Lincoln Electric Holdings Inc (LECO) 2010 Q3 法說會逐字稿

Greetings and welcome to the Lincoln Electric third quarter 2010 results conference call. At this time all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce Mr. Vincent Petrella, Senior Vice President and CFO for Lincoln Electric. Thank you, Mr. Petrella, you may now begin.

Thank you, Chris. Good morning, and thank you all for joining our 2010 third quarter earnings discussion. Financial results for the quarter were released this morning prior to the market's open. Our Chairman and Chief Executive Officer, John Stropki, will start the discussion this morning, and provide commentary on the quarter and the regions. However, before we start that discussion, I would like to remind you all 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 turn the call over to John Stropki.

Thank you, Vince. Good morning everyone. In an economic environment characterized by moderate growth in many of our key end markets, and burdened with economic uncertainty surrounding many regions of the globe, we maintain our focus on delivering value-added welding products and services to our growing list of key global customers. As part of our long-term commitment to these customers our research and development efforts continued unabated to deliver state-of-the-art products and solutions, and our ongoing attention to customer support through multiple distribution channels is key. In addition, improving our operating performance and thereby enhancing shareholder value is our ultimate objective and focus.

Taking a look at the numbers for the third quarter. Total sales in the third quarter were $519 million, up 18% from the same quarter last year. And based on our typical third quarter sales patterns and results usually dampened by the European summer holiday season, the modest sequential revenue growth from Q2 was quite encouraging. Q3 also marked the 6th consecutive quarter of volume growth. Volume growth this quarter was up significantly increasing 15.2% during the quarter and 12% year-to-date. During the quarter operating income performance continued to reflect the impact of our overall operating efficiency initiatives. Operating income increased 44% to $48.2 million, a rate of 9.3% of sales, compared with $40.3 million and 7.5% of sales in the 2009 third quarter. Vince will cover the results for the quarter in more details in a few minutes. Next however, I want to cover some highlights of the economic environment for our industry by region, review some recent end market developments and take a look at our segments. First, the general economic and market sector prospects for the remainder of 2010 and for 2011 indicate that the more developed economies should avoid a double-dip recession. But only achieved growth rates in the low-single digits. The BRIC countries, Brazil, Russia, India, and China are expected to continue experiencing high single-digit growth rates in 2011 and beyond.

One of the key barometers of the health of the welding industry is global steel production. The World Steel Association recently increased its forecast for steel demand in 2010 to 1.27 billion metric tons, an increase of 13.1%. This same association is also forecasting the demand for all grades of steel will increase another 5.3% to a record 1.34 billion metric tons in 2011. This reflects a stable outlook for the economic recoveries in NAFTA and the EU and the CIS countries, as well as continued strong rebound in the emerging markets. China, which accounts for almost half of the world's total production and consumption of steel, expects to see demand increase 6.7% in 2011, and an additional 3. 5% in 2011. In the US, steel demand is expected to grow 33% this year, an additional 9.4% in 2011.

India is expecting an 8.2% increase this year, and 13.6% in 2011. If the 2011 number is achieved, India would be on target to become the world's third largest steel-consuming country behind China and the United States. Car and light truck sales around the world continue to be a mixed bag. The US is experiencing modest month-over-month increases while countries that are still enjoying government-backed incentives are growing much faster. The European luxury car automakers are finding a much better environment for their product in the emerging markets and are selling more cars in China than in their home regions. China with subsidies for cars under 1.6 liters is on pace to exceed 16 million units this year, exceeding the highest annual output ever in the United States. Japan is also experiencing all-time sale highs. Lincoln's strong offering of robotic solutions and application specific consumables, will continue to help our business grow market share in this important segment.

The global heavy fab industry continues to be very robust. The Chinese government continues to deploy its focused $600 million stimulus package for urbanization and large-scale infrastructure development projects. Currently it is estimated that China represents nearly 50% of the heavy equipment market in the world. According to the new report by the industry consultant off highway research. This same report indicated that in 2010, construction equipment sales in China are expected to grow 27% to over 370,000 machines. Crawler excavator sales alone are expected to grow 66% to 135,000 machines.

With increasing commodity prices, Brazil and Australia are experiencing increased demand for mining equipment. Demand has continued particularly strong in Brazil in the mining and civil engineering sector. The heavy fab sector covering agriculture is also reporting global strength for ag equipment. The association of equipment manufacturers recently reported a 23% growth in the shipment of four-wheel drive tractors for the first half of 2010, compared with the first six months of 2009. Against this strong demand backdrop, key customers like Caterpillar tractor, John Deere, Hyundai, JCB and Komatsu, had a list of manufacturers who are expanding global capacity. As an example, Cat is building new plants here in North America, South America and China. Hyundai just broke ground for a new plant in China. JCB and Deere are expanding in Brazil.

These expansion plans provides us a great opportunity for sales of both high-tech equipment and welding consumables. In the oil sector, prices continue to fluctuate in the $75 to $85 per barrel range. The basic growth premise by the International Energy Agency is still an annual 1% to 1.4% demand increase. With this capital spending on oil and gas exploration and production appears well-positioned for strong growth in 2011 and 2012. With the golf moratorium recently lifted, activity in this region should show an improvement during 2011, and just last week Chevron announced that it would move ahead with a $7.5 billion project to develop two sizable deepfields in the Gulf. The pipeline and pipe mill sectors continue to be important and relatively stable end markets for our industry.

