does that mean slowing down in non- value- added activities? Not sure what - -

Well, I mean, again if, you read what's happening in the Chinese economy, most of the layoffs or the slowdowns, have come in, their widget manufacturing side of things. Don't see that long- term, sustainable kind of business.

I see, I see. Okay. Thank you.

So you want to be a value- added kind of businesses that employ a lot of laborers, for example, shipbuilding. A lot of people employed. Very high value added. And they think that that bodes good for the steel industry in China as well as the labor consumption.

Great, thank you very much.

Okay. Fritz, you're welcome. And, thank you for joining us for our third quarter 2008 conference call. We do look forward to reporting our fourth quarter 2008 results in mid- February. Talk to you then.

Ladies and Gentlemen, this concludes today's teleconference. Thank you for your participation. [ Event concluded ]