Lincoln Electric Holdings Inc (LECO) 2009 Q4 法說會逐字稿

Greetings and welcome to the Lincoln Electric fourth-quarter 2009 and full-year 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, Chief Financial Officer for Lincoln Electric. Thank you, Mr. Petrella, you may now begin.

Thank you, Jackie. Good morning to all of you joining the Lincoln Electric 2009 fourth-quarter and full-year conference call. We issued the financial results press release for the quarter and year, and filed our 10-K, prior to the markets opening this morning. Additional copies of the 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 today and provide commentary on the quarter and the segments in a moment. But before we start that discussion, a reminder 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.

Let me now turn the call over to John Stropki.

Thank you, Vince, and good morning, everyone. During one of the most severe and longest economic downturns in our Company's 115-year history, our experienced management team and 8,900 dedicated global employees rose to the challenge. Their hard work, tough and decisive actions, along with aggressive restructuring dramatically lowered our overall global cost basis.

Because of these actions, along with our continuous focus on customer service and the dynamic actions to bring new welding solutions to the market, we ended the year on a positive note. A fragile but slowly improving economic environment in selected segments and key markets, coupled with cost reductions initiatives and other operational efficiencies we announced over the past 15 months resulted in another sequential improvement in operating performance in the fourth quarter.

As a result, the financial results for the 2009 fourth quarter give us reason for optimism as we begin 2010. Vince will give you the specific details for the quarter and the year in a few minutes. But first here are the highlights of our performance improvements.

Total sales in the 2009 fourth quarter were $462 million, up 5% sequentially from the 2009 third quarter. This is a significant accomplishment, given that typically our fourth-quarter sales are considerably weaker than our third quarter.

Our increased global market penetration continues to support sales growth, with almost 60% of our sales outside of the United States. During the quarter, operating performance continues to improve sequentially, with operating income improving by $3 million over Q3 2009 to $43.5 million and reaching 9.4% of sales.

Importantly, we achieved these positive results despite the overall global industry demand being down approximately 30% in 2009. The key initiatives we instituted to reduce our cost structure, improve our capacity utilization by rationalizing our European, Asia Pacific, and Harris Products operations eliminated significant fixed cost overhead and realigned our workforce to match the global industry demand.

At the same time, we maintain our ability and our commitment to respond to the forecasted long-term growth opportunities. During the year, we also made important investments in selected welding markets, including the Jin Tai acquisition in China and a major expansion of Heli joint venture's sub-arc production facility. We also opened our first welding consumable manufacturing plant in India.

With Jin Tai's broad portfolio of consumable products we are much better positioned in the infrastructure, automotive, and energy-related endmarkets in China. The Heli expansion is critical to the growing infrastructure needs in China and throughout southeast Asia. Our factory in India is allowing us to achieve market penetration into a number of growing industry segments, especially pipelines, pipe mills, and automotives; and our overall sales are improving nicely.

We continue to focus our efforts on strengthening our global market leadership position by offering better welding solutions to our customers which help them become more productive and efficient.

As an example, this past year we developed and brought to the market a broad array of new and improved products, including new application-specific consumable offerings, more energy-efficient machine offerings, and the revolutionary VRTRX 360 virtual welding training system. During the fourth quarter, we experienced strong demand and interest in this unique training systems from key customers and many well-known training institutions throughout North America.

In August, we realigned our management team to improve our strategic focus on global growth markets. In conjunction with this renewed focus, we changed our segment reporting structure. As a reminder, the worldwide Harris Product brazing, soldering, and retail business became a new segment. We also consolidated Mexico into North America Welding; and we separated Asia and South America into individual reporting segments.

On the global economic front, as we enter 2010 there is still much uncertainty about future business levels although many of the metrics that measure overall business expectations, such as the Purchasing Managers Index, industrial production, and capacity utilization, are improving in many systems around the world. For example, the Institute of Supply Management Indices reported improvement in US, China, and Euro Zone for the fourth quarter.

Other key variables impacting our business, such as global steel production and consumption, are showing improvement in all regions. China is leading the rebound, with steel production of 48 million tonnes in December, a 27% increase year-over-year. Total production in China rose 14% for the year to a record of 568 million metric tons, accounting for almost half of the world's steel production in 2009, a key reason why we continue to invest and focus on growth opportunities in the China market.

Overall, global steel consumption is projected to increase approximately 15% in 2010, which is good news for the welding sales.

With oil prices relatively stable in the $70 to $80 per barrel range, it's anticipated that leading oil companies will increase their capital spending on oil and gas exploration and production in 2010. The current forecast is for global expenditures to rebound significantly, rising 11% to over $400 billion in 2010. Russia, Brazil, and China are expected to see the most important activities. Each country's government has approved an aggressive strategy for the development of their fuel and energy infrastructures.

The pipeline and pipe mill sectors are very important to the welding segment, and we have a very strong participation in these segments. We have also introduced a number of new high-technology products targeted to strengthen our position in these key market segments. We expect these sectors to improve during the year, with spending in North America alone estimated to be in excess of $9 billion for 2010, up almost $1 billion from 2009.

