Lincoln Electric Holdings Inc (LECO) 2009 Q3 法說會逐字稿

Greetings and welcome to the Lincoln Electric third-quarter 2009 conference call. At this time all participants are in 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. Mr. Petrella, you may begin.

Thank you, Melissa, and good morning and thank you all for joining our Lincoln Electric 2009 third-quarter conference call. We issued the financial results press release prior to the Market's open this morning. Additional copies of the press release are available through our investor relations department at 216-383-4893, or on Lincoln Electric's website. Lincoln's Chairman and Chief Executive Officer, John Stropki, will lead the discussion this morning and provide commentary on the quarter and the regional results. Before we start that discussion, though, let me remind you that certain statements made during this call and our discussion may be forward looking and actual results may differ from our expectations. Risks and uncertainties that may affect our results are provided in our press release and in our SEC filings on Forms 10-K and 10-Q.

Let me now turn the call over to John Stropki.

Thank you, Vince, and good morning to everyone. Our financial results for the third quarter show significant sequential improvement in profitability compared with Q1 and Q2 of 2009, as cost savings initiatives, factory rationalization efforts and other actions aimed at improving operational efficiencies are delivering much improved results. Unfortunately, even though many domestic and international macroeconomic variables are indicating improvements, this has yet to manifest itself in meaningful top-line revenue growth for the overall global welding industry. However, we are starting to see signs of recovery in several key geographies and market segments. Our 2009 third-quarter sales of $442 million delivered a sequential increase of 7% from the second quarter of 2009, and volume was up slightly sequentially from the previous quarter. I should also note that our third quarter is historically weaker than the second quarter, so the Q3 volume increase is good news. Excluding non reoccurring items, net income increased to $27 million, or $0.63 per diluted share compared with 2009 second-quarter earnings of $15 million, or $0.34 per diluted share.

As we continue to focus on improved operating results, we took several important actions in the third quarter to further align our cost structure and improve our overall profitability. We recently announced the closing of a welding consumable manufacturing plant in Spain, and the downsizing of our flex cord operations in the Netherlands. As such, we will be shifting the capacity of these facilities to our plants in Poland. We have also announced plans to move all equipment manufacturing out of Lincoln, Australia to our Shanghai manufacturing operations, and with engine drive production moving back to Cleveland. As a result of these actions taken over the last year, we have improved our capacity utilization, eliminated meaningful fixed-cost overhead, and realigned our workforce to current global demand. We continue to evaluate other structural changes to further improve operational efficiency, while maintaining our ability to meet the expected return in global demand and simultaneously maintaining our commitment to world-class customer service and product quality.

Vince will give you more specific details about the number for the quarter in just a minute. But first an update on the market conditions we face and the latest developments regarding our strategic initiatives. First, looking at North America, in the US, industrial activities continues to hover at historic low levels. While industrial activity measured by industrial production actually increased in September by 0.7% it is still 6.1% below 2008 levels. Capacity utilization also improved to approximately 68%, but again, well below the mid-80s levels, which would be indicative of a robust manufacturing economy. Although there continues to be uncertainty about the overall business levels moving forward, a majority of the forward-looking metrics that measure overall business expectations, such as the Purchasing Managers' Index, are improving. As an example, September durable goods reported up 1%, with machinery component up 7.9% in the month.

Other metrics, such as steel production and demand, are also showing some improvement. After major contractions this year, steel demand is forecasted to rebound nicely in 2010. US steel mill capacity rate continues to climb and was at 63% at the end of last year, with expectations as high as 70% for Q4. Global steel productions continue to rebound, with China up 19% year to date and the emerging economies are expected to grow over 12% in 2010. In Canada, despite a summer of automotive sector realignment and extended factory shutdowns, industrial production manufacturing is beginning to show positive growth again, with a 5% increase over early 2009. However, a broad recovery is not expected until early 2010 when significant oil and gas-related projects come back on-line. Reflecting the current economic environment in the region, our North American sales of $241 million in the third quarter were essentially flat compared with the second quarter of 2009. US export sales of $38 million were also flat with the second quarter results. However, we continue to see some good signs of recovery in Asia, which indicates that the stimulus programs in China and India are driving important infrastructure and construction activity.

We did see order trends in our traditional US welding market begin to tick up as we move through the quarter, with many large manufacturing customers coming off of summer shutdowns or slow-downs. However, we continue to remain cautious about the robustness of the fourth quarter and early 2010 outlook. The strongest end markets domestically continue to be energy related; namely, pipelines, pipe mills, and renewable energy, primarily wind towers. For example, the American Wind and Energy Association reported that US wind energy installed 1600 megawatts of new power-generating capacity in the third quarter, an amounts higher than either the second quarter of 2009 or the third quarter of 2008, bringing the total capacity added this year to date over 5800 megawatts. With oil prices rising to approximately $80 per barrel, there's also renewed interest in new oil exploration and production project. In the US, spending from the government stimulus package is having a trickle effect at best, as many shovel-ready projects have been aimed at road resurfacing as opposed to more steel-intensive bridge restructuring work where Lincoln more fully participates. The Canadian stimulus package introduced at the beginning of this year was designed to provide stimulus through both infrastructure spending and tax cuts, and we still expect that both programs will have some impact on demand during 2010.