As a critical logistic infrastructure for the transportation for oil and gas reserves, this is a key end market for Lincoln. A demonstration of our strong position in this sector was recently validated by industry consultant Frost and Sullivan, which cited Lincoln for two special awards for Best Practices in the pipeline industry. These awards were for Market Share Leadership and Customer Value Enhancement. The awards recognized the valuable relationship Lincoln has developed with the construction companies, by providing value-added technical support, industry-leading R&D efforts, and a strong distribution network, coupled with a unique growth strategy.

Globally the pipeline industry is now expected to increase the number of sub-sea pipelines, based on the increasing number of exploration and production activities in deeper and remote frontiers. This development only enhances our market position as our new state-of-the-art high technology equipment and consumable products are the perfect solutions for these mission-critical welding environments. A significant development specific to North America is TransCanada's announcement of a project layer agreement for the US construction component of a proposed $7 billion keystone Gulf expansion pipeline project. This 2,000-mile 36-inch diameter crude oil pipeline stretching from Alberta, Canada to delivery terminals in Texas. This project is characterized by private sector funding, and is shovel ready, and will be very good news for several North American steel pipe manufacturers and pipe contractors.

On the renewable energy front, although wind power installations in North America is down from 2009, there are still 5,500 megawatts under construction, and many new projects being proposed. As an example, the Atlantic Wind Connection Project being put forth by Google, although several years away, should spur additional wind farm construction by eliminating the need for developers to build their own individual transmission line.

In Europe, the outlook is bright for offshore wind projects in the North Sea, along the British and Scottish east coasts, that are projected to generate 32,000 megawatts of power, requiring over 10,000 wind towers, which is almost equal to the current European land-based installations. As China continues its quest to become the largest generator of wind power in the world, the overall prospects for renewable energy there are great. With Lincoln leveraging its technology in pipe mills and pipe mill technology to this similar application, we anticipate strong success in this growing and important market place. Nuclear energy remains another key alternative energy source. And the growth prospects there are well documented.

China's power generation requirements and the strategy to deploy nuclear plants to help meet their growing energy demand is already paying dividends for our Company, as we are a key supplier on many ongoing projects. In the United States we are posed for a nuclear renaissance, however new projects are not being funded at the original anticipated rate. Of the Nuclear Regulatory Commission's 22 applications for 31 regulators, only two plants are under construction. With both houses of the Congress supporting nuclear power, and the Obama Administration seeking $54 billion in loan guarantees for the industry, this is still a growth store for the US manufacturers, albeit at a delayed pace from the original projections.

Based on our specialty alloy product portfolio and internal development projects, we are leading the way with developing state-of-the-art welding consumables, aimed at meeting the stringent requirements of these new nuclear plants. Looking at the segment numbers, North America sales in the third quarter were up 20% to $256 million compared with the year ago quarter. On a sequential basis, sales were relatively flat with the second quarter, and continue to be aided by strong export sales of welding machines. China continues to be the country with the strongest demand followed by Russia, Brazil, and the Middle East. In the US economic indicators continue to show a recovery is still underway, however the rate of growth is slowing. With the second quarter annualized US GDP growth rate of less than 2%.

However, for the manufacturing sector growth in capital spending and improvements in capital utilization are counter to the trends of weakness in the consumer spending components of GDP. The economists at the manufacturers alliance are currently predicting a sustainable recovery with manufacturing output growing 5.7% in 2010, and 4.7% in 2011. In this environment of moderate growth rates, our focus on market share continues to be a major initiative. Our refresh broad product line offering, a focus on value-enhancing pricing, and customer support through the distribution channel is serving us well.

In Canada which had the least severe economic decline of any major advanced economy is now starting to experience slower growth in GDP than previously forecast. Estimates have been lowered to the 2% to 3% growth for GDP in 2011. However similar to the US growth rates in the manufacturing sector are stronger than other components of the economy. The recent rebound in exports is supporting a forecast of industrial production growth rates of 5.7% for 2010, and 4.8% in 2011. Mexico with an economy closely aligned to that of the US is already starting to witness a slow down in the US demand for Mexican exports. However, due to reductions and fixed investments in 2010, it is not clear how a recent up trend in capacity utilization will be affected.

The good news is the oil and gas sector in Mexico is delivering good news as Pemex is forecasting a 25% increase in capital spending in 2011 to $26 billion, and maintaining that spending level through 2019. This is an effort to satisfy its gas demand by developing shale gas fields and offshore oil. Turning to Europe, Lincoln Electric Europe sales of $86 million in the quarter were up 1.8% on a year-over-year basis in dollar terms. However, European sales volumes actually grew 11% on a comparative basis, but foreign exchange impacts resulted in the net sales reduction.

This is the second consecutive quarter of European sales growth, an encouraging sign for the region. Although the Euro Zone continues to face difficult economic challenges, with a deepening recession in Greece, and financial concerns in Portugal and Spain, swift and decisive actions by the EU and the IMF appear to have averted renewed recessions in this region. In fact, a modest recovery remains in place for the large economies. Germany's GDP growth and manufacturing output continue to improve. Fueled by automotive exports and serve as somewhat of a catalyst. Euro Zone GDP growth is forecasted between 1.4% and 1.6% for both 2010 and 2011.