In the power generation sector, China is still accelerating investments for the construction of nuclear and coal fired plants. In the renewable energy wind tower segment, there is a consensus that there will be a global recovery during the 2010 first-half, due to liquidity returning to the financial markets, with additional incentives for renewable investments. There are also signs of renewed activities in Germany, North America, South America, namely Brazil.

Last week's announcement by President Obama to boost US nuclear energy production through federal loan guarantees for two new nuclear reactors was good news. The first nuclear plants to be built here in the United States in nearly 30 years should give a lift to the creation of manufacturing jobs and the sales of high-technology welding equipment and consumables.

The President's proposed 2011 budget includes $54 billion in loan guarantees, which would provide enough money to cover constructions of an additional 12 plants and has the potential to signal the resurgence of the nuclear industry in the United, States, with Lincoln Electric uniquely positioned to capture the majority of welding products used in the resurgent industry.

In the heavy fab construction equipment segment Brazil, China, and India are expected to be the key markets which will lead to growth during 2010. Caterpillar, with 11 plants in China, expects robust growth, particularly in the mining segment. The company also brought back 600 workers in the US in the past 60 days, including 100 for their engine plant in Indiana, while Deere & Company has recently opened an agricultural mining and machinery test center in Tianjin to strengthen its R&D capabilities and production in the region.

Looking at the results for our segments. In North America our sales of $240 million in the fourth quarter were up 3% compared with the third quarter. Overall, North American sales continue to be aided by export sales as a result of a strong demand for our high-technology products developed and manufactured in Cleveland.

In the US, economic indicators continue to show improvement during the quarter. The Industrial Production Index at 98.7 in December represented the strongest performance of any month during the year, with an improvement of 1.4% from November. US industrial production rose 0.9% in January, the seventh straight monthly increase.

The economists at IHS Global Insights have become more optimistic regarding the 2010 economic recovery and have revised their forecasts upward for both the US GDP and the manufacturing sector outlook.

After a prolonged decline, manufacturing in Canada is expected to boost a broad recovery, with industrial production expected to be up 7.6% in 2010 ahead of the GDP forecast of 3.3%. South of the border, Mexico is expected to renew GDP growth in the 3% range.

In Europe, Lincoln Electric Europe sales of $87 million in the quarter were essentially flat with the third quarter as Europe begins its recovery. Our hard automation and consumable business experienced the strongest sales growth in the region.

The Euro Zone is still facing a number of economic challenges, especially with the crisis facing Greece. However, the IMF expects the Euro Zone to grow 1% in 2010, up from 1.8% decrease in 2009. France is expected to grow; Germany and Italy the same.

The IMS also predicts a 2010 GDP growth of 2% in Central and Eastern Europe. Poland, where we have a solid and growing manufacturing base, is the region's strongest economy and was the only European country to achieve positive GDP growth in 2009. The forecast for 2010 is up 2.3%.

In Turkey, where we have a strong joint venture partner, a new state-of-the-art manufacturing facility, and a significant market share, the economy is expected to be one of the fastest-growing in our European Welding segments.

Turning to South America, sales during the quarter were the highest for the year at over $30 million, which is an increase of 15% from 2009 third-quarter sales and 14% higher than 2008 fourth-quarter sales. Expectations are for continued improvement in most countries in the region, are forecasted to rebound from 2009 with positive GDP growth, favorably impacted by the commodity prices and fiscal stimulus projects throughout the region.

Of particular importance to the welding business is the capital investment outlook for infrastructure and energy-related projects in Brazil especially the FIFA World Cup and Olympics on the horizon and the boost to the oil sector as a result of Petrobras's discovery of vast offshore subsalt oil deposits.

In Asia Pacific, China continues on its trajectory with the economy growing more than 10% in the fourth quarter. The country's manufacturing sector is still experiencing rapid growth. Industrial production rose 18.5% in December year-over-year.

The HSBC China Manufacturing Purchasing Index rose to a record 57.4% in January from 56.1% in December, making the fourth straight month the Industry Index has climbed.

In India, the other large economy in the region, GDP growth is forecasted to be 7.7% in 2010, up from 5.6% in 2009. This positive economic environment benefited Lincoln Asia Pacific.

Sales including our Jin Tai acquisition grew 22% in the 2009 fourth-quarter to $77 million. Our business has also benefited from the success of Chinese companies responsible for planning and the construction of the country's new generation nuclear plants. Since recent visit by key contacts to Cleveland, we have secured several major consumable orders for new nuclear facilities in China.

As I mentioned earlier, the picture for the number of endmarket industry segments looks bright, with automotive an engine for growth; and the power generation sector as well as pipeline projects continue to be funded.

Last, looking at Harris Products Group. With the new organizational structure, we're reporting this business as its own segment. Harris is focused on cutting, brazing, and soldering products along with US retail sales channel.

Sales in the quarter were $55 million, down slightly from the third quarter. Key economic variables impacting their performance of the group is the construction activity in both the commercial and residential sectors on a worldwide basis. Activity is mixed around the world, with North America housing starts and commercial construction at historic lows, but with modest prospects for growth in 2010.