Turning to Europe, the euro's own activity remains at relatively low levels. Western European economies continue to have large unemployment numbers and the industrial production is at historically low levels. As a result, Lincoln Europe's sales were $89 million in the quarter. However, the region did show substantial improvement in profitability, as high-cost inventories were liquidated and the region benefited and will continue to benefit from our additional efforts of overhead reduction and factory rationalization initiatives. There were some signs of recovery in the euro zone. The private sector, powered mainly by France, Germany, and Spain, appeared to expand this month at the fastest rate in over two years. According to the Purchasing Manager Index for the region, the composite index rose from 51.1 in September to 53. The index improved for the third consecutive month and was the largest monthly gain since December of 2007.

In Asia Pacific, China, the world's largest economy, continued showing improvement during the quarter. China's economy grew 8.9% in the quarter, and is on track to hit its growth target for the year. Sales of Lincoln Electric Asia Pacific, excluding Jin Tai, were up 7% from the second quarter of 2009. During the quarter, we completed the Jin Tai acquisition. The company has annualized 2000 revenues of approximately $130 million US dollars. Ah addition of Jin Tai, our welding consumable products offering in the region and enhances our distribution and end-market penetration into key ship building, automotive, heavy fabrication, and infrastructure sectors. China has already announced plans to expand its nuclear power generation capacity by more than 30 new nuclear plants over the next ten years. It also will add more than 30,000 megawatts of new wind power by the end of 2010, and Lincoln's unique portfolio of products for power generation mark highlights the importance of our expansion strategy in the world's largest welding market. As a result, we stand to benefit from China's stimulus programs, which is focused on infrastructure projects and energy related projects.

In a few weeks we will host an important delegation for one of China's major nuclear plant contractors, responsible for building portions of the nuclear reactors for China's government. They will be here in Cleveland attending a technical seminar to learn more about our capabilities and our welding solutions for the important nuclear energy sector. Also, large construction equipment manufacturers, like Caterpillar and Komatsu, are indicating very positive signs towards recovery in China. In addition, the country's automotive industry is also showing excellent growth. Overall sales were up 78% in September to 1.33 million vehicles, and China now leads the world in sales with over 9.6 million vehicles sold through September of 2009. India's automotive industry, while much smaller in current production, is also rapidly expanding. India's market conditions remains favorable, with solid growth in mining, pipelines, and pipe mill end markets. Both our MIG wire factories in India and Jin Tai operations, with their leading product quality, position Lincoln well to participate in two of the world's fastest growing automotive mark.

Turning to Latin America, our Latin America results reflect the improving economic conditions in the region and indicate that the worst of the recession in the region appears to be over. Lincoln sales in the respect were up approximately $9 million, an increase of 17% from the second quarter. The profitability in the region has also improved since the second quarter, as cost savings initiatives and volume increases improved our results. Expectations in the region is that we could see continued improvement through the fourth quarter. Latin America countries should be favorably impacted by the recent up tick in commodity prices and fiscal stimulus projects throughout the region. Brazil, the largest economy in Latin America, is clearly growing. Private consumption has been robust throughout the cyclical downturn. Unemployment levels have been down in recent months and Brazil has actually experienced net job gains and now is at pre-recession employment levels. Other signs, industrial capacity utilization is up at 80.5% in July versus 76% in January, and expectations for a 2010 real GDP growth forecast of 3.6% according to one economic report shows that there are a lot of infrastructure projects underway for plant.Economic activity in Mexico, the region's second largest economy, shows that for July, year over growth -- year-over-year growth contracted by 6.9%, compared with an 8.1% fall in June. Economic reports expect a slower rate of decline for the rest of the year and return to real growth in 2010. That's a broad overview of the region.

Next I would like to cover some of our market segments and initiatives geared to make our customers more productive. Our focus on technology leadership is being well received around the world. The rollout of our 108 new or improved product introductions in the last nine months is a hit in the marketplace. At the most important global trade fair in the welding industry, held in mid-September in Essen, Germany, the Lincoln booth was clearly the most visited of the show. Among the number of products introduced at the show, two clear standouts, which attracted a lot of attention, were Lincoln's new C-300, a revolutionary power source, and our new virtual welding source called [VR Tec 360]. The C-300 is a new power wave that supplies automation to a small to mid-size footprint. The VR Tec system is a training solution for the growing training centers and and school market and provides a virtual hands-on training experience for students. It uses computer-generated data with a virtual welding gun and helmet equipped with internal monitors to practice welding in a virtual environment. The VR Tec 360 can simulate a welding booth training environment, as well as field welding applications.

In addition to the virtual welding training system, our new consumable offers (inaudible) geared towards pipeline and offshore applications, new inverter welding solutions, plasma cutting product and our hard and flexible automation solutions gave our distributors and end users plenty to be excited about. Our new product received a similar success at that time Beijing welding show this past summer, and we will conclude our global new product introductions here in North America in November at Fabtech International and AWS Trade Show held in Chicago. We have also developed several new products specifically for the pipeline industry. As an example, the new Pipeliner 80 Nickel 1 is a MIG wire designed for automatic welding high-strength pipe with the demanding application including Arctic service temperatures.