Turning to South America, sales in the quarter were $34 million, which is an increase of 29% year-over-year. The region experienced strong growth in both consumables and machine sales, with volume growth in the region exceeding 45%. In the fast-growing Brazilian market, our efforts to increase share and broaden our presence are paying off, with machine sales doubling, and consumable sales up 34% when compared to the prior year's quarter. Pricing had a favorable impact on sales. However, these results were more than offset by the foreign exchange impact, primarily driven by Venezuela's inflationary currency situation. Expectations are that the economic growth in Latin America will moderate. But the region remains on track to deliver strong GDP growth for the year, as a result of the robust commodity prices, increasing domestic demand, and strong capital investments. Brazil GDP forecast is holding constant at nearly 7%, with an impressive 26% increase in capital formation. With the exception of Venezuela, which is still forecasting an economic contraction, the other countries in the region are expecting low-single digit growth.

In Asia Pacific, China's economy grew 9.6% in the third quarter. With the purchasing manager's indexes cooling, fixed investments declining and trade concerns, particularly with the US, China's growth could slow in 2011. However, with the government's ambitious infrastructure plan, the environment for the welding industry is still strong and growing. Lincoln Asia Pacific sales including our Jin Tai acquisition increased 28% in the second quarter to $80 million, compared to $62 million in the same quarter last year. We continue working our strategy to be a key player in the region. Our new [Hurley] welding consumable plant will increase our capacity to supply flux to the region, and is on schedule to open during this fourth quarter. We are also completing our expansion plans in [Lejuan] County and Nanjing, to increase our ability to supply growing demand for other consumables in the region.

In India our new Chennai facility continues to grow as a result of our solid wire products continuing to win new customers in the pipeline, pipe build business. In other areas of the region, although ship building orders remain weak, our Korea sales are growing as other end markets expand. We are also growing share in our Japanese welding markets. Our China Flux-Cord business was negatively impacted by changing mix in the sector, especially the weakness in ship building. However, those sectors connected to infrastructure, such as construction equipment and general fab, showed growing strength.

Looking at the Harris product groups, our cutting, brazing and soldering business, sales in the quarter were $64 million, up 15% year-over-year. The strongest market for Harris continues to be Latin America, with Brazil enjoying growth in excess of 50% on a year-over-year basis. The ability to leverage our BrassTech acquisition with the Harris product line has given us an enviable product portfolio, a strong market position and an extensive distribution network. Pricing impacted our growth by nearly 10%, as commodity prices for copper and silver continue to increase. Our ability to maintain margin in this environment is reflected by our improving operating performance.

That is an update on the region and market segments. Before Vince discusses the numbers and details, a few bits of good news. As we have stated, acquisitions continue to be a key component of our global growth strategy. Today we would like to announce that we have signed a definitive agreement to purchase MGM, a welding consumable manufacturer located in Orel, Russia, a city about 400 kilometers south of Moscow. MGM is a leading manufacturer of solid wire in the region made up of CIS countries.

The company has annual revenues of approximately $30 million, and over 200 employees. The transaction has already received regulatory approval by the Russian authorities, and is anticipated to close this Friday, October 29th. We are very impressed with the professionalism and the skill of MGM's people, as well as its very strong R&D capabilities. Adding this local Russian consumable manufacturing capability, and their strong distributor network to our current existing import business of specialty consumables and machines, will greatly enhance our position in this important welding growth area for our industry.

Looking ahead to other welding industry news, let me remind all of you that Fab Tech, the annual industry welding show will be held in Atlanta, November 2nd through the 4th. We invite you to stop by and visit our booth and learn about the exciting new products and services we are delivering to the market place. In addition, during the show we will be unveiling a new strategic partnership with IPG Photonics for offering a hybrid fiber laser MIG welding solutions to industrial customers around the world.

Finally Lincoln was recently named a global industry partner for the World Skills International, a well-known global organization that develops various skills based on vocational programs for youth in more than 50 countries including China. Given the shortage of welders around the world, this is an excellent opportunity to promote welding and welding education through direct access to top educators for the skilled trades around the world. Lincoln's products, such as the VRTEX 360, virtual welding cell, backed by our expertise will be showcased at the organization's next global competition scheduled for October 2011 in London. More than 200,000 visitors are expected. Now Vince will provide more detail regarding the results for the quarter.

Thank you, John. Now for the additional financial highlights. As John pointed out, our consolidated sales were up 17.5% compared to the prior year. Our EBIT margins excluding special items improved to $51 million, or a 25% increase year-over-year. The third quarter represented another quarter of sequential sales growth, although sales were up less than 1% compared with the second quarter of 2010, the sequential growth rate is notable since the third quarter is typically a weaker sales quarter due to domestic manufacturing shutdowns and European holidays.

On a year-over-year basis, quarterly sales in North America were up 20%. South America increased 29%. And Harris grew by 15%, while Europe increased by 2%. Europe's volumes actually increased by more than 11%. However, foreign exchange decreased Europe's sales by 9.5%. Asia's revenues increased by 28%, aided by the Jin Tai acquisition in China last year. Without the affect of the acquisition, Asia sales still grew by 8%. On a consolidated basis, volumes increased reported sales by 15% over the prior year, and foreign currency effects decreased sales by about 3%. Pricing increased sales by 3%, and acquisitions contributed an increase of nearly 3%. On a product line basis, machine sales increased 19%, and consumable sales increased 13% year-over-year.