That is the view of the region and the market segments. With our strong balance sheet, little debt, and ample cash reserves, we believe 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 highlighted, our fourth-quarter 2009 financial results reflected a sequential improvement in both revenue and operating earnings from the third quarter of 2009. Consolidated sales were up 5% compared with the third quarter; and EBIT margins excluding special items improved by 11% to $43.5 million.

On a year-over-year basis, sales in North America declined 24%; Europe was down 21%; and The Harris Products Group declined 6%; while South America grew by 13%. Asia experienced a growth rate of 56% aided by the Jin Tai acquisition in China. Without the effect of the acquisition, Asia sales declined by 12%.

For the quarter, volume decreased reported sales by 18% and foreign currency effects increased sales by about 3%. Pricing decreased sales by 3%, and acquisitions contributed an increase of over 6%. Please refer to the attachments to the press release for further details of volume, price, foreign exchange, and acquisition changes by segment.

Fourth-quarter gross profit margins increased to 29.1% compared with 26.8% of sales in the comparable prior-year period. The quarter included a LIFO credit of $14.9 million, of which approximately $7.5 million is related to estimated reductions in inventory levels. Other improvements in margins resulted from rationalization efforts around the world.

The absence of LIFO credits in the first quarter of 2010 will reduce margins compared with the fourth quarter of 2009.

SG&A expense for the fourth quarter was $91 million or 19.7% of sales. The increase in SG&A expense in the fourth quarter was primarily driven by higher pension costs, incremental SG&A from acquisitions, and foreign currency translation effects.

For the year, lower 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 $12.1 million higher than the prior year.

Operating income for the quarter was $39.3 million or 8.5% of sales compared with $35.5 million or 6.8% of sales in the same year-ago quarter. The 2009 quarter included charges of $4.2 million primarily related to rationalization actions and asset impairments in Europe and Asia.

The prior year's quarter included a charge of $19.4 million, primarily related to asset impairment charges in Asia. Operating income before these charges was $43.5 million or 9.4% of sales compared with $54.9 million or 10.4% of sales in 2008.

Now on a geographical segment basis and excluding special items, North America Welding achieved an EBIT margin of 17.4% in the fourth quarter, which was only 10 basis points below the comparable quarter in 2008. Europe Welding's EBIT margin was 3% compared to a loss in 2008. South America's EBIT margin of 11.7% of sales represented a 210 basis point improvement over 2008. Finally, The Harris Products Group returned to profitability in the fourth quarter, and the Asia Pacific segment recorded a loss.

Nevertheless, all of our segments improved on a year-over-year basis.

The effective tax rate for the fourth quarter was 39.7% compared with 40.7% in the fourth quarter of 2008. The higher effective tax rate in both years is mainly due to foreign subsidiaries recording losses with no current tax benefit. We expect the effective tax rate in 2009 to migrate down into the low 30s.

Now turning to the full-year results. Sales for the year were down 30% to $1.7 billion. The global recession affected all segments, with North America and Europe having the largest declines in sales, at around 35%. The Harris Products Group and South America experienced 22% and 15% reductions, respectively; and Asia was down 10%, aided by the acquisition of Jin Tai.

The sales decline was volume driven, with a reported sales impact of 30%. Foreign currency effects decreased sales by about 3%. Pricing decreased sales by less than 1% for the full year. And acquisitions contributed an increase of 3% in 2009.

Gross profit margin for 2009 was 26.4% of sales compared with 29% in 2008. The decrease was primarily attributable to unfavorable operating leverage during the first six months of 2009 as rationalization initiatives were being implemented. The year did include a LIFO credit of $28.5 million of which approximately $14.3 million is related to estimated reductions in inventory levels.

SG&A expense for the year was down $72 million to $333 million or 19.3% of sales compared with $405 million or 16.4% of sales in 2008. The decrease in SG&A expense was primarily driven by global headcount reductions and the impact of reduced profit-sharing bonus expense for the year.

Operating income decreased in 2009 to $93 million, representing 5.4% of sales compared with $295.4 million or 11.9% of sales in 2008.

During the year, rationalization charges totaled $29.9 million. Excluding these rationalization charges, operating income was $122.9 million or 7.1% of sales.

On a geographical segment basis and excluding special items, North America achieved EBIT margins of 14.3%, and South America had 10.7% EBIT margins for the full year. Strong financial results in Venezuela aided by foreign exchange gains drove the EBIT margins in the South America segment. The recently announced devaluation of the Venezuelan currency and the impact of hyperinflationary economy will decrease reported earnings and margins in the South America segment in 2010.

The Harris Products business was able to remain profitable, while Asia and Europe reported full-year losses as our investments in Asia continue and the impact of the European economic recession in the first half of the year could not be overcome by fourth-quarter profitability.

The income tax provision for 2009 reflects an effective tax rate of 43.8% compared with 29.2% in 2008. Higher effective tax rates in 2009 were mainly due to foreign subsidiaries recording pretax losses with no associated current tax benefit.

During the quarter, the Company invested $11.9 million in capital expenditures, resulting in a full-year CapEx amount of $38.2 million. Our 2010 capital spending plan will continue to trend below our recent historical spending levels.

