Lincoln Electric Holdings Inc (LECO) 2008 Q4 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Lincoln Electric 2008 fourth quarter and full year earnings results conference call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Vince Petrella, Senior Vice President and Chief Financial Officer for Lincoln Electric. Thank you, you may begin.

Thank you, Diego. Good morning and thank you for joining the Lincoln Electric 2008 fourth quarter and year-end conference call. We released results for the 2008 full year and fourth quarter this morning prior to the market's open. You can obtain additional copies available through our Investor Relations department at 216-383-4893 or on Lincoln's website. John Stropki, Lincoln's Chairman and Chief Executive Officer, will lead the discussion this morning and will provide commentary on the quarter and the year in a moment.

Before getting to that discussion, let me remind you that certain statements made during this call and our discussions 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 I'd like to turn the call over to John Stropki.

Thank you, Vince and good morning, everyone. Given today's current economic conditions, it's a real testament to the dedication and commitment of our employees and the support of our customers that we are able to report that 2008 was the best financial year in the history of the company. It is our fourth consecutive year of record sales, profit, and cash flow generation; however, our fourth quarter results reflect the challenges affecting the world economies and the pessimistic outlook around the world for the year ahead.

Vince will give specific details for the quarter and the year but to set the stage, I'll cover the financial highlights for 2008. First, sales grew 9% to $2.5 billion when compared to 2007. This shows that our global diversification strategy continues to push good results with over 41% of our sales generated outside of North America. When combined with North American exports of $242 million, which grew by 25% in 2008, more than half of our sales went to destinations outside of North America. Earnings per share excluding rationalization and asset impairment charges would have been $5.36 per diluted share, an increase of 15% compared to 2007.

As I mentioned, financial results for the year were record, but were more driven primarily by the outstanding results through the first nine months, and during the fourth quarter we experienced a dramatic turndown in our business as a result of the difficult global economic environment. Sales in the fourth quarter decreased 9.3% to $526 million, when compared with the year ago quarter. Sales were down in both the international and North American market; however, excluding FX impacts, international sales by destination increased 3% in the quarter.

The quarter-over-quarter comparison of sales does not tell the entire story when it comes to the 2008 fourth quarter. The weakening in the global economies was sudden and dramatic. The sequential decline in sales when compared with 2008 third quarter resulted in a sales reduction of 17%, which we experienced in all regions around the world. Rest assured that Lincoln Electric is prepared to face the global headwinds encountered in the fourth quarter. We have initiated many decisive actions towards aligning our business costs for significantly lower global demand in 2009.

Vince will give more color to the numbers in his remarks and explain our cost initiatives, but first let me touch briefly on the activities in the region and the segments. First, looking at North America. During the fourth quarter, business conditions in North American operations started showing signs of deterioration as the overall economic environment became increasingly challenging. As an example, total manufacturing industrial production, excluding the high-tech sector, was trending 12.9% below 2008 in January of 2009, while capacity utilization was running at approximately 68%.

In addition, markets impacted by housing, automotive and consumer sectors continued to be more strained. Job losses continue to mount within the entire manufacturing sector, and there continues to be mixed reaction to the US Government stimulus programs. Those statistics plus the volatility in the credit market and on Wall Street has led to much uncertainty about the overall business levels moving forward.

In Canada, with steep drops in the price of oil and the ongoing manufacturing slump, the Canadian economy formally slipped into a recession in [2004]. Activities in the country's western provinces softened as future energy related projects were delayed. The economic investment package was introduced in Canada during the January [2005] federal budget to provide stimulus through both infrastructure spending and tax cuts; however, any benefit is most likely not to be felt until late 2009. Although year-over-year sales in North America grew by 4% to $1.57 billion, the region experienced a 9% drop in the fourth quarter over the previous year's quarter comparison and again a 17% reduction sequentially from the third quarter of '08. Export sales growth continued to be relatively strong through the end of the year, especially for key infrastructure development projects that prefer Lincoln's more advanced high end US manufactured products. The outlook for 2009 exports, however, is more pessimistic, as oil and other commodity prices remain at very low levels.

During the year we have continued to make strategic investments to secure our future. We opened with great customer enthusiasm our new automation center in Euclid, Ohio, and we expanded our logistical infrastructure in Mentor, Ohio and our R & D operations completed the design on several new products which will be introduced in 2009. We will continue to invest in research and development to create new products for the future which take market share and continue to offer advanced technology solutions to our expanding global customer portfolio.

Turning to Europe. The overall economic trends in Europe deteriorated during the fourth quarter of 2008 and continue into 2009. European industrial production declined 8% in November and 12% in December of 2008 on a year-over-year comparison. The growth rates that were slowing through the third quarter of 2007 turned negative in the fourth quarter of '08 and our European business reflects that change. Our Lincoln Electric Europe sales decreased 15% to $121 million in the quarter. However, excluding the impact of acquisitions in foreign exchange, sales decreased 7%.