Sales by product line were approximately 67% consumables and 33% equipment, compared with 68% consumables and 32% equipment in the prior year same quarter. For the first nine months of 2010, sales in North America were up 16%, South America increased 23%, and Harris grew by 16%, while Europe declined by about 2%. Declines in pricing and foreign currency effects drove the overall decrease in sales dollars in Europe. Asia's revenues increased by 75% aided by the Jin Tai acquisition. Without the affect of the acquisition, Asia sales grew for the nine months by 8%.

Volumes increased reported sales by approximately 13% over the prior year's comparable period, and foreign currency effects and pricing impacts were essentially flat. Acquisitions for the nine months contributed an increase of 7%. Please refer to the attachment to the press release we released this morning for details of volume, price, foreign exchange and acquisition changes by segment.

Third quarter gross profit margins decreased by 27.7% of sales compared with 28.3% in the comparable prior year period. A LIFO charge of $1.4 million reduced gross profit in the quarter reflecting our expectations for a continuing rising cost environment. The prior year's LIFO effect was a $7.6 million credit in the third quarter of 2009. The LIFO effect reduced gross margins by 30 basis points in 2010, and increased gross margins by approximately 170 basis point in 2009. Foreign exchange rates had an unfavorable translation impact, and South America welding had higher inventory costs as a result of the change in Venezuela's functional currency to the dollar, and the devaluation of the bolivar.

For the nine-month period, gross profit margins increased to 27.6% of sales compared with 25.4% of sales in the prior year. The increase in gross margin resulted from the leverage of increased volumes, improvements in margins affected by lower cost inventories and cost reductions, as well as rationalization efforts, primarily in Europe. Foreign exchange currency rates favorably impacted margins by $4.5 million in the nine-month period. A LIFO charge of $6.7 million reduced gross profit in the nine-month period as well. We expect to continue to record LIFO charges during the remainder of 2010 approximating the run rate incurred for the first nine months charge. In the first nine months of 2009, LIFO credits were $13.6 million.

Moving now to SG&A expense for the quarter increased by $11 million to $96 million, or 18.4% of sales. SG&A as a percentage of sales was 19.2% in the prior year of 2009. The year-over-year improvement reflects the fixed cost nature of certain SG&A expenses. The dollar increase in the SG&A expense was driven by higher bonus accruals as operating profit increased on a year-over-year basis. Selling Administration and Research & Development expenses were also higher. Foreign exchange gains and losses swung to a $3.2 million negative impact in 2010 which included a $1.4 million loss recognized in Venezuela on the sale of sovereign bonds. SG&A expense for the nine-month period increased $42.7 million to $284 million, or 18.9% of sales. SG&A expenses as a percentage of sales in 2009 was 19.1%. Again the improvement in SG&A leverage is related to our fixed cost structure in SG&A.

The increase in SG&A expense was primarily driven again by higher bonus accruals. Selling Administration and Research & Development expenses were also higher, and legal expenses were $8.4 million higher than the prior year, and the acquisition of Jin Tai also added about $4 million in incremental SG&A expense. Foreign currency translation increased reported SG&A expenses by $3.7 million, but these were partially offset by a gain of $2.6 million due to the change in functional currency in Venezuela, as well as the devaluation of the bolivar in the nine-month period. The prior year's SG&A did include a gain of $2.1 million from a pension settlement previously discussed.

Operating income for the quarter was $48.2 million, or 9.3% of sales compared with $33.3 million, or 7.5% of sales in the prior year's same quarter. The quarter did include special items of $300,000 for rationalization actions in Europe, as well as a charge of $800,000 related to the Venezuelan functional change and devaluation of the bolivar. This should be the last of those charges in 2010. The prior year's third quarter included a charge of $7.1 million, primarily related to rationalization charges associated with employee severance and head count reductions that is in the prior year.

Excluding these special items in both years, adjusted operating income was $49.3 million, or 9.5% of sales in 2010 compared with $40.5 million, or 9.2% of sales in 2009. Again, refer to the attachments to the press release for a reconciliation of operating income, as well as adjusted operating income.

Operating income for the nine-month period was $134.1 million, or 8.9% of sales compared with $54.3 million, or 4.3% of sales in the same year-ago period. The first nine months of 2010 included special items of $2.6 million of a net credit and rationalization activities, as well as a $3.1 million net charge from a Venezuelan functional currency change and devaluation. The prior year's first nine months included a charge of $25.7 million, primarily related to rationalization activities associated with employee severance and head count reductions, offset by the previously mentioned pension settlement gain of $2.1 million. Excluding these special items in both years, adjusted operating income was $134.7 million, or 8.9% of sales compared with $77.8 million, or 6.1% of sales in 2009.