During the quarter, we paid cash dividends of $11.5 million, which resulted in dividend payments for the full year of $45.8 million. The dividend rate has been maintained at $0.28 per share for the dividend to be paid on April 15, 2010. Our weighted average shares outstanding for the quarter ending December 31, 2009, are 42,729,755 shares.

Even during these most challenging economic times we continue to demonstrate important improvements in operating results, and our financial position remains strong. During the quarter and for the total year, we generally $19 million and $250 million, respectively, in cash flows from operations, raising our cash balance to $388 million at the end of the year. This improved our net cash position to $264 million and resulted in a net debt to total capital ratio of a positive 22%.

With a growing market presence around the world and sound financial position, the Company is well positioned to take advantage of the opportunities before us as the year unfolds in 2010. With that, I would like to open the call for questions. Jackie?

(Operator Instructions) Tom Hayes, Piper Jaffray.

Good morning, gentlemen.

Good morning, Tom. We can barely hear you.

Okay. Is that any better? Sorry about that.

I'm just wondering if you can comment maybe a little bit on your plans on the Asia Pacific region. The EBIT has been a little bit challenging for the last couple quarters. Just thoughts on returning that to a profitable EBIT margin, as far as timing, and what do you have in place to do that?

Well, Tom, as I commented on in my prepared comments, we're pretty pleased with the sequential improvements in EBIT and operating profits in all of our segments. We were hit with a pretty severe global downturn starting in 2008 fourth quarter, and we believe reacted very quickly and have taken actions to improve our profitability in all regions of the world.

With the current improvements in the top line and the rationalization actions that we've taken in between, we continue to believe that 2010 will show further sequential improvements in regions including our Asia Pacific region. So we're optimistic that 2010 should show improved results.

Okay. Does the India facility roll up into the Asia Pacific?

Yes, it does. India just started up in May of last year. And in any situation where you have a startup manufacturing operation, there is going to be an earnings curve that will take a couple, two, three years to come to a more mature operating model. So certainly India did not aid our Asia Pacific operating profit profile in 2009.

Yes, it's been a nice sequential improvement, I just -- that was very helpful. Just one or two other ones. One is, your thoughts on the use of cash. I mean, you are sitting on almost $7 net cash. Just thought on the uses of your cash going into 2010?

Well we, Tom, have talked before about our priorities on cash; and we continue to look for the right opportunities to build our business. We continue to use our strong cash position to reinvest in the business. And we continue to take the opportunity to raise our dividend on an annual basis to return some of that cash to our shareholders.

There won't be, in our view, any dramatic changes in our priorities for using cash in 2010.

Okay. Just lastly, maybe John, if you can provide maybe a little more detail on the success you're having on the virtual training program.

Well, as I mentioned, we just really rolled this unit out at the October FABTECH show -- or early November FABTECH show. We have been very pleased with the reception that it has received both with large end-users who are looking to accelerate their training within their own facilities, but more importantly, within the Union or the educational facilities, vo-ed educational facilities, across the United States.

We are quite optimistic that this is going to become a very significant part of our portfolio. We think it's very unique in terms of anybody else's offering. And we're very excited about the prospects for that for the years to come.

Great. Thank you very much.

James Bank, Sidoti & Company.

Hi, good morning. Vince, I was wondering if you could give me a better idea of your pricing environment. What you are seeing now and what we could maybe expect in the months ahead.

Well, as you have seen during the course of the year, James, pricing generally on a sequential basis fell on a year-over-year basis. We're seeing some stabilization of the pricing environment.

We have to wait and see what input costs do during 2010 to evaluate further any pricing environment. But we think it's stabilized for the most part around the business, after some more significant declines in consumable pricing during 2009. But I don't have any view of any significant changes in pricing going forward.

Okay. You guys did such a great job with the cost reduction and informing us what you were pulling out, when, on a quarterly basis and for the yearly basis, both on the COGS and SG&A. Are you going to do the same sort of thing when some of that discretionary spending comes back?

Well, I wasn't planning on continuing to update on that, because we are going to and have started to see some restoration of those costs during the course of 2010. We're starting to work more hours. We will restore pay in certain geographies around the world. I think using 2008 as a baseline for cost changes will lose its significance as we start to ramp up our volumes again during 2010.

Having said that, the fourth quarter of 2009 we continue to have cost savings and reductions in line with what we had talked about at the end of the third-quarter call. But that will start and has started to reverse itself early in 2010.

Okay. The equity earnings -- now that Jin Tai is out of there and it looks like you sold that property in Turkey, what is actually left in that line now?

The bulk of what's left is our 50-50 joint venture in Turkey.

Okay. And Venezuela as a percentage of your sales for South America?

We don't talk about countries on an individual basis. I can say that it is a very important part of our profitability in the South American segment.

Okay. CapEx for 2010, John -- or, Vince, I'm sorry?

We think it would be roughly the same as what it was in 2009.

Okay. Thank you.

Mark Douglass, Longbow Research.

Hi, gentlemen. This is Phil Anderson filling in for Mark today. First off, what was pension expense in the quarter?