In automation, we continue to make improvements and upgrades to our robotic welding packages. Two of the world's large heavy manufacturers of welding -- excuse me, of heavy machinery equipment have placed substantial orders for our robotic and welding equipment for new factories or manufacturing line upgrades. This accelerated large-scale global new product launch is another of our strategic responses to current market conditions. Our continued effort in consolidating and streamlining our manufacturing operations and our continued focus on cost management is setting the stage for both top-line revenue growth and margin expansion in the upcoming quarters. Combined with our strong balance sheet, with little debt and ample cash reserves, we are well positioned to maintain our market leadership in providing welding solutions around the world.

Now Vince will cover the financial results in detail.

Thank you, John. As John pointed out, our third-quarter 2009 financial results reflect a meaningful improvement in operating earnings from the second quarter of 2009. To start with the top line, our quarter's consolidated sales were down 30%, with North American sales decreasing 35%, and sales reported outside of North America down 23%. Volume declines decreased reported sales by 28%, and foreign currency effects decreased sales by about 3% in the quarter. Pricing decreased sales by 4%, and acquisitions contributed an increase of about 4% in the quarter. On a product line basis, machine sales decreased 40%, and consumable sales decreased 31%, excluding acquisitions. Sales by product line were approximately 68% consumables and 32% equipment, compared with 63% consumables and 37% equipment in the prior-year same quarter. The first nine months sales were down 35%, with North American sales decreasing 36%, and sales reported outside of North America down 33%. Volume declines decreased reported sales by 33% in the nine months and foreign currency effects decreased sales by about 5%. Pricing was flat, and acquisitions contributed about 2% in the year-to-date period. The percent of gross profit in the quarter was 28.3% of sales, compared with 31.1% in the prior-year's same quarter. The decrease in gross margins as a percentage of sales is primarily attributable to favorable operating leverage caused by decreased sales volumes.

The quarter included a LIFO credit of $7.7 million, of which approximately $3.8 million is related to estimated reductions in inventory levels. For the nine-month period, gross profit was 25.4% of sales compared to 29.6% of sales in the prior year. Again, the year-over-year decline in gross profit was due to favorable operating leverage combined with the impact of liquidating higher-cost inventory in the first half of the year. LIFO credits totaled $13.6 million, of which $6.8 million relate to the estimated reductions in inventory levels for the year-to-date period. SG&A expense for the third quarter was about $85 million, or 19.2% of sales, representing a $22 million reduction from the prior-year period. The decrease in SG&A expense was primarily driven by lower bonus expense and decreased selling costs associated with lower sales volumes. Foreign currency exchange rates decreased SG&A expenses by $2.6 million in the quarter.

Pension expense included an SG&A was $2.7 million higher in the quarter. SG&A expense for the nine-month period was $242 million, or 19.1% of sales, representing a $77 million reduction in year-over-year SG&A expenses. Decreased bonus expense of $56 million and the impact of foreign currency translation were the main contributors to the reduction in SG&A costs. Pension expense included in the SG&A line was $8.8 million higher year over year. Rationalization charges of $7.1 million were recorded in the third quarter, related to the plant consolidation actions taken in Europe and the other country segment that John mentioned earlier. On a year-to-date basis, rationalization charges totaled $25.7 million.

Our cost savings initiatives resulted in savings totaling approximately $35 million in the third quarter of 2009. We expect to achieve a similar amount of cost savings in the fourth quarter of the year. Third-quarter operating income at 7.5% of sales was down 670-basis points versus the third quarter 2008. Excluding rationalization charges, operating income was $40.4 million, or 9.1% of sales. On a geographical segment basis, and excluding special items, North America achieved EBIT margins of 12.3% in the third quarter, Europe returned to profitability with an EBIT margin of 2.1%, and the other countries geographical segment recorded a 5.1% EBIT margin. Excluding rationalization charges, second quarter 2009 EBIT margins were 9.9% in North America, a negative 3.3% in Europe, and 2.9% in the other country segment.

All geographical segments margin improved in the third quarter over the second quarter as a result of lower input costs and our cost cutting measures on a global basis. Our nine months operating income decreased to $53.6 million, or 4.2% of sales. The nine-month period of 2009 included rationalization charges of $25.7 million and a pension settlement gain of $1.5 million. Excluding these special items, operating income was $77.8 million, or 6.1% of sales in the first nine months of the year. The income tax provision for the third quarter reflects an effective tax rate of 47.4%, compared with 25.5% in 2008. Excluding the tax effect of the special items in the quarter, the effective tax rate would have been 31.2%. The year-to-date effective tax rate was also 47.4% compared with 27.8% in the prior year. The higher effective tax rates in 2009 were mainly due to foreign subsidiaries recording pretax losses with no associated current tax benefit.

The Company invested $5.5 million and $26.3 million in capital expenditures in the three and nine-month periods respectively, compared with $22.4 million and $53.5 million in the prior-year's three and nine-month periods respectively. Our 2009 capital spending plan will continue to trend substantially below the prior-year's spend. We do expect to spend approximately $35 million to $40 million on capital expenditures for full year 2009. Other uses of cash in the first nine months include the pay-down of $30 million of debt and the payment of approximately $34 million in dividends to our shareholders. Weighted average diluted shares outstanding decreased to 42.642 million shares, compared with 43.209 million for the 2008 third quarter, a 1.3% decrease in shares. Shares outstanding at the end of the quarter, September 30, 2009, were 42.528936 million shares.