Now on a geographical segment basis and excluding special items , North America improved its EBIT margin to 15.2% of sales, and Europe improved from a loss in the comparable quarter in 2009, achieving a 6.4% EBIT margin. South America reported a 9.1% EBIT margin, while Harris product groups rose to a 6.3% EBIT margin in the quarter. Finally Asia Pacific's loss in the quarter narrowed significantly from the prior year's loss. Geographical segment EBIT adjusted for special items for the nine-month period was North America 13.9%, Europe 5.5%, Asia Pacific 0.4%, South America 6.4%, and the Harris products group 4.8%. This information is also in the attachment to the press release and segment information.

Net income for the third quarter was $32.5 million, or $0.76 per diluted share, compared with $12.8 million, or $0.30 per diluted share in 2009's third quarter. Excluding special items, net income was $33.6 million, or $0.79 per diluted share, compared with $27 million, or $0.63 per diluted share in the 2009 third quarter. The effective tax rate for the third quarter was 33.2%. The nine-month rate was 32.9%. The effective tax rate is lower than the statutory rate, primarily because of income earned in lower tax rate jurisdictions. Operating cash flows for the quarter were $56 million compared with $97.1 million in the prior year same quarter. Increased net income was more than offset by working capital needs to support higher sales levels. For the first nine months of 2010, operating cash flows were $103.7 million compared with $231.3 million for last year's nine-month period.

Again the increase in cash flow from net income was more than offset by investment in higher working capital required to support our increased sales levels. However, working capital efficiency was 23.2% at September 30th, 2010, which was the same level of working capital required at the end of last year, December 31st 2009. For the nine-month period the Company invested $43.2 million in capital expenditures, and we now plan to spend approximately $50 million to $55 million on CapEx during the whole of 2010. Our depreciation and amortization expenses are running at approximately a $57 million annualized run rate. During the first nine months of the year, we paid cash dividends of $35.6 million.

We also purchased $22.9 million of Treasury stock under our share repurchase program, at an average price of $53.38 per share, or 430,000 shares. Our weighted average shares outstanding for the quarter ending September 30th on a fully diluted basis were 42,535,000 shares. The Company closed the quarter with a cash balance of approximately $383 million, and a net cash balance of $282 million, a total debt to invested capital of 8%. That is the extent of my prepared comments. Chris, I would like to open the call now for any questions we may have.

Thank you. We will now be conducting a question and answer session. (Operator Instructions). One moment please while I poll for questions. Our first question comes from the line of Tom Hayes with Piper Jaffray. Please proceed with your question. Your mic is now live.

Thank you, good morning, John. Good morning Vince.

Good morning, Tom.

I was just wondering if we can talk a little about the Asia Pacific operating margin. We had seen some nice progress over the last couple quarters. Went positive first quarter, second quarter. Even with a nice volume number, just wondering what are some of the drivers that flip that margin number negative?

Tom, there are a number of things. I will make some general comments, and Vince could give a little bit more color or detail in regards to it. The market in China is growing and growing importantly, with the one exception being Flux-Cord wire with the very heavy concentration in the ship building industry. We really have several different businesses there. The other businesses performed quite well. In fact, are still very much capacity constrained. So my comments about us growing the capacity in solid wire submerged our flux and stick are indicative to that.

But the cored wire operation is very large. It has a lot of embedded capacity and a fair amount of overhead associated with that. And that market place is exceptionally weak right now. So we have got a product mix issue there that we are addressing. Specifically with that plant of diversifying the portfolio of products that we produce in that facility, to allow us to enter different market segments of Flux-Cord wire than what we had originally intended when we were experiencing this very robust and quite accelerating growth in the ship building industry.

Is that product exportable? Is there a part of the global market that would need the Flux-Cord you that you could export it to?

Yes, and that is part of our newer strategy of looking at markets around the world. Brazil would be a very good example of that, where we could take advantage of growing markets where we don't have local capacity, or where the pricing is very competitive, and our cost base in China would give us some advantage.

Okay. Secondly, congratulations on the acquisition announcement. Do you guys, I mean I guess, one, how is the pipeline looking or holding up? And do you have a preference versus products or geographic disbursement, as far as acquisitions?

Well, no preference. I think we have some limitations in certain geographical segments, based on market concentration-type issues. And we always try to work around and finesse our way through that. Our product portfolio is pretty full right now. There are a few exceptions, and we either have organic R&D programs underway to address that, or we are active in the acquisition side to try to address that. But I think that if you look where the world for welding is growing, it is in the BRIC countries as I commented, and when we have an opportunity to enter a very large and strong market like Russia, we think it presents us with a real opportunity. As I mentioned, we are already a pretty significant player on the import side there, but this opens up a whole new distribution channel, and a much broader product portfolio than that we currently participate in.

Okay. Lastly, if I could, just wondering if you could make some comments on how the quarter progressed as far as sales activity, and any thought on how October is progressing?

I would say, Tom, that the quarter was stable, and actually October order and sales levels from a North America standpoint in particular have ticked up slightly.

Great. Look forward to seeing you at Fab Tech. Thanks.

Thank you. Our next question comes from the line of Mark Douglass with Longbow Research. Please proceed with your question. Your line is now live.

Good morning, John and Vince.

Mark.

Morning. John, you mentioned the heavy machinery build out in China. Can you talk about how you will participate in that and what your market share is like in China? I know you mentioned obviously shipbuilding is a polarity of at least trying to sell there very significant, but where are you as far as participating in the heavy machinery build out in China?