Pension expense was approximately $11 million in the quarter.

Okay, and expectations for that going forward?

We have an expectation that our pension expense should decline in 2010 between about $2 million and $4 million. $2 million to $4 million.

Okay. Just looking at the JK Harris Group, what would be the mix, if you can talk about it, between residential and nonresi or commercial construction within those brazing and soldering type products?

Well, again, that group is composed of three very unique different segments. J.W. Harris, which was an acquisition, was rolled into the Harris Group. Their business is heavily weighted towards residential construction because they make the brazing products that are used in heating, refrigeration, and air-conditioning units, both commercial and residential side.

The gas apparatus portion of that business, Harris Calorific, that was the original foundation of that business, is less impacted by that. Their primary business would be metal cutting and the steel consumption is probably a better aggregate reference for that.

Okay. You made reference to nuclear power plant construction both here and abroad. Just wondering if you could give us a little more color around the amount of welding consumable content that would typically be in a nuclear power plant.

We have an estimate that we think is fairly accurate. The new generation, the generation 3s, the AP1000 or their comparable designs from other companies would represent somewhere around $3 million to $4 million of consumable and equipment per facility.

Okay. Fair enough. Finally, on the LIFO credits, are those expected to shift to more neutral in the first quarter? Or actually are you expecting a bit of a headwind?

Would likely be some LIFO debits in 2010, although not as significant obviously as the LIFO credits were in 2009. Although it's a bit too early to make any predictions, we're seeing some modest input cost inflation across our product portfolio.

Okay. Very helpful. Thank you.

Steve Barger, KeyBanc Capital Markets.

Good morning. I want to go back to the pricing issue. If we are going to continue to assume gradual sequential improvements in endmarket demand, and we concurrently see steel prices start to increase, are you going to have more or less pricing power than you traditionally have had in 2010, do you think?

Well, it's hard to identify by what you mean by traditional. Each market and each cycle is a little bit different in terms of the rapid acceleration; and obviously the steel input costs have a huge impact in where we go as far as our pricing is concerned.

We would expect, as Vince said, that any price erosion that we have experienced would evaporate. And then we would begin to focus on price acceleration with the assumption that steel input costs would continue to go up and that volumes would continue to go up.

I think again we have generally demonstrated that we're very effective in that. We want to be patient because I think the visibility of the market growth and the stability of the markets is much less visible than it was in the last input cost cycle that we went through in 2006 and '07.

But we know what to do and how to do it and we will be responsive to what we need to do.

Yes. You guys did a great job of getting steel price increases in 2008 when the markets were very strong. I guess just generally speaking, is it tougher in a more modest growth environment?

Sure, it's tougher. I would also say that we don't expect anything in terms of the cost increase that we experienced in that last cycle either.

Right.

The cost increases that people are talking about are much more modest. We're not accepting those as a foregone conclusion. We have a lot of different options available to us in terms of where we source and who we source from.

We will be very firm in terms of our pushback on those situations. But if we incur cost increases then we expect our sales organization to be effective in putting those cost increases through to the marketplace.

Okay. Are there more facility closures and consolidations coming? Or do you have a target you can talk about in terms of the number of facilities or maybe square footage? Some metric we can measure to think about where the footprint is going over time.

Steve, I would first say that 2009 brought substantial restructuring activities. The bulk of what we think we needed to do has either been initiated or fully accomplished. I would say that we won't have anything near the types of activities and the charges that we had in 2009.

That's not to say that there won't be some continual tweaking on the edges. But there is nothing that we are prepared to outline or announce in this call today.

Just conceptually the big stuff is behind you?

That's exactly right, Steve, and not only is the big stuff behind us, but now we have the opportunity to take advantages of the consolidation works that we have done and really focus on improving the operations and to realign and the remaining facilities.

Right. Well, and to that point, you have taken some cost out permanently. On a prior call you said that some or most of that reduction will come back with volume. Have you thought about what level of incremental contribution margin you can expect as volumes come back, relative to past up-cycles?

Well, you are as familiar as us in terms of the operating leverage that the business was capable of achieving in the upturn ending in 2008. We think we will have a higher peak earnings opportunity as we start to ramp back up to those types of volume levels.

As a reminder, our operating margin leverage was somewhere around 30%. I think we can do a little bit better than that when volumes start to come back on a worldwide basis.

And just, Vince, looking at my model it looks like your peak operating margin in one quarter -- it was 3Q '08 -- was around 14%; and you ran almost 13% for that year. Is that also assumed, that your operating margin can get more to a high teen? Is that how you are thinking internally?

Yes, I think we can -- at the kind of volume levels we were experiencing in 2008, I think we can exceed 15%.

Okay, great. One last question. You mentioned wind towers. Are you actually seeing inquiries or volume pickup from the wind tower manufacturers yet? Or is that just something you are anticipating?

Yes to both. We are seeing some pickup and we're also hearing from our customers of specific projects and their expectations.