The year-over-year sales decline was attributed to declining volume demand associated with the overall economic trends; however, the sequential sales and profit decline for the region was attributable to the combination of declining volume as well as rapid decreases in consumable prices associated with declining commodity costs. The fragmented nature of the European consumable markets has pressured consumable pricing to a greater degree than other mature markets. We expect that these pressures will continue into the fourth quarter, excuse me, first quarter of 2009, as we liquidate high cost inventories and adjust our production costs for reduced volumes.

We also took actions in the fourth quarter to reduce our European workforce 10% and we are continually evaluating additional alternatives to manage our profitability during this economic [out] turn. That said, however, we continue to make and to review additional strategic investments in Europe in preparation for improving economic conditions. As an example, during the year, we fully integrated the Electro-Arco acquisition into the regional commercial structure.

In Latin America, the view a few months ago was that the region would be mildly impacted by the unfolding of the US and European economic crisis, but that has changed. The current reality is that despite much improved macroeconomic variables such as fiscal surpluses, large reserves and lower debt to GDP ratios, 2009 growth in major Latin American economies will slow, come to a halt or even potentially decline.

As an example, Mexico's GDP growth forecast for 2009 has moved from 3% as stated in September of '08 to the current number of minus 1.8%. Brazil's growth has also been lowered from 4.5% to 2 and the region as a whole has been revised downward from 4% to 2%. That being said, many governments in the region, including Chile, Peru, Columbia, Brazil and Mexico have announced emergency plans to support domestic demand in public spending and infrastructure development, but many economists are still predicting a regional slowdown.

In Latin America, we continued to execute our strategy in the region and took a number of steps to better position our business. We expanded our brazing and soldering alloy consumable operation with the acquisition of Brastak in Brazil. We increased our participation in Brazil's growing shipbuilding industry by securing equipment and consumables orders with one of the country's leading shipbuilders and lastly, we initiated cost reductions in our business throughout the region to right size the operation for reduced volumes.

Turning to Asia Pacific. Overall, Asia Pacific had a dramatic slowdown in the economic activity in all countries by the end of 2008. China's 2008 fourth quarter GDP growth rate declined to 6.8% and the contraction on a quarter-over-quarter basis. The IMF GDP growth forecast for China in 2009 has been reduced again. China's government announced $580 billion of infrastructure spending; however it remains to be seen if that will be sufficient to sustain the construction industry and to avoid large scale job losses as the industrial growth slows. That being said, this program represents a much bigger commitment to infrastructure than the US stimulus plan. Sales for Asia Pacific, excluding currency impacts, increased 29% for the full year and were up 18% in the quarter, with China sales growing 60% in 2008 to $146 million.

Although the growth has slowed in this region, we are still implementing our strategy, attacking the market, and continuing to strengthen our sales infrastructure, increasing our distribution channel, and expanding our offerings of new products. As an example, our plant in Chennai, India, is expected to begin trial production of welding consumables in March, which will support the strong demand we are seeing with an emerging wind tower industry, pipe mills and pipeline projects still under way. Power plant expansion, both thermal and nuclear, are also moving forward. That's the view of the company's regional results and relative market conditions for the last quarter and the year.

Lastly, I repeat, we will continue to use our strong financial position to seek the strategic acquisitions around the world, develop new products and services for our end market applications, and strategically expand our regional manufacturing capabilities to position Lincoln for the future. With those activities, we are in an even better position to weather the economic challenges ahead.

In addition, just recently, we announced a series of aggressive measures to align our businesses around the world to the current market conditions. We are closely monitoring these initiatives to insure the expected impact on our business and results.

Now, Vince will go over the details of the financial results.

Thank you, John. As John mentioned, 2008 was another record year for the Company. Those annual results reflected three quarters of strong performance while the fourth quarter started to show the impact of the global recession on our business. January and February results continued to deteriorate as sales volumes around the world fell sharply.

The fourth quarter global recession marked a shift in the market outlook and overall demand. The quarter's consolidated sales decreased 9.3% to $526 million when compared to the fourth quarter of 2007. Third quarter sales in North America and Europe were down 10% and 13% respectively while the rest of the world was flat. US exports grew in the quarter by 16% to $54 million.

Volume declines accelerated during the quarter with December reflecting a 20% year-over-year reduction. For the quarter, volume declines reduced sales dollars by 15.7%, pricing increased sales by 8.7%. The stronger dollar resulted in foreign currency translation reducing sales in the quarter by 5.2%. Acquisitions did contribute sales growth of about 3%.