Well, I think we have a very strong position there, Mark in a number of different ways. On the global front with the international companies that are moving into China to take advantage of that very strong growth that I spoke of, we have got an exceptionally strong position, based on one of two factors or both of those two factors. One would be where we have got a very strong position with those companies in their home market, Caterpillar, Deere, and Volvo as examples of that. When they go into an emerging market like China or Brazil, they are very much interested in having the same kind of relationship with us in those emerging markets that they have in their home markets.

And coupled with that, we have a very strong sales and distribution organization in that market unlike many of our international competitors, we are substantially ahead of the curve in being able to support customers in that market place. So we are participating on the imported equipment front when it is very high technology. We are participating in the domestic equipment front, if it is more a normal type of equipment, standard type of equipment, and our Jin Tai and the expansion of Jin Tai, our Lejuan County welding consumable factories are participating on the consumable side in a very meaningful way. It is one of the critical reasons that we are pushing hard to increase capacity of solid wire in that market place.

Do the Chinese transplants as well as some of the newer companies, are they tending to gravitate toward robotic welding systems and hard automation?

I think you will see that trend continue for all companies. Again, driven by three factors. Cost is obviously a very important factor. Even in China labor costs are going up, but the productivity of robotic cells is very high. Secondly quality issues. The transplants as well as the domestic Chinese manufacturers are building capacity in China to be able to export it, as well as service the local market. And they recognize that if you are going to export from China you have got to have pristine quality to satisfy the customer needs in regards to that. Third, then there is just a shortage of welders around the world. So the robotic solution is a very important solution to that.

And you participate with robotic Fanuc systems as well as consumables?

Absolutely. We are on a very important growth trajectory in robotic activities, and hard automation activities in China, and we have got an automation facility in Shanghai, and that is growing, and we have got a very strong relationship with Fanuc Robotics in China, and that is growing quite well also.

Thanks. We can switch gears to Europe. I was a little surprised by the relative volume strength considering 3Q in Europe. Any specific end markets, or is it their delayed recovery versus the rest of the world?

I think it is a number of factors again. I mean, we have substantially realigned our business in Europe over the last several years, and we have talked about that in some meaningful ways. That has given us a much better cost position. We have reenergized the sales organization as a result of having a much better cost position. And then those markets which we have been traditionally strong are doing much better than the normal standard type of markets. Going back to your earlier question on robotics and hard automation, we have substantially grown our position there in particular with the automotive companies, and are always driven by high productivities and pristine quality type of demands, that our robotics solution and our Power Wave platform competes extremely well against any of the local options available.

Okay, and then a final question you mentioned that, Vince that orders and sales levels are pretty decent here in North America, do you have reason to suspect that 4Q will be different than a typical seasonal downtick overall?

Well, the fourth quarter as you point out is traditionally from a sales standpoint typically slightly less than the third quarter. The third quarter being slightly up from the second quarter certainly is a good sign that there is some stability in the order levels and sales levels. And so we are cautiously optimistic that we will have a continuing stable order and sales levels into the fourth quarter.

Thank you, gentlemen.

Thank you. Our next question comes from the line of Walt Liptak with Barrington Research. Please proceed with your question, your line is now live.

Hi, thanks, good morning, John and Vince. I wanted to go back to China, and just ask about the Flux-Cord business to the ship builders. What percentage of revenue is that of the roughly $80 million in the quarter?

It is probably approximately half of that business there in cord wire.

Okay, so half of the $80 million in the quarter was --

No half of the cord wire business goes to the ship building industry. We don't provide the granularity of individual product lines in the total segment sales.

I understand that.

I would just add to that is that it would traditionally be half, but because in the peak of the ship building period it was substantially more than that, a very high focus and concentration. We have been able to diversify that to bring that percentage down, but three years ago there was no need to do that because the ship building industry was consuming all the Flux-Cord wire that all of the manufacturers could collectively make.

So where do you think are you in the diversification process, I guess? Are we going to see losses coming to an end and profits in the fourth quarter, and in 2010 or do we continue --?

Clearly our intention is to accelerate our diversification. We have hired and have had on board now for several months two very competent experienced design engineers that are familiar with cord wire formulation, and have great experience not only in the Chinese market, but in the Asian market, which should give us some ability to address the export market that was part of Tom's question. And we are looking at the transfer of some of Lincoln Cleveland's formulation. And other areas of cord wire which we think would be appropriate for that market place.

I will add a couple more comments, Walt, and give you color on the margin movements in that segment and in that country. During the quarter we lost margin on our price cost relationship. Steel costs and in turn pricing moved very rapidly in China, and the third quarter was an environment where steel prices were escalating, and our actual prices to the market place had been slightly on a year-over-year basis. And so that is something that we deal with on a continual basis, and we will need to adjust for that going forward. I will point out to you, if you look at the press release, and look at our pricing by segment around the world, you can see that North America had a year-over-year price increase as did South America, Harris Products group, Europe was flat.