As an example, Vestas, who is one of the largest manufacturers of wind towers in the world, expects their orders to more than double in 2010. So we're seeing renewed investments in the facilities to produce wind towers; and obviously we're seeing some pretty important activity regarding the manufacturing of wind tower, with specific fundings already applied.

Very good. Thanks.

Marc Heilwell, Spectrum Advisory Services.

Hi. Thank you. Vince, could you break down where the cash is located a little bit? Domestically, and maybe even by continent?

Well, the bulk of the $388 million is sitting in the US.

Oh, it is? Okay.

Over $300 million of it is in the US, so we have about $80 million or so overseas.

Okay, good. That's all I needed. Thanks.

Walt Liptak, Barrington Research.

Hi, good morning, John and Vince. I've got a couple of follow-up questions. I guess first on the $56 million in lower bonus for the year. I guess, Vince, your comments about some costs coming back as you restore pay. Can you help us by maybe quantifying the change from into 2010 from 2009?

Well, the profit-sharing bonus can't necessarily be quantified at this point because it's generally a percentage of EBIT profits on a worldwide basis. So that number has run roughly 25% to 28% on an annual basis. So 2008's total profit-sharing bonuses on a worldwide basis were around $100 million; and that number in 2009 was roughly $44 million.

So as profitability rises, a bigger share of that is set aside in terms of bonus provisions. So you have to look at it in that respect.

Other cost savings initiatives in 2009 that will restore themselves are that we took our workforce down in all parts of the world that we were able to. And most importantly in the US marketplace, where we have our employment relationship here that allows us to take the workforce down to 30, 32 hours a week. Some of that will continue; most of that, hopefully, will be restored during the course of 2010 and will add costs to our structure.

But of course, we will be able to gain greater leverage as our revenues increase.

Other cost savings initiatives that will likely be restored during the course of the year are wage reductions for salaried and executive employees around the world, as well as hourly employees. That pay were taken down in geographies where governments allow that kind of a wage reduction scenario.

So, it's not such a bad thing to be restoring these costs, because that means that volumes and leverage will increase. We also cut our 401(k) matching in the US out during the course of 2009; and restoring that will likely add $3 million to $4 million in 2010, offsetting our pension costs' expected reductions that we will have during the course of the year.

Okay, got it. Can you help us with a number on the restored wages and salaries?

That's something I'm not prepared to give you today.

Again, Walt, just to reemphasize, those adds are driven by volume increases. If we don't have the volume increases then we won't see the increases in the costs.

Okay. Just so I understand on the profit-sharing portion of it, you would take 2009 operating profit and then a bonus pool for every dollar above that level of 25% to 28%. Is that how I should understand that?

Well, that's not exactly correct. Because it's going to depend on where the profits are made. We have different bonus programs in different parts of the world, so it's the blend of that.

So in those markets where we didn't earn any profit, we don't have bonuses. So it will depend on where the bonuses -- where the profit is earned as to what that blended mix is (multiple speakers).

Okay, but if I look the North American market, I could take 25 to 28% of (multiple speakers)?

No, that's the consolidated number. What I would tell you to do, Walt, is take 2008, the $100 million bonus provision; and then compare that to what EBIT was, including that number; and take the $44 million bonus provision in 2009, and take that as a percentage of EBIT before that bonus in 2009. And that will bracket our best year's bonus in 2008 and our worst year's bonus in 2009 for the last few years. That would give you sort of a range of what could be expected.

Okay. Okay, good. Thanks for that. Going to the pricing questions, I may have missed this, but have you talked about what prices have gone up for the year, for January, February, price increases?

I would say that we have not experienced any price increases and don't expect any in the first quarter of this year. There may have been some incremental increases in products that are tied specifically to high-cost metals like silver, copper, or those type of things. But in the general carbon steel it's been relatively flat this quarter versus the fourth quarter of last year.

Okay. It seems like this is about the first year I've ever heard where you guys have not instituted a price increase in like the January-February time period.

Well, we didn't institute any last year, I can tell you, as we were going into the first quarter of 2009 with a very pessimistic look at what the economy was going to look like.

I think you are right; traditionally the industry model has traditionally looked at a forecast for cost, a forecast for growth, and generalized the increases across-the-board. So we're just getting our arms around the optimism that we feel about the economy and the various different segments, and we've got some work to do on that.

As I said just a second ago, we are evaluating what we expect to happen in the second half of the year as far as input costs are concerned. And then we will react to that.

Okay, got it. Okay. Thanks, guys.

Holden Lewis, BB&T Capital Markets.

Good morning. Thank you. Just to keep beating this price horse a bit, can you comment a little bit about the pricing in South America and the pricing in Harris? In a sort of sluggish environment certainly in Harris it looks like you got some pretty good pricing there, and some pretty good pricing in South America as well. Those are some pretty positive deltas in an otherwise slightly negative mode. Can you just give some color there?

Then Europe was also down quite a bit. I don't know what it was prior to that, but just some color perhaps on those three units.

Sure, Holden. South America's pricing environment is driven by Venezuela, which I talked about earlier. They are in a highly and now hyperinflationary environment. That kind of environment leads to high inflation and therefore high pricing changes. So that has driven the price increases in South America.