Gross profit for the quarter was 26.8% compared to 27.7% in the comparable period of last year. Liquidations of high cost inventories and declining factory overhead absorption associated with reduced volumes resulted in a lower gross profit margin. Fourth quarter SG&A expense was $86.2 million or 16.4% of sales. This is compared to SG&A of $95.1 million in 2007 and 16.4% of sales. The lower SG&A cost was primarily associated with decreased bonus expense and the effects of foreign currency translation in the quarter.

Operating income for the quarter was $35.5 million or 6.8% of sales compared with $66.4 million and 11.4% in 2007. The quarter did include charges of $19.4 million, primarily related to asset impairments in Asia and rationalization actions in Europe. Operating income before these charges was $54.9 million or 10.4% of sales compared with $65.8 million or 11.3% in 2007.

On a geographical segment basis, North American EBIT margins declined in the quarter 140 basis points to 13.4%. Both the European and other country segments recorded losses in the quarter. The other countries' segment losses resulted from asset impairment charges totaling $15.6 million. Excluding these charges, the segment would have recorded an EBIT margin of 7.1% compared with the 1.4% in the prior year's quarter. The European losses within the quarter resulted from a combination of rationalization charges, equity affiliate losses and declining gross margins.

The effective tax rate for the fourth quarter was 40.7% compared to 28.8% in the fourth quarter of 2007. The increase in the effective tax rate resulted from asset impairment charges with no tax benefit recorded in the quarter. Excluding these items, the effective tax rate would have been 27.6%.

Now turning to the full year results. Sales for the year grew by 8.7% to $2.5 billion. Third party sales were up around the world with North America and Europe growing at 3.6% and 13% respectively. The rest of the world grew by over 22% with the growth in Asia being a significant driver.

Foreign currency effects contributed 1.9% to the revenue increase, pricing contributed 7.7% to revenue growth, and the impact of acquisitions for the year increased revenue by about 3%. Volumes did decline by 3.9% for the full year. Gross profit for 2008 was 29% compared to 28.4% in 2007. The increase was primarily attributable to favorable pricing leverage and improved operational effectiveness during the course of the year.

SG&A expense was $405 million or 16.4% of sales compared with $370 million and 16.2% of sales in 2007. The primary drivers affecting the increase in SG&A as a percentage of sales were increased investments in international commercial sales resources, increased foreign exchange losses of approximately $4.4 million, and the effects of foreign currency translation, which added $5.6 million.

Operating income increased $17.8 million in 2008 to $295.4 million, representing 11.9% of sales compared to $278 million and 12.2% of sales in 2007. Excluding the previously mentioned rationalization and asset impairment charges, operating income margins expanded 50 basis points to 12.7%. Now, on a geographical segment basis, North American EBIT margins for the year improved by 20 basis points to 14.3%. The other countries segment for the full year was flat at 4.9%. Excluding asset impairment charges, the other countries segment achieved a margin expansion of 340 basis points to 8.3%. European margins declined in the year from 11.8% to 9.2%. Europe results were impacted by fourth quarter charges associated with workforce reductions and lower income from equity affiliates. The income tax provision for the year reflected an effective tax rate of 29.2%, comparable to the prior year's 29.4%.

Operating cash flows generated during the fourth quarter of 2008 totaled $40.7 million. Operating cash flow generated for the full year 2008 totaled $257 million, representing approximately $6 per share of cash flows. The year ended with a cash balance of $284 million, and our capital structure remained very strong, with a net cash position of $142 million and a debt to total capitalization ratio of 12.5%.

During the fourth quarter, the Company invested $19 million in capital expenditures, resulting in a full year CapEx amount of $72 million. As previously announced, we expect capital expenditures to be at least $20 million lower in 2009. During the quarter, we paid cash dividends of $10.7 million, and we increased our dividend rate to $0.27 per share, an 8% increase for the dividend paid on January 15, 2009.

Finally in the quarter, we purchased approximately 367,000 shares under our previously authorized share repurchase program at a cost of $19.2 million. For the full year we purchased over 740,000 shares at a cost of $42.3 million. Weighted average shares outstanding decreased to 43.1 million shares from 43.4 million in 2007. Shares outstanding at year-end were 42.5 million, down 440,000 shares from the prior year-end. Our conservative capital structure, low debt-to-capitalization ratio, strong cash position, superior credit quality and cash flow generation characteristics will serve us well during this economic cycle.

Now, a couple comments on the year ahead. Our challenges in 2009 will be significant. The severity and duration of the current global economic recession is obviously unknown; however, the quarterly sequential decline in our sales volume has required immediate and significant cost savings measures. We are taking the appropriate actions to position our Company for the economic downturn.