Even during these most challenging economic times, we continue to demonstrate important improvements in operating results and our financial position remains very strong. During the quarter, and first nine months of the year we generated $97 million and $231 million respectively in cash flows from operation, raising our cash balance to $406 million at the end of the quarter. This improved our net cash position to $275 million, and resulted in a debt to total capital ratio of 11%. The Company is very well positioned to take advantage of the opportunities before us as the year unfolds in 2010.

With that, Melissa, I would like to open the call for questions.

Thank you. (Operator Instructions). Our first question is from Walt Liptak of Barrington Research. Please proceed with your question.

Good morning, guys. Great quarter. I wanted to ask -- you mentioned something about a LIFO adjustment in the quarter, Vince.

Yes. So we had -- we've had LIFO adjustments during the course of the year, and the quarter included $7.7 million, and the year-to-date adjustments were approximately $13.6 million.

Okay. And so was that which youd in the adjusted number?

No.

Okay, so that increased your gross profit by $7.7 million.

Yes, and that's reflective of declining commodity costs during the course of the year. So LIFO is a cost flow assumption methodology that matches your most-current costs with your most-current revenues. And so $13.6 million for the year and $7.7 million for the quarter are estimates of what our most-current costs will be at the end of the year.

Okay.

So just one further point, Walt, is would you have to annualize that year-to-date figure to estimate what our total 2009 credits will be for LIFO accounting.

Okay. Does that mean that in the fourth quarter we would not see a LIFO adjustment?

No, no, that means you will see another LIFO adjustment that annualizes the $13.6 million, based on current estimates. So this is subject -- LIFO accounting methodologies are subject to estimating what your year-end inventory levels will be and what your year-end cost environment will be. So they are adjusted during the course of the year, and currently our best estimate is for the nine months, $13.6 million, and so annualizing that for the full year would raise the number somewhere around $18+ million.

Okay, got it. Wanted to ask about European profitability that improved, was that related to the cost-out action that John talked about earlier?

Certainly cost savings actions have aided Europe significantly during the course of the year. One important factor that has affected us in the third quarter and going forward is, Walt, what we've been talking about all year in terms of liquidating high-cost inventories in Europe. So we had a headwind, a drag in the first two quarters, and we had been talking in first two quarters about putting that behind us by the third quarter and that is certainly now through the system and clean, and so those headwinds are now behind us and it's improved our operating profit in the region.

Did that come to an end in the quarter, during the the middle of the quarter, or at the beginning of the quarter?

Beginning of the quarter.

Okay, so this is the margin at these volume levels we'd expect, like next quarter?

I would say so, and although you understand we do have some seasonality and the fourth quarter tends to be our weakest quarter of the year. So I would expect perhaps a tick down in EBIT margins in the fourth quarter in the light of our normal seasonality.

there's one other factor, too, Walt. It's product mix within -- not just within the European business but with all of our businesses, is that the markets that are soft are the traditional lower-end, general fabrication automotive kind of markets, and the markets that are strong are petrochemical, energy-related infrastructure, and those are much higher margin products for us, and I think for the industry in general, as there's just a lot less competition in those areas. So where we're selling the high-tech product for the specific projects we're capturing larger margins there.

Okay, got it. And speaking \of automotive in North America what is your percentage of sale that's automotive? Some of your competitors say they don't have a lot of automotive for welding in North America, is that because the sales go to you?

Well, the market is really about a mid single-digit welding market.

Okay. So 5% of your North America is automotive?

Roughly, some place between 5% and 10%.

Okay, thanks, guys.

Thank you. Our next question is from Mr. Mark Douglass of Longbow Research. Please proceed with your question.

good morning, gentlemen.

Good morning, Mark.

Nice results. Vince, can you go through the sales mix for me, please, by region for volume, price, currency?

Sure. For the quarter, in North America, our volumes were down about 32%, price was down about 3%, and foreign exchange was relatively flat. And moving to Europe, volume was down about 23%, price was down about 7%. And foreign exchange had a negative impact of about 7.5%. Then finally, the other countries segment, volumes were down about 24%, price was down about 2%, and acquisitions improved the other countries segment, primarily because of our acquisition in China, by 22%. And then foreign exchange had a negative impact of about 4.5%. So in the aggregate, on a consolidated basis, volume was down 28.1%, price was down 3.6%, acquisitions contributed 4.3%, and finally, foreign exchange add detrimental impact of 2.7%.

Okay, thank you, that's helpful. If we can talk about pricing, I guess there's just a lot of the pricing, was it relatively flat sequentially though, would you say?

If you look at the second quarter, Mark, and then look at what it was in the third quarter, you'll see that our pricing decreased probably about 200 -- over 200-basis points quarter to quarter, and so we believe in the fourth quarter that we will continue to see slight deterioration in pricing as it sequentially comes down to try to better match reductions in input costs.

Okay.

So I would -- I said in the last call that I thought we would be in the low to mid single digits in pricing declines, and it probably will be in the fourth quarter somewhere in the mid single digits in pricing declines.

Okay. Can we talk about the Jin Tai? What do we -- you're looking at accretion of, what, $0.08 to $0.12?

Yes.

After tax?

Yes.

Okay. So I know the other countries segment has been pretty volatile as far as margins, but on average over the last couple years would you say Jin Tai has better than historic margins in that category, or about the same?

Well, out of the box, the first two months they have had better margins than the overall other country segment.

Okay, that's helpful. And then can you repeat again the restructuring savings in the quarter and what you're looking for in the 4Q?