The only region of the world segment that had a price decline was in Asia Pacific, which is primarily China of 2.6%. The other thing that we need to continue to focus on is aligning our cost structure to the current volume environment that we have in China. As John pointed out on a couple of occasions, we rapidly moved to increase our infrastructure and our capacity in all lines of business in China. As John pointed out on a couple of occasions, we have rapidly moved to increase our infrastructure and our capacity in all lines of business in China. And in the short-term, we just will need to do a more focused effort to balance our capacities to where the market is growing more rapidly, and where the market is not growing more rapidly. And so in solid wires, we are certainly looking to add capacity for profitable growth. And in the cord wire business, we will need to adjust our cost and capacity platform in order to better align ourselves with the current environment. And then finally take advantage, as John pointed out of greater export opportunities particularly on the cord wire part of the business.

Okay. So is pricing going to be weak again in the, or down again in the fourth quarter do you think?

I can't comment on where pricing is going to go in the fourth quarter, but what I will say is that we will make every effort and focus on improving our price cost relationship. Again, third quarter, they moved in the opposite direction which obviously hurt our margins, and we just need to align those a lot better in the fourth quarter and going forward, in adjusting prices and being sensitive to movements in steel costs. But again, there is a fairly important structural difference dealing in China than maybe some other markets of the world where pricing moves in a very rapid fashion, and we need to be more nimble and adjust to that more rapidly. But you will have these types of situations and volatility that I have talked about for two or three years, where the market moves very rapidly there, and sometimes you may benefit from it, and other times it may be to your detriment.

Okay, I understand. And you mentioned the pricing in North America and Europe. Can you tell us about there were price increases that were instituted in the third quarter in North America-Europe?

The third quarter impact were largely price increases that were put through in the second quarter. On a sequential basis, our prices globally in a consolidated way were up about 2.7% third quarter over second quarter.

Okay. You mentioned with the expectation for raw materials going up that, is there a pricing outlook or whatever that you can give us for the beginning of 2011?

Well, I think the steel situation on the welding consumables is really unknown for 2011. We have got very stable pricing in place in North America for steel for the remainder of this year. In Europe we were actually seeing some reductions in raw materials. Raw material increases that we have to deal with are more on the equipment side of the business. Copper prices are again at all-time highs. Electronics which have been in short supply are increasing. But I think we have always demonstrated that we have very good ability to put through those cost input increases on the equipment side, and it is a very rational marketplace, and we are quite optimistic on that side. It is more the volatility on the steel side and the markets outside of North America that are unknown. But that we are pretty experienced in dealing with.

Okay, good. And if I could change topics one more time, the tax rate for the fourth quarter and for 2011, can you give us a guess at what that might be?

Well, the fourth quarter rate should approximate the rate that we booked through the first nine months of the year which is 32.9%. It should be right around 33%.

Okay.

I think that is about as good of a rate that you can guess at for 2011 at this point in time. As we have talked previously, tax rates are driven by the profitability that we have jurisdiction by jurisdiction, and that could vary significantly from period to period, but I would expect we are going to be in the low 30s.

Okay. Thanks.

Thank you. Our next question comes from the line of Martin Pollack with NWQ Investment. Please proceed with your question. Your line is now live. Martin Pollack: Hi, just wondering if I can cover a few topics with you. One, working capital to sales targets, if you could maybe describe where your targets would be, what those targets would be by the different regions, if you could talk about that, I would appreciate it. With regard to this Russian acquisition, what were the metrics of that purchase? What hurdle rates did you use or discount rate for that acquisition? And are there other significant opportunities there to build on in terms of further acquisitions? The other thing on the Harris group, just a price mechanism there in terms of surcharges, or is it just pure pricing? Because clearly the pricing there has been quite strong right through the nine months. I appreciate if you could cover those topics.

Okay, I will go last to first, so I don't forget. Harris, Marty, is a business that is driven by commodities that tend to be precious metals. So there can be a fair amount of volatility there. We buy a lot of silver and copper. As you know silver has increased in price significantly over the prior year. Silver last time I looked was up $24 an ounce, and that is a big move over the prior year. And copper has moved likewise I think in percentage terms, and perhaps even more. That is the brazing and soldering part of the business. The other side of the business is the gas apparatus that is driven by brass costs that can drive our pricing. And so a great deal of that brazing and soldering side of the business is pass throughs of the silver and copper content, and that drives pricing both up and down significantly in the Harris segment.

As far as Russia is concerned and metrics of pricing our deals, we have talked in the past that we expect to have a double-digit ROIC in the first two or three years of an acquisition. We expect to have mid to high teens in IRR, and this deal will give us some accretion in 2011. We estimate that at the present run rate we will have about a penny a quarter that we will add to our shareholder value. And as far as other opportunities, this was a very important acquisition to us, as John pointed out in his prepared comments. Russia has been an important and growing market to us that we have served on an import basis from our operating units around the world. This manufacturing platform gives us a very important step forward in the infrastructure of the Russian market place, the existing sales force, distribution channels, and it is certainly an exciting opportunity for us to gain the synergies that we inevitably gain by having an infrastructure platform, including manufacturing in a BRIC country like Russia. So this is a big leap forward. Certainly our other opportunities we will continue to look at in the international markets as we go forward.