On February 2, 2009, we announced a number of actions aimed at managing our cost structure to target an overall 10% reduction in our compensation cost. These actions included reductions in management compensation, a voluntary separation program for our Cleveland-based workforce, reductions in work hours, hiring and merit increase freezes and other discretionary cost reductions. The US-based voluntary separation program is estimated to result in a quarter one, 2009 charge of between $10 million and $12 million, and annualized cost savings of approximately $15 million. In total, on a worldwide basis, we expect cost savings initiatives announced to date to reduce expenses by approximately $80 million on an annualized basis.

We are committed to taking the necessary actions to align our cost structure with our current business conditions. We do expect our sales volumes to be significantly lower in 2009 than in 2008. January 2009 sales results declined approximately 30%, with February to date results tracking those levels in January on a year-over-year basis.

Lower commodity prices and the stronger U.S. dollar will continue to negatively impact our results in 2009 as well. The magnitude of the current sales level declines will result in significant reductions in operating earnings despite these cost cutting measures. Nevertheless, our broad geographic and market diversification and the long history of successfully managing through these types of business cycles gives us reason to remain optimistic for the long term prospects of our Company.

Those are the extent of my prepared remarks. Diego, could you open the line for questions?

Thank you. (Operator Instructions). Our first question comes from Mark Douglass with Longbow Research. Please state your question.

Good morning, gentlemen.

Good morning.

Hi. First of all, Vince, could you please run through the volume-price currency mix for the different regions?

Sure, Mark. For the quarter, for the fourth quarter of 2008, North America had volume declines and I'm going to round to the nearest percentage, 18% volume, about 8% price increase, about 1% increase for acquisitions and about 2% decrease for foreign exchange. So overall North America, 10% decline in the quarter. Moving on to Europe, we had about a 7% decline in volume, pricing was flat, acquisitions contributed about 5% and foreign exchange reduced sales by 11%. Lastly, the other countries segment, which includes Asia and Latin America, a 20% volume decline, a similar price increase, acquisitions contributed 8% and foreign exchange reduced sales by about 9%, for the region being flat about year-over-year. Europe in the aggregate was down 13%.

Okay. Thank you. Can you also comment on the split of the charges between cost of goods sold and SG&A?

Well, all the charges were in SG&A. If you look at the press release and our 10-K that will be filed tomorrow, the rationalization and asset impairment charges are on a separate line called "Rationalization and asset impairment charges," but they are down below gross margin.

So none of the rationalization was in cost of goods sold?

No.

Okay, thank you. Regarding the common and liquidating high cost inventory, is that still primarily looking at Europe or -- because North America is LIFO; correct?

Yes.

Could you comment how long before it flows through and what you see as far as profitability in Europe?

We will have the issue of higher cost inventories on a worldwide basis. As you know, late Fall, there was -- early Fall to late Fall, there's a peak in commodity prices so we will be affected by rolling through the higher cost inventories on a global basis. In terms of how long that will last, we think that it will continue at least through the first quarter and if commodity prices stabilize from this point forward, most of it should be behind us by the second quarter. There might be some additional higher cost inventories rolling through into the second quarter but the bulk of it we believe will be behind us in the first quarter. Based on current commodity prices and current market conditions.

Right. Okay, thank you.

Our next question comes from Walter Liptak with Barrington Research. Please state your question.

Hi, thanks, good morning, everyone.

Good morning.

I guess I'd like to follow-up on the Europe question. As you talk about this high cost inventory rolling through the operating loss that you had this quarter, it sounds like that will be expected to continue because of the inventory; is that right?

Well, Walt, let me just shape up where we are and how we got to where we are. If you recall, going into the third quarter when most of the negotiations would take place around the world for fourth quarter pricing, the commodity markets were still very strong and were increasing, and demand was strong and supply was somewhat questionable, so our conservative nature and our strong cash flow position encouraged us to buy inventory. And obviously, we bought at a time when prices were much higher than they are today and that put us into the situation that we're in.

As Vince said, we think that we will be through most, if not all of that, through the first quarter of this year but that again is predicated on what really happens in the markets. Obviously, we're well through the first quarter and we have pretty good visibility of that so we think we're pretty accurate in regards to that. And Vince can talk about the technical details on the inventory side.

Well, I wouldn't really add much to that other than to say that the liquidation of the higher cost inventories is certainly exacerbated by the pretty significant declines in volumes that we've seen, starting in the first quarter with declines of approximately 30% in January followed by a similar year-over-year decline in February, so again, our estimates would be that we should be pretty well clear of the decline in commodity prices that began in the Fall.

By that you mean you'll have the inventory cleared out but last quarter you got price of 4.2%; this quarter, your pricing was flat.

That's, I'll point out that flat pricing is based on a year-over-year basis. So looking back to the fourth quarter of 2007, on a sequential basis, the pricing deterioration has been greater than flat.

And in the January/February time period, are you, I assume you're at least flat or maybe prices are even going down in Europe?

Yes, prices are down on a sequential basis in Europe, clearly.