Yes, I said that we estimated cost savings of approximately $35 million in the quarter, and we expect something similar in the fourth quarter.

Okay. Okay, thank you. And then, John, you mentioned something about robotic orders. That's intriguing. Can you explain a little bit about where the up tick in orders is coming from? Have you seen just a general up tick in capital spending, or are people just seeing the savings of robotics because they don't want to replace employees? Then any estimation on the size of robotic sales at this point?

Well, I would say that the specific orders that I talked about were for large construction equipment manufacturers who are either introducing new product lines, building new factories, or upgrading existing manufacturing capabilities. And as we've talked a number of times, we think that that's consistent, sustainable trend as people address worker shortage, labor costs, and quality improvement initiatives in that area. And we have a very key position in that area. We've substantially upgraded the technology associated with the welding power source and robotic interfaces, and we believe we continue to capture significant share of that marketplace. And it is moving globally, Mark, where traditionally that started in the US, it moved in North America, now after strong platform in Mexico, and we're building the same type of capabilities and scale in Asia and Europe.

And relative size?

Relative size of the overall market?

Of your orders.

Well, these were pretty significant orders, but I'm not going to give the absolute detail on them.

Okay, thank you.

Thank you. Our next question is from Tom Hayes of Piper Jaffray. Please proceed with your question.

Thanks. Good morning, gentlemen. Vince, I was just wondering if you could just -- I wanted to circle back to the LIFO adjustment real quick, make sure I understood it. So in the third quarter there was a benefit to the margin line of -- flow through of, what, $7.5 million?

$7.7 million.

Okay. So -- and then for the full year -- it's been an impressive margin performance over the last two quarters. Would that be the main driving force that's pushed that margin back to those levels?

Well, certainly following input costs have had an input -- have an important impact on our margins, but we also have very important cost savings recognition over the course of second, third, and now going into the fourth quarter. So LIFO accounting, again, is a reflection of matching the most-current costs and commodities that you're purchasing against your most-current revenue levels. So these are real profit-generating gross margins, and it's reflective of a declining commodity cost environment. In terms of --

And its also a measure of our ability to continue to capture price, even though input costs are reducing.

So I guess some of the outlook, then, for the raw material continues to show a little bit of weakness, so would it be a fair expectation that if that input price were to trend down you would continue to see some future LIFO adjustments?

Yes, that would be the case, but we would say at this point in time, if anything we're seeing indications of higher input costs running into the fourth quarter into 2010. So you well know, we buy a fair amount of steel and other commodities, and those have recently started to trend upward, and so there will likely be more pressure and headwinds on margins than anything else compared to the first three-quarters of the year.

Okay. And then if we could just shift a little bit, John, you mentioned the tremendous job you guys have done on the new products, I was just wondering if you could describe -- are you seeing the sales traction on those new products following a similar pattern to previous product rollouts?

Well, this is a very broad rollout, Tom, as we discussed. We diverted substantial internal resources to really focus on upgrading or introducing new products, and we did in that the slow market recognizing that we needed to capture share in order to really get maximum value out of the resources that we have in-house. So we're early in that game, but the early returns are very, very positive. And as I mentioned, the turnout and the enthusiasm that was generated during the course of the Essen welding show, which attendance is three or four times that of the North American welding show, was quite refreshing, and we're very optimistic. So we think that the trend will be quite good, and because of the number and the scale of the introductions, we think there's a great amount of up side with them, particularly when the markets do return to normal volumes.

No, it looks like a great product offering, and I compliment you on the foresight for that. Kind of a derivative question, have you experienced any delays in what would be a normal machine upgrade cycle since a lot of the welders that are already in the field have been relatively underutilized for the last six to nine months?

Well, I would say you really to have break the market into two segments. The low-end commercial business, more of the walk-in industrial distributor business, is quite slow and I would suspect that until the markets return, it will remain quite slow. What's driving our growth in both revenues, where we have them, and also market share is the upgrades that the major end users are going through. And again, that's either driven by the fact that they've got a new product line coming out that they have to build, or they've got quality issues, or they have productivity issues, like all companies have, and they're trying to lower their product manufacturing costs and focusing on the productivity increases that we can demonstrate.

Okay, I appreciate the insight. Thank you.

Thank you. Our next question is from Seaver Wang of HSP Capital Markets. Please proceed with your question.

Hi, good morning. Just want to get this right. The facility rationalization, that's mostly done at this point, or is there a little bit more to go?

There's -- well, the ones that John talked about are still in progress, not completely done, so running into the fourth quarter we'll still be completing those actions. And then we continue to look at other opportunities to consolidate, or reduce our fixed cost structure. I would say, though, Seaver, that the bulk of what we think we need to accomplish has been either announced or accomplished, and there won't be a significant amount of additional actions, either announced or progressing in the fourth quarter into 2010.

Okay. Then going for the tax rate again, can you give us some kind of guidance there?

Well, the tax rate, excluding the special items impact, was about 31%, so I would tell you that you could use that as a proxy for an ongoing operating-type effective tax rate.

Okay. And then just in general, the M&A pipeline for you guys,if you guys are looking at smaller or larger because you have a boat load of cash now?