Then The Harris Products Group has a significant amount of its products associated with more precious metals like silver and not so precious like copper. Those prices as you probably know have risen fairly significantly during the course of 2009. So the bulk of the increase in Harris Products Group is related to metals pricing and the pass-through to end-customers in that segment.

Then finally, Harris has a bigger impact from its mix. They have a significant mix towards consumables, and that pricing has declined more than some other regions of the world.

And that's Europe?

That's Europe, yes.

Okay. When you look at those three businesses from a price standpoint -- again, because we really don't have any of the history. Does Q4 -- these numbers are a function of comps? Or did these increasing and decreasing trends get better or worse in Q4? How should we be looking at the trends in those businesses going into 2010?

Well, the trends in pricing have generally moderated or improved. Foreign exchange has actually improved during the course of the year. It flipped to a positive in the fourth quarter.

Volumes generally have moderated and improved. In particular, sequentially in the fourth quarter in international regions and on the equipment side of the business.

Okay. Then just refresh my memory, what did you say the LIFO impact was in q$?

And was that significantly a true-up type of number to adjusts for year-end values? Or was that sort of specific to the fourth quarter?

Certainly at the end of the year you have your answer in terms price levels and volume levels. During the course of the year, you're simply making projections and estimates of where you think you are going to end up.

So the final calculations of LIFO occur at the end of the year. In some respects they are a true-up, because you can't necessarily perfectly forecast what you think price levels will be on December 31 and what volume levels will be on December 31.

Just to remind you, Holden, the LIFO credit for the fourth quarter in total was $14.9 million; and we estimate that about $7.5 million of that credit was related to inventory level declines during the course of the year.

Okay. So when you talk about expecting gross margin to step back in Q1 from the Q4 level, that's because the LIFO stuff stays in, but you had that $7.7 million true-up piece, and that's probably about the amount that the margin should come down by sequentially?

I don't know what the margin will come down by. But I do know that we won't have that LIFO credit inventory reduction during the first quarter of 2010.

I also know that from a previous question that was asked, that we won't have LIFO credits in the first quarter and will likely have some debits. It's early in the quarter and the year to be making any estimates of that; but pretty confident that 2010 will bring inflation and will therefore have some LIFO charges.

Got you. Then just lastly, on the inventories, you did a good job pushing inventories down again this quarter. How much further are you going to work that off?

And what does that say about production? Have you been continuing to cut production or did production in Q4 step up? How should we look at the inventory versus production relationship here?

Holden, I think inventory will likely start to reverse itself during the course of 2010. Even though there were very good reductions in inventory quantities and values in 2009, we're starting to see, as we have said a sequential improvement in volumes. That will in all likelihood bring some increases in inventory levels and quantities.

Certainly it is our objective to continue to improve our average operating working capital to sales ratios, which are largely driven by inventory levels. But you can see in the attachments to the press release that, even in a very difficult down year, bringing inventories down, we were able to reduce our net operating working capital to sales ratio to 23.2% from 24.8% in the prior year.

So we do have operating efficiencies and operational improvements that continue to be worked on, on an ongoing basis. And it's our belief that our operating working capital will continue to improve. But inventory will likely go up with higher volumes at the sales level.

Right. What happened to production in Q4? Given that your inventory has hit a new low, I believe if I remember correctly, in Q3 you actually had begun to step production up a little bit. Has production comedown sharply in Q4 to achieve this inventory? Or is there something in that relationship we should know about?

Well, December is always a very slow month for us on a worldwide basis. So in the aggregate, December production was probably lower than the third quarter simply because of seasonality.

Okay. All right, great. Thanks.

Greg Halter, Great Lakes Review.

Good morning, guys. Just wondering if you could comment on your thoughts relative to the Airgas-Air Products and maybe any others in the industry as they possibly consolidate, what kind of impact that would have on your business.

Well, the distribution side of our business in the US has been consolidating for many years, as you know. It's gone through different ownership cycles, but the trend has been very much towards consolidation.

Obviously, Air Products-Airgas would be a very significant consolidation on the gas side. But it wouldn't really dramatically impact the distribution side because Air Products really is not in the distribution side at this particular point in time. So there really wouldn't be any added consolidation on the distribution side of the business.

That being said, Airgas is a very significant, very important customer. Air Products has been an important customer over the years in the US and is still a customer of ours outside of the US. So it's something that we're following closely.

We will find a way to make whatever the outcome is work to our benefit. We know both parties extremely well. And remember that their purchases are driven what the end-users demand in the marketplace, and we think that there is a strong preference for Lincoln products regardless of who the owner of the distribution channel is.

Okay. Thank you.

Seaver Wang, HFP Capital Markets.

Hi, good morning. Can you give us a split machines versus consumables? How they performed in the quarter, and then also your capacity for utilization for both -- or capacity also?

Well, our split on consumables and machines ended the year at roughly 65%/35%. 65% consumables, 35% machines and equipment. That's up maybe 300 basis points from the prior year's quarter and year.

Machines -- if you look at that, Seaver, on a sequential basis, has been showing improvements during the course of the year. But as a reminder our machine equipment business got hit more heavily in the downturn because of the CapEx-related nature of it and the durable goods nature. And it's shifted our split between consumables and equipment a bit during the downturn.