And that will lead to operating income or you have operating losses in the first quarter because of the dynamics of the inventory and pricing?

Yes, that will likely happen in the first quarter in Europe in 2009.

Okay. And will that -- that will show up again in gross margin in the first quarter. But once you get through this inventory, can we expect the gross margin will move back up to something more normal?

Well, I don't know about normal when you have 20 to 30% decline in volumes. We'll move up to something normal for that type of decline but certainly, covering the fixed overhead structure with volume declines of that magnitude will make it difficult to return to normal margin levels. But from a normalization standpoint, we do believe in the second quarter in Europe that we will largely have this commodity price decline impact behind us, provided that there's not another step change from where we are today.

Okay, all right, got it. One more and then I'll get back in queue. I guess I wonder about the cost reductions and wonder about timing and where that $80 million in savings is going to show up. I wonder if you could provide a little bit more quantitative guidance on that?

Well, that annualized run rate will reflect about half of the full run rate in the first quarter, so roughly $10 million of our cost savings initiatives should be realized in the first quarter and then by the second quarter of 2009, we should be hitting our full year annualized rate achievement, or about $20 million per quarter going forward.

Okay, and that will show up largely in the margin for Europe and the other countries; is that right?

Well, it will offset the margin compression that we would normally have with the kinds of volume magnitude decline in sales and production volume.

Okay, got it.

The bulk of it though, however, more than half of the cost savings initiatives are in North America, Walt.

Oh, they are?

Yes, more than half.

Thanks for clarifying that.

As I said in my prepared comments, we had a fairly significant voluntary incentive separation program in Cleveland that's taking more than 300 full-time equivalents out of our organization here in the next month or so, and that's resulting in a good portion of the overall savings as well as some of the other initiatives in our Cleveland based operations. But from a macro standpoint, more than half of the total $80 million savings should come out of the North American business unit. Okay, Diego, do we have another question?

Thank you. Our next question comes from Thomas Hayes with Piper Jaffrey. Please state your question.

Good morning. Thank you for taking my call. Vince, if you could just maybe provide a little bit of detail, you mentioned both January and February were trending down 30%. Could you just provide any geographic color to that?

Well, it's pretty equally spread across the world.

Is it? Okay.

I'd say that the other countries segment, which include Latin America and Asia, is catching up with the sharp declines that really were initiated and at the forefront of the business in North America and Europe, and now the rest of the world is starting to match those types of declines in January and February.

Okay, and then I guess you did provide some good detail on the pricing environment in Europe. If you could just provide maybe a little bit similar color on both in the Asia Pacific and what you're seeing in North America?

Well, Tom, the analogy that I would use to best describe the situation is that where there are high market shares and fewer numbers of local competitors, the pricing pressures will be less severe than when the market share is low and there are a great number of local competitors. And I think we're pretty consistent in that approach both on the upside of pricing and on the downside of pricing. It's a pretty logical type of assumption.

So clearly in North America, our market share is stronger. There are less number of local competitors although we are seeing some reintroduction of lower cost imports which generally happens in recessionary kind of periods. In Europe, our market share is good, but there are a lot of local competitors, and some of those are private companies that are far less disciplined in their pricing approach as they really need to just focus on cash flow generation in the short-term versus long term profit generation. And in Asia, it's a very fractured, fragmented market and very traditional low price pricing mentality. And that's the reason in Asia that we're focusing a lot on the high end value proposition of our imported products and trying to direct our local manufacture into those sectors that really appreciate the support and the involvement of Lincoln Products and technical involvement.

Okay, great, thank you. And lastly if you could, just a little more color behind the write-offs in China?

Well, the write-offs were principally related to goodwill and intangible assets in our China operations that have been acquired in the last few years. The requirements to evaluate the carrying value of those investments compared to our current outlook on their earnings and cash flow streams resulted in us taking a write-off principally on the goodwill related to two of our Chinese businesses.

With the slowdown there, is that something that still remains on an annual review?

Well, we've written, there is an annual review requirement but we've written off the total of the goodwill on those two businesses, so there shouldn't be any additional goodwill and intangible write-offs related to China.

Okay, I appreciate it and then just lastly, on the $80 million savings, I guess on a percentage basis, what would you expect, how much has to show up in SG&A versus cost of goods sold?

It will likely be about two-thirds cost of goods sold and about a third SG&A.

Okay, I appreciate your time, thank you.

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

Hi, good morning.

Good morning.

The $13.2 million of goodwill impairment, was any of that related to JW Harris or some of the more recent acquisitions?

Again, James, you might not have heard the last question, but that was all in the Asian region and it all related to our operating units in China.

Oh, okay, I'm sorry. I misread that. The $2.4 million I thought was China. Okay that's fair enough. The $42 million you spent on the share purchases, what average price would you say you bought that back?

It was roughly $52 a share.