Well, we look at all opportunities, we don't really classify them by size. We look at them based on the value that we think they could bring to our shareholders. We've talked a lot about the fact that we have good relationships with many of the people in the industry, and we think that our conducts -- contacts there are important in identifying the good opportunities that exist. And we think that the future looks bright there, that the acquisition targets, I think, have a better view of what the future looks like for them, the challenges that they face, and those that aren't up to the challenges are looking at the alternatives that are on the table, and Lincoln presents a very good alternative for people who choose to exit the business.

Do you believe there's greater activity now than a year ago?

I think it's just -- it's easier to get reasonable dialogue going on valuations. As we've entered into this tremendous decline in the revenue and the profits of businesses, it was almost impossible to have any reasonable discussions on valuations. So again, as people have a better view of what their future looks like, those discussions could be much more productive. So, yes, the pipeline is a little better than what it was, but our pipeline is, as I would say, is fairly continuous. It's always a timing issue in terms of execution.

Okay, thank you.

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

Thank you, good morning.

Morning, James.

Hi. Your gross margin, it's roughly where it was back in 2007. I was just wondering, with LIFO most likely having less of a benefit, or impact, let's say, in 2010 and pricing where it is, do you think you guys could see margin pressure next year, or at the very least suppression, of further expansion?

Well, a lot of it's going to depend on how the volumes go, James, that's the unknown in the equation. If the volumes improve, with the cost cutting measures that we've implemented we should be able to capture significant margins based on the reductions that we have. If they don't or they decline, yes, we'll be challenged, as we always are.

Okay.

Assuming the volume environment that we're in today and facing what we see, at least in the near term, in terms of increases in input costs, however, we would have some pressure on the margin line, provided that input costs increase and we do not match that with the requisite increase in the pricing, as well as the necessary margin maintenance. So we're certainly going to see input costs increase and it will be a managerial challenge to match those increases at the top line and maintain the kind of margins that we've achieved here in the third quarter of 2009.

Okay. And the run rate for your restructuring now, I'm sorry, is it $140 million?

Yes, if you were to annualize what we achieved in the third quarter and, the fourth quarter, yes, $35 million is our run rate at this point in time.

and what was the breakdown ,again, between the COGS and the SG&A?

well, it's all, James, included in a separate line called rationalization charges after gross margin but before operating profit.

So you had no -- okay, I'm sorry, I thought there was some SG&A reduction, as well?

Oh, you're looking for the savings?

Yes. No, I'm sorry, the savings.

Yes, the saving number, the bulk of it is cost of goods sole.

Okay. And that annual run rate is $140 million?

Roughly.

Okay. The Jin Tai, I'm sorry, how much did that add to your other countries in the quarter?

In terms of earnings?

Absolute dollars.

Or revenue?

Revenue.

Revenue was about $22 million, but the total acquisition's in that line, because there was another acquisition added about $27 million. Because we had an acquisition last year that didn't affect the third quarter.

Okay. Now, the equity earnings affiliate line with Jin Tai now being owned, what happens to that line going forward?

Well, that line, we'll primarily have our 50/50 joint venture in Turkey in that line.

And that's the only one?

Well, we -- there's another smaller one in Latin America, but the bulk of -- the sizable joint venture now is in Turkey.

Okay. How did that perform this quarter?

it was modestly profitable.

Okay. Okay, that's all I have, thank you, Vince and John.

Thank you.

Thank you. Our next question is from Steve Barger of Keybanc Capital Markets. Please proceed with your question.

Good morning.

Good morning, Steve.

If I look back to 2004 and '05 coming out of the last recession, you were running incremental contribution margins 10% to 20% on really solid revenue growth. So as I think about all the restructuring you've done now, should you have a structural benefit as revenue comes back versus the last downturn, or what do you think your incrementals are going to look like as volume comes back?

I think certainly we're going to have a structural benefit. Rationalizing and consolidating and driving some of our higher cost factories out of our portfolio is going to give us an opportunity to achieve both a higher capacity utilization, as well as a better unit cost profile in the next up turn. I would point out that in an environment, Steve, where our sales are down over 30%, our North American business put up a 12.3% EBIT margin.

Right.

I think we will exceed the previous peak earnings margins if we can get those kind of revenue numbers back again, and certainly some of the other -- the other two regions have performed fairly well in terms of progressively improving their EBIT margins during the course of the year in a very difficult volume environment. Now, it's also fair to say, on the other side of the ledger, that a fair amount of the cost savings figures are guaranteed employment techniques and our ability to take wages and hours down to match our productive capacity. So you can't simply say that the $35 million is gone forever, because when our volume levels return, there will be a fair amount of our cost savings being restored back to the P&L to match current demand levels. But there's still a meaningful amount of fixed costs and overheads that have been removed from the system that should give us a higher peak earnings capability in the next up turn.

So when you think about the $30 million or the $140 million run rate, either one, what percentage of that is fixed versus variable, if you know?

Probab -- I'll give you a rough estimate of two-thirds to three-quarters is probably variable.

Okay. And do you want to take a shot at what the incremental contribution margins could look like, let's say, if you get a 10% revenue growth rate in 2010 or 2011?

No. (LAUGHTER)

All right. It seems like a lot of companies -- as we've listened to reports over the last week or two, everybody's done about five years of restructuring in the last three-quarters, so cost basis have gotten much smaller. What's the risk that this becomes a volume game globally at the expense of price as competitors try to take market share, if the recovery is a little slower than people want it to be?