Okay. If you look at kind of peak volumes, could you satisfy that at the current footprint?

We will have no problem satisfying any increase in demand that we could foresee. As we commented a number of times, the fact that we have rationalized manufacturing locations around the world, that was not geared towards necessarily reducing our capacity footprint but improving our capacity footprint.

So we generally moved production equipment to lower-cost facilities and lower-cost countries in order to achieve a long-term cost reduction, not to achieve a long-term reduction in our overall capacity.

Okay. Then just skipping around a little bit, the tax rate should gradually trend down to low 30s, you said?

Yes, it ought to come -- we were disadvantaged from our earnings mix around the world during the course of 2009. Our expectations are that we will be profitable everywhere; but certainly the mix of earnings and the level of profitability will drive our effective tax rate during 2010.

But expectations are that it should be declining in relation to 2009 and should migrate down towards the low 30s.

Okay. Thank you.

Marty Pollack, NWQ Investment Management.

Yes, just wonder if you might talk a little bit more about the 2010 outlook by -- perhaps give us a look at the first quarter. It sounds like the LIFO credit itself not being there in (technical difficulty) be kind of a -- suggesting a fairly large sequential decline.

Are you getting (technical difficulty) potentially offsetting growth just based on the economy's growth or your businesses growing? If you could just talk a little bit about that in Q1.

Yes, Marty, we think that we will continue to see some sequential improvements in volumes during the course of the first quarter. We will have some headwinds related to input cost increases and the lack of decline in inventories and cost that we experienced in 2009. But the first quarter will largely be dependent upon what kind of volume increases we achieve and also the extent of the input cost increases that we're expecting during the course of the quarter.

As you know, Marty, we don't provide guidance on quarterly or annual earnings, but are trying to give you the best directional feel that we can, where we sit today in February.

If I may, just as far as CapEx, your CapEx outlook, significantly lower than your D&A and also down sequentially from 2009. Are you looking for that number to rebound at a certain point to more of a one-to-one ratio?

It likely will at some point in time, Marty. I wouldn't expect that during the course of 2010.

I'll point out to you that in the run-up between 2004 and 2008, there were years where we spent more than our D&A. I recollect a $76 million year, maybe another $67 million year. We were investing during the course of the run-up in additional capacity in emerging and growing markets like China, India, Latin America, and also had some heavier investments in improving our capacity capabilities in the more developed markets in Europe and North America.

So we have put a fair amount of bricks and mortar and productive equipment in during the run-up. So in 2008 we probably had a bit of excess capacity before the downturn, and we'll be able to pick up that slack in the next upturn without increasing our CapEx to D&A levels and beyond. So we have had again some historical heavier investment that should bode well for us in this next upturn.

Just last question, on the M&A front, obviously the big cash hoard and the opportunities you see -- how does the marketplace look currently for you?

Well, I think we're optimistic that 2010 will be a year of recalibration on the buyer and sellers' front. 2009 was nearly impossible to have those substantive kind of conversations. We think a number of businesses that have gone through a radical downsizing as far as the industry is concerned will reevaluate their long-term prospects and hopefully reach a conclusion that they're better off being part of a large successful organization than being totally independent.

We're working on that as our philosophy and we have ratcheted up our regional approach to that side, and we think we've got a good portfolio of opportunities ahead of us.

Okay. Thank you.

Holden Lewis, BB&T Capital Markets.

Thanks. Just can you give us a little specific on the walk in your SG&A? Obviously, revenues were down year-over-year; but SG&A was up roughly $4 million year-over-year. Just give us -- and up a little sequentially. Just give us the big pieces on how you get there.

Because given all the restructuring and cost efforts that you had, obviously that being up on a down revenue, just want to get a feel for what the pieces are there.

Yes, in terms of fourth quarter, Holden, there were two items that we experienced that we had not experienced in the first three quarters of the year. That was we had a relatively significant add to SG&A from our acquisition of Jin Tai in China; so that added $2.2 million to fourth-quarter SG&A.

The second item that drove higher SG&A was we had a negative impact or additional SG&A from foreign currency translation effects. So the impact of the dollar move compared to all of our operations around the world added $3 million to the SG&A line on an apples-to-apples basis.

Okay, all right. But that represents kind of a good base level, though, heading into 2010?

Yes, I think so. Obviously, the top line will drive that in percentage terms by volume improvement.

Then affiliate income, that Turkish business, nice step-up in Q4. You're expecting further progress from here on that affiliate income?

Well, as I mentioned in my prepared remarks, is that the prospects for the Turkish economy are quite good. We have a very nice business that we've invested in substantially over the course of the last several years. It positions us to take advantage of the projected growth rates in that economy.

So it's very well managed, very well positioned, and if the economy improves the way people are forecasting it to improve we would expect improvement in that metric also.

Great, thank you.

You're welcome, Holden. That brings to a conclusion our fourth-quarter and full-year conference call. We look forward to talking to you all about our results for the first quarter sometime towards the end of April 2010.

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