Okay. And what's making up short-term debt?

Well, most of the short-term debt is related to lines of credit or borrowings outside of the US. We also have a payment that is due coming up here in the first quarter on our private placement in the US.

Was that the $30 million?

Yes.

And the rest was notes payable or amount due banks outside?

Outside the US.

And not to harp back onto your margins, but if I could go back to what Walt was trying to ask--excuse me, not trying to ask. But what I'd like to know a little bit more is when you said "Normal" margins, would you maybe say normal to last trough margins?

Well I'll point out to you, James, you have to look at each trough on its own based on the type of sales and volume declines that we have. The last trough between '01 and '03, we didn't start out with a 30% decline in volumes so it's difficult to compare where we will end up in this trough compared to 2001 to 2003. Our volume declines were much more moderate compared to where we stand today and certainly in January and February.

You would have to look back to '81, '82 to get an idea of the kind of volume declines that we're experiencing in this recession so far. That's a difficult comparison because in '81, '82, we were quite a different company, mostly a US firm. Today we're certainly much more global with a much broader footprint around the world and a higher fixed overhead structure from our global platforms perspective. So this will not be like what we saw in '01 to '03 and is certainly a greater magnitude than what we've experienced in a very long time.

Would you be able to discuss your ability to maintain higher earnings despite a lower profit dollar but higher earnings then than what you had in 2002, 2003?

Well, that's going to be very challenging and at this point although it's very early, it's two months where we're down 30%. December we were down 20, but I would say to you that if we continue for the next year at a 30% decline in sales it's going to be very difficult and unlikely.

Okay. Fair enough, and I got all of the EBIT margins except for Europe. What was that excluding any adjustment it might have had in the quarter?

Let me look back at that. Let me come back to that, James.

Sure. And last question is the--

Actually, I'm sorry, James. It's on the very last page of the press release.

Oh, okay.

So the quarter showed 13.4% in North America, negative 2.5% in Europe, and a negative 7.9% in other countries segment. But then after adjusting for the rationalization and asset impairment charges, North America was 13.8%, Europe was still a negative 0.4% or 40 basis points negative, and other countries was a positive 7.1%.

Okay.

So again, should be the financial highlights page entitled "Segment highlights" in your press release.

Okay, terrific. And the $80 million of cost savings, when do you expect that to hit, immediately?

At a previous question, I responded that about in the first quarter we should see a run rate of $10 million and then in the second quarter a full run rate of $20 million.

Okay, great. That's all I have. Thank you very much.

Thanks, James.

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

Hi, good morning Vince and John.

Good morning.

Just to follow-up on the consolidated operating margin commentary here, you indicated it could be potentially lower than the last trough given global demand. Those comments are exclusive of the $30 million run rate cost savings that you were just talking about?

No, inclusive. It's actually a $20 million per quarter run rate.

Okay.

And so despite our cost cutting measures, I think that it will still be difficult to achieve the kind of trough earnings that we had in the last downturn.

I see. And so I know it's very hard to model out or to even think about, but what are the potential detrimental margins you're looking at relative to your global overhead now versus the declining revenue?

Well, a 30% decline in volumes is going to have a significant impact on our earnings capabilities. With SG&A that's at least two-thirds fixed and a cost of goods sold that has a significant fixed cost element, you can do the math on how much costs you need to take out with a 30% decline in the top line when you have more than two-thirds of your SG&A that's fixed in nature.

Right, and, well, I guess, to that point, is the SG&A performance that you put up in this quarter sustainable or can it get better than the $86 million per quarter after adjusting for the write downs?

Well, our sales were down 9% in the quarter. The run rate is closer to 30% in the first quarter, so it's going to be challenging, but we think that we should be able to maintain or come somewhere near that type of ratio that we saw in the fourth quarter.

But if you're asking, Steve, in terms of the aggregate dollars of the $86 million, obviously that number is going to go down sequentially as we talk about the cost savings that are part of that equation that Vince went through of the $80 million per year.

Right, so that's what I was trying to get at, is in terms of absolute dollars what should we look at for Q1, Q2, SG&A levels?

Well, take what we have now and take off the $20 million run rate split between cost of sales and SG&A as I previously mentioned.

Okay, that's great.

Just one follow-up point on that, Steve, is if the trend of the current levels of business continue or even further deteriorate, obviously we're not done in terms of the cost savings initiatives that we will take, and our goal here is to try and get ahead of the curve on the cost side, not to be behind it, and I think we took a very good step with the actions that we just completed within the last couple weeks.

Right. Yeah, it's tough to get in front of revenue declines of that magnitude, so as you talk to your Global Sales force, is there any region that they're looking at relative to global stimulus or anything else that you would anticipate might pick up before North America or Europe, or is it pretty much just seeing declines everywhere for the foreseeable future?

Well, let's go back and go through the regions. Clearly Asia, we have not seen the kind of declines that we seen in North America and even the predictions for GDP are for some GDP growth, not the kind of contractions that we're expecting to see in North America and/or in Europe, so we still think that there are some reasonable prospects for growth in those regions. That being said it will be far less than what we've experienced in the past, but yet we remain optimistic because that's an area where we have smaller share and there's predictions at least in this point in time for growth.

Europe and North America I think are still kind of up for grabs, as the predictions continue to deteriorate, I haven't seen much in the way of any upbeat or optimism and I again think that the reviews of the current US stimulus plan are fairly weak in terms of how they would impact manufacturing and infrastructure kind of build-outs. In Latin America, it changes almost daily based on the impact of the North American economy on the Latin American economy, but I think we are more optimistic in Latin America than we are in North America in terms of the potential growth or reductions, the percentage of reductions that we would see as far as sales are concerned.

That's a great rundown. I appreciate it. One last question. Based on current business conditions, or if business persists at these levels, should we anticipate further writedowns in any of the non-China businesses or are you in pretty good shape everywhere, do you think?

Well, there aren't any writedowns contemplated or required at this point in time. We certainly are searching and evaluating all options available to us to continue to bring our cost base down in the face of the fairly significant volume declines. That being said, we could be looking at further actions in the second and third, fourth quarters of the year to continue to lower our cost base and improve our operating results for the economic environment that we're faced with today, but there aren't any additional asset writedowns that we would be contemplating as we speak today.

That's great. Thanks very much, gentlemen.

Our next question comes from Greg Halter with Great Lakes Review. Please state your question.

Yes, good morning. I wonder if you could comment on the LIFO charges that you saw in the quarter, if you had a dollar figure there.

We actually had a LIFO credit in the quarter, the fourth quarter of 2008 in our US business unit, of approximately $4.2 million.

Okay, thank you. And now you've talked about R&D and spending and so forth. For the year, can you provide what you spent dollar wise in terms of R&D and what you would look for going forward?

Actually, the spend was approximately $27 million for R&D for the full year, and that's up year-over-year from about $26 million in the prior year, so roughly a 4% increase in R&D expenses. And my view is that we will likely continue to spend at a roughly similar rate in 2009 but I'll allow John to make any additional comments on that.

Yeah, I think our strategy there is we're trying to accelerate some of our R&D efforts and we're actually reassigning people who would have been and would have stayed in other cost areas into some of our R&D efforts with the idea of being that we have a very good and exciting portfolio of new products that we think can capture share even in a downturn type of economy and we don't want to miss that opportunity. In fact, we may need it more now than ever so that's a good part of where our focus and energy will be applied during the course of the 2009 calendar year.

Okay. And what kind of impact did foreign currency, foreign exchange have on net income in the quarter?

Well for the quarter, net income was reduced, a detrimental impact of foreign currency translation of approximately $2.7 million, Greg. That compares to a benefit in the prior year's quarter of 600,000, so the swing year-over-year was a detriment of $3.3 million, as the dollar, as you know, started to strengthen late in the year.

Right. And there was also a large swing in your equity earnings, I think 2.1 negative versus 2.4. Any comment there?

Only that our joint venture and equity affiliates turned negative in the quarter in Asia and Turkey.

Okay. And one last one, as your equity on a sequential basis was down about $220 million, I know there's some share repurchase and also some income obviously but there's a large difference there. Is that due to currency?

No. The reason for that is the accounting requirements under defined benefit plans where as you know, the equity markets in 2009 declined significantly, the impact on our US based Defined Benefit Pension Plan moving from an overfunded position to an underfunded position comparing assets against the projected benefit obligations results in us putting in our, on our balance sheet a liability and in our equity section, a reduction in the company's equity, so the majority of that change, over $200 million, relates to putting our underfunded pension plan on our balance sheet.

Okay. And one last one, on your cash, where is that invested geographically and what is it invested in? What kind of rates are you earning on that?

It's invested in all very highly liquid short-term cash investments, money-market funds, T-bills. The majority of it is in the US, where over $225 million of it is here in the US. There's another approximately $40 million in Europe and the rest of the world has about $20 million, but the bulk of it by far is sitting at the end of the year in our US short-term investments, close to 80% of it sitting here at home.

Okay. And on your -- relative to your debt, what kind of average interest rate are you paying, and can you break out the split between fixed and floating?

Well, right now for the full year, our effective rate on our debt was 8.6%. On our senior notes, our private placement for the full year was about 4.6%. The rest of our borrowings outside of the senior notes, the private placement that we have in the U.S., are in foreign jurisdictions including Latin America with much higher interest rates, so almost all of our debt at the end of the year was variable rate interest payments on a global basis.

Okay, thanks.