Again, I think that if you go back to the remarks about the moves that we made in Europe, we're basically transferring the productive capacities of the facilities that we downsized or closed to lower-cost locations. These are locations where we had built out the infrastructure in preparation for volume increases. Since the volume increases did not come because of the recession, those spaces were available, and we're moving the production equipment into those facilities that are -- the infrastructure is already there, the workforce is already trained, the management is in place, and we can turn on the switch as soon as we move the equipment. Very good example of that is in our Harris portfolio where we moved our product line out of Italy into an existing Harris facility in Poland, and in 24 hours, we moved 40 truckloads of production equipment into a new facility, and in very short order had it installed and operational. And that's what we've done with these restructuring efforts that we're talking about, and we don't see that inhibiting our ability to meet any up tick in the capacity needs that are -- that may come.

Great. And, Vince, I was kind of surprised to hear you talk about potential input costs increasing going to 2010. Steel capacity's been coming back on-line pretty steadily, but as I've looked at some of the steel company results, it seems like pricing could get softer domestically in the near term. So was that a global comment, and what's the right metric for me to think about for consumable read through? Should I be looking at steel capacity, or is it pricing?

It's pricing, and we use a significant amount of long steel, as well as the flat rolled steel, and you can track pricing in all the regions of the world through various steel services. But it's not only steel, but as you know, other commodities have been rising in price, including copper, aluminum, silver, just about everything -- well, oil is certainly leading the way at over $80 a barrel. So we're seeing rising commodity prices in our environment.

I think it's becoming much more difficult to predict in the short term, Steve, because two things are happening on the steel side. The capacity is coming back on-line and I talked about the capacity utilization numbers going up --

Right.

-- and that's good news because it relieves some of the stress on the supply chime -- chain. But also, as the mills see that their business is improving, obviously they're going to want to go back to where they were from a profitability and a margin basis. So there's a shorter term view of that, and I think if you track what happens in the steel production area, you'll get a better view of what we might expect as far as price is concerned.

Okay, one last question. John, in your prepared remarks you said China was the world's largest welding mark. Did you mean fastest growing, or is it actually bigger than the US in terms of dollars?

I think it's -- it's surely bigger by volumes, absolute, no question. It's a little harder to track by dollars, because you don't have the visibility because of the lack of public companies.

Right.

But it would be very close, and I will guarantee it will be the biggest, if it is not already the biggest in terms of dollars. But by volume it's substantially larger.

Got it. Thanks.

Thank you. Our next question is from Mr. Greg Halter of Great Lakes Review. He please proceed with your question.

Yes, thank you for taking this. Wonder if you could comment about where your cash is invested and what kind of rates are currently being earned on that?

Well, 80% of the cash, Greg, is in the US. And then the remainder is spread around in the bank accounts of our non-US operating subsidiaries. And as far what is the rate is that we're achieving, it's extremely low. It's -- you can look at our interest income and divide it by what our total cash balances are and come up with a return that's in the very low single digits. So we have our cash in very short-term, highly-liquid instruments.

Okay. And given the fact that you could have greater than $300 million of net cash by year end, and obviously, I heard the commentary about M&A, but just wondering how would you prioritize between acquisition, share repurchase, and dividends in terms of that cash?

Well, Greg, acquisitions are priority one, two, and three, and we really think that this is the time and the environment to take advantage of our strong financial position and the multiples and the pricing environment that we think are appropriate at this point in time. In terms of the other uses of cash, there really hasn't been a shift in our view of how we use our balance sheet. We're a committed dividend payer, and a committed dividend increaser. We have a reasonably modest yield on our dividend payouts, and through cycles, we have what we believe to be an appropriate payout ratio, one that is a bit higher than normal based on the most-recent earnings history of the Company. And then finally, share buybacks are something that we look at not from a systematic viewpoint, but from more of an opportunistic viewpoint in terms of what our outlook is for use of cash and what opportunities we have to pursue our top strategies. And from time to time, as you know, in our history we'll enter the market and take a few shares out now and again, but that's not something that we will do on a regular basis, but largely an opportunistic profile?

Okay. And given your debt, where you have it now, is any of that -- and I know you've reduced it by$30 million -- any of that can be paid down, or are you locked out in the near term here?

Yes, the debt maturity on the remaining outstanding debt has an $80 million bullet that's due in March of 2012, and there are prepayment penalties that are not attractive that we run the calculations periodically from time to time, and it's been our view that we won't pay down that debt at this point in time, but wait for its maturity, based on the current interest rate curve today, until March of 2012.

Okay. Given that the month of October is almost over, any commentary on how October volumes have shaped up so far?

Well, we -- I think John might have commented on this in his formal comments, but we've seen a -- as the quarter progressed and into October, a continuing slight strengthening of order levels.

Okay. All right, thank you very much and, Vince, good luck on the soccer game.

Thank you, Greg.

Thank you. Our next question is from Holden Lewis of BB&T Capital Markets. Please proceed with your question.

Melissa, this will be our last question.

I've got 35 of them, Vince.

Okay. Fire away, Holden.

On the savings, you;re at the $140 million run rate, but does that include the savings you're anticipating from these most-recent rounds of closures?

There will be a little bit more from those most recent rounds. Those are not in full maturity yet, so we'll likely have maybe a range of another $5 million or $6 million on top of that.

So you feel like $145 million in annualized savings are pushed in here and you feel like that's where you want to be?