Lastly on working capital, our working capital objectives are both short-term and long-term. And from a short-term perspective we generally are trying to look for improvements of upwards of 10% on a year-over-year basis when we look at working capital, as to where we set our targets and our budgeting from a year-to-year basis. From a long-term perspective, we would like our working capital ratio as a percentage of sales to be in the teens. And so that gives you a short-term and a long-term view for the business. From a operating unit standpoint, working capital will vary significantly, Marty, between mature markets like North America and emerging markets like China. As you probably are aware accounts receivable terms are shorter in the US than they are in developing markets. Inventory management varies market by market as well as accounts payable turnover rates. And so generally working capital is lower in the developed markets of the world as compared to the developing markets of the world, because of trade terms and other supply chain issues.

Thank you very much. Appreciate it.

You are welcome.

Thank you. Our next question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question. Your line is now live. Alex Walsh: Hi, guys, this is actually [Alex Walsh] in for Steve. Yesterday a few of the larger steel manufacturers were talking down global steel production in the fourth quarter. I guess given the typical correlation we see between your business and global steel production, I was wondering if you could help us reconcile the disconnect there? Do you think it is more of a steel specific issue or where they might have overproduced, or do you think it is more of a demand-related issue?

Well, I think a good part of it is steel specific. We follow the steel dialogue daily, and there are pockets of good growth in steel, both in type of steel and also in the geographies of the markets, but there are also some weaknesses in those particular areas. What we know is what our incoming order patterns look like, at least the short-term visibility that we have got, and as Vince said, it is stable and maybe picking up just a little bit at least again for the short-term that we see.

The only thing else I would add to that is that there are lags between steel production and welding usage. It could be a precursor for maybe a little slower first quarter of next year, but we don't have an absolutely precise correlation when a ton of steel is produced, a ton of welding occurs. So there are some variances in timing of production. One thing we have talked about in the past is that purchasing managers index is a good leading indicator for welding and Lincoln Electric sales. And it leads us by about four months. When the activity is going on in the market place, we do trail behind a little bit more than a quarter. So again just emphasizing that we don't have a tight correlation to monthly steel production.

If you look at the specific sectors of heavy fab, agriculture, and infrastructure, the volumes of steel that are consumed in that versus the consumer-related side may be very much equal. But in terms of welding, obviously the heavy fab, the agriculture, the infrastructure are much more important than consumer-related appliances and things like that that are very high users of steel, but not so important as far as welding is concerned.

I guess as we have seen PMI moderate since about April, how should we think of your production levels going forward?

Even though PMI may have moderated, it is still more than 50 which is a growing environment. Moderation from that perspective could mean slower growth rates going forward.

Thanks, guys. I will jump back in the queue.

Thank you. Our last and final question comes from the line of Jason Rodgers with Great Lakes Review. Please proceed with your question. Your line is now live.

Thanks for taking the question. Looking at the LIFO charges, you might have mentioned it earlier, but if you could just speak about what your expectations are for the fourth quarter, and potentially for 2011?

First the fourth quarter, our LIFO convention requires us to book our estimates what our expectations are for the end of the year over the four quarters of the year. And so on that basis, we have booked approximately $6.7 million of LIFO charges for the nine-month period, and that would put us at a run rate of right around $9 million. So we could expect based on what our view of what prices will be at the end of the year, and what inventory levels might be at the end of the year, it will book another $2.2 million to $2.3 million. I caution you that could vary significantly if prices change, and if inventories don't turn out to be what we expect them to be. Another charge in the fourth quarter of over $2 million.

No expectation yet for 2011?

No, 2011 is I think a little too early to tell. John went through I think a fair level of detail from what we are seeing from different regions from a steel perspective from the fourth quarter. And we really don't have the visibility of what we are purchasing for the first and second quarter of next year at this point in time. But if I were to guess, I would say that it would be in a moderate or slight inflationary environment next year.

Okay. And finally looking at your CapEx expectations, do you have any early expectation for 2011?

We haven't made any announcements or finalized our CapEx budget for next year at this point in time.

Okay, thank you.

Thank you. Our next question comes from the line of Holden Lewis with BB&T Capital Markets. Please proceed with your question. Your line is now live.

Thank you, good morning. Good morning, Holden. Can you comment about the sequential increase in inventory? Obviously through much of the downturn you kept a pretty good lid on that. It looks like you had a bigger sequential increase in inventory than you necessarily did in your revenues and costs during the quarter. Does that reflect higher costs in raw materials? Are you getting ahead of price increases or concern over shortages? And what does it suggest about the rate at which you have lifted production in Q3, and what you need to do about production over the next quarter over two? Is it higher in Q3 than you expect it to be, or do you expect further progress?

We do expect further progress. Holden, we would expect to improve our working capital to sales ratio in the fourth quarter before year-end. But what we really look at more than the raw inventory dollars, because that can be distorted by a number of factors is what our ratios are. Again our ratios stayed stable in the quarter. And the growth and inventory dollars is purely a result of higher sales levels. When sales levels increase 17.5% over the prior year, and there is some sequential improvement in sales levels, you are generally going to need a little bit more inventory to satisfy customers and your order levels.

Yes, I guess I was just looking. You had the inventories up 9% to 10% which is certainly more than you had the revenues up. So I agree the year-over-year, you did a great job of limiting the working capital. I was just curious if the increase sequentially suggests that you ramped production sharply during the quarter, or if there was some reason why this quarter in particular saw you get a little bit more aggressive with those inventories?

I don't think we ramped production. There are seasonal