Our next question comes from Holden Lewis with BB & T Capital Markets. Please state your question.

Thank you, good morning.

Good morning.

Just I guess I kind of missed the basis of the conversation about how low, I guess, the earnings can go. When they are talking about 2003, I guess that was your trough year in that downturn and it was about a 6.5% margin and $1.34 in earnings. When you're talking about being difficult at this revenue run rate to sort of sustain levels you saw back in '03, are you referring to the $1.34 in earnings numbers or are you talking about the operating margin level, or both?

I was talking about the operating margin level first, and that certainly has an impact on the bottom line. But the only point here, and we ought to move on to some other questions, is that our volumes are down significantly more than what we experienced in 2001 to 2003. Our initiatives will obviously be greater. Our tools that are available to us are certainly similar as 2001 to 2003.

But the point is that we have a fixed cost structure, two-thirds of our SG&A, we would estimate, at least being fixed in nature and a significant portion of our cost of goods sold. And even despite the cost cutting measures to take $80 million out of our cost structure with 30% declines in the top line, the trough levels in 2003 are at this point, if they continue at these types of declines, will be difficult to achieve without further cost savings measures.

And in regards, I'm sorry?

We lost your question.

Oh, okay. With regards to the cost savings measures, I think when you talked about the voluntary retirement program, or voluntary severing, you referenced sort of a $50 million number and now you're talking about $80 million. Did you just get more participation or what's the difference in that number?

Well, some of both. We achieved a greater number of people participating that we originally had thought, but we have also taken additional actions in other parts of the world that were not part of our initial strategy or initiatives, and so it's a combination of both factors, Holden.

And it wasn't that long ago. What added on in the interim?

Well we're taking headcount down in other parts of the world, in Europe and Canada and Asia, Latin America, so we have initiatives that we've instituted that have come to fruition on a worldwide basis as well.

Okay, and with regards to the balance sheet, I mean, you did do a good job I think working off a lot of the working capital assets and that sort of thing. How much progress do you expect to make in that? I mean, are you looking at sort of holding those, the 350 in inventory flat and receivables in 300 flat or are you looking at significant cuts even to those numbers and benefiting cash flow in '09?

Well we expect to have some harvesting of our balance sheet in 2009, Holden. Our expectations are that we will at least maintain our ratios in the form of days and inventory and accounts receivable average working capital to sales ratios and so having said that with the top line declining significantly, we better be bringing down receivables and inventory in like amounts.

Okay, and can you comment about what the impact of pension will be in 2009 as it relates to cash you need to contribute versus '08 and sort of the impact on the P & L in '09?

Yes. We expect to contribute at least $30 million for our US plans and we expect our pension charges for 2009 on a global basis to increase by at least $38 million.

Okay, thank you.

Our next question comes from Michael Coleman with Sterne Agee. Please state your question.

Good morning. Just wondering if you would care to draw a distinction between the down 30% volume that you cited so far in the quarter in terms of channel contraction versus retail sell-through and whether you would think that you need additional channel contraction before your end markets begin to or your volumes begin to reflect end market demand.

Channel contraction, you mean inventory reduction at our distributors?

Correct.

You know, we get this call almost every call and it's my opinion that there's little or no impact of that. Generally, our distributors do not carry excessive inventories. There may be some speculators if they think price is going to go up and availability would be low but I think that the visibility that they would have had over the last four or five months would not lead them to that kind of conclusion. Most of our business is a very quick order fulfillment rate. We have 90%-plus fulfillment of our traditional high volume products within a 48 hour period so there's no need to carry heavy inventory, so I don't think that there's much in the way of contraction as far as inventories are concerned.

Okay, thank you.

Diego, we will take one more question and then wrap up our call for the day.

Thank you, sir. Our final question comes from Walter Liptak with Barrington Research. Please state your question.

Hi. I just want to follow-up on the pension charge. Are you talking about a delta of $38 million in pension charges in 2009 or maybe another way to ask it is what was pension income in 2008?

It will be an additional charge, Walt, or a delta of at least $38 million we estimate today.

Okay, all right, significant, so even with the $80 million in cost savings on an annual run rate a big chunk of that is going to be eaten up by these additional pension charges?

Yes.

And what's the break out of equity versus fixed income in your pension?

Our target is roughly 65% equity and 35% fixed income. At the end of the year, that split is a little lighter on equity as the market is rapidly declined. We finished the year roughly 52% equity with the remaining amount in fixed income, but our target is 65/35. That's where we started 2008.

Okay, all right, thanks very much.

Thank you, there are no further questions at this time. I'll turn the conference back to Vince Petrella to close the conference. Thank you.

Thank you for joining us today and we look forward to talking to you about our progress and managing the Company through this difficult time in April at the end of our first quarter results.

Thank you. This concludes today's conference. Thank you. All parties may disconnect now.