That's not a bad estimate, and that's likely substantially what we'll be able to achieve through the end of this year.

And did I hear you right that of that two-thirds to three-quarters is variable so it can come back on the P&L as volumes return?

Yes.

Okay, so one-third to one-quarter, then, is how much the fixed cost of the plants and all is?

Right.

Okay.

But we would -- Holden, I would emphasize, we would be delighted to have those variable costs come back on the P&L, because if they come back we're going to have much higher earnings and much higher leverage and therefore much higher peak EBIT margins.

I guess to raise the question, are those savings -- when they come back, do they naturally come back as the volumes get better, because maybe you have to put in COLA or 401(k) match or whatever, or can you hold those off until your revenues get to X percentage of levels, and what would that be?

Yes, the bulk of what will come back will match productive volume levels. There are some more modest variable costs that will come back as we restore wages for salaried employees and also profit sharing match. But that's the smallest part of the variable cost savings to date. The bulk of it is taking our productive labor costs down, as well as -- as you well know, Holden, our variable compensation structure associated with bonus. So there's a fair amount of variable costs that are associated with just how profitable the firm is -- the Company is from period to period.

Got it. And looking (inaudible) another way, can you talk about how much of your productive capacity now -- maybe talk about in terms of the NorAm, Europe and rest of world categories that you tend to think of it in, but where is your production capacity now versus maybe before all of this began? Is it materially different?

Well, it is. Roughly speaking, when we were at our peak in 2008 we were running at very high capacity utilization levels, and you also know we had a very high CapEx spend and largely the majority of that CapEx spend was to add new capacity as we were tight in different consumable categories running through ;06, '07, '08. And so if your sales are down on a year-over-year basis by 30% or 40%, and if you assume we're 90+ % capacity utilization, we're down there roughly 50% to 60% capacity utilization. So there's a tremendous amount of capacity available, as proven by our peak volume trends achieved in '07 and '08.

I guess what I'm trying to get at is, assuming you get back to peak utilization, given that you've shuttered a bunch of facilities and moved some stuff around, peak utilization is North America now like 60% of production, where it used to be 80%? I mean, how is that skewed now between Noram, Europe, and rest of world?

Again, I just emphasize what John said and let him add to it some more color, but we really aren't taking out productive capacity. We're consolidating facilities, we're transferring equipment, we're moving the capability to make the same products in the same volumes but at a lower cost structure, and exiting fixed cost situations to give ourselves a better productive unit cost. But we do not believe that we're actually taking capacity out of the system, we're driving our fixed cost base lower.

Right. I guess --

The other part of that, Holden, is that this is really a two-fer in most of these moves. Not only is it just the direct labor rate that will improve, it's the productivity that will improve, and in many cases we're moving to new factories that have better layouts and flow, and in most cases, have a higher level of productivity associated with the workforce.

Actually when you moved capacity it's been from Western Europe to Eastern Europe and Australia to Asia.

Right, exactly.

Okay, all right. And then I guess, last question about production, inventory in the quarter actually moved up a little bit sequentially -- excise me -- does that mean that we've stepped up production a little bit, or that utilization rate, the production levels really have not moved at this point?

Generally speaking, Holden, we have moved up production levels in the quarter to meet the slight sequential increase in orders and revenues. So that is true that capacity utilization has ticked up a bit enterprise wide.

Okay. And that looks relatively permanent because you feel like you have the inventories where you need to have them, I guess?

Well, it's hard to say whether it's going to be permanent or not, but we -- I think we've managed our balance sheet very well during the course of this downturn. You'll notice that our average operating working capital is actually down year over year. Inventories have come down significantly during the course of the year to match our volume requirement. So we're still ongoing continuous improvement initiatives, Holden, to try to drive more inventory out of the system and so those two factors will somewhat offset each over. We'll work hard to drive our day sales and inventory down, but we'll also have to adjust our business to current and expected volume levels.

And then just lastly, the pricing, if you look at PPI data -- excuse me -- if you look at PPI data it's really suggesting that in the quarter, machinery and consumables were maybe slightly down, less than 1% year over year, and you're talking about more like down 3%. What's -- have you ever lack at that data? What's the difference?

Well, we look at a lot of data, but we don't know everything that goes in the machinery number, and I'm sure that we're a fairly modest percentage of that aggregate macroeconomic figure, so we couldn't provide you with any further color on why Lincoln might separate itself from the overall machinery figures.

Okay. This is North American machinery and consumables so I would gather that you're probably a big contributor to that, but I guess it comes down to, do you feel like you're using price, perhaps, to boost volumes or anything like that, or do you feel like you're (inaudible) the market?

No, we're not using price and on the equipment side of the business, price has moved very little. I will comment that our equipment orders and sales have, during the course of the quarter, ticked up, particularly in export international markets, to the point where September was our best month in exports in 2009. And we're certainly, on a year-over-year basis, down significantly, but we're starting to see some reignition of the export markets, particularly on the equipment side of the business.

Okay. Great, thanks, guys.

Thank you. Mr. Petrella, I'd like to turn the conference back over to you for closing statements.

Okay, thank you, Melissa, and thank all of you that joined the call today, and we appreciate your questions and your interest in Lincoln Electric, and we look -- very much look forward to providing you with the progress of our plans for the fourth quarter and full year next year in 2010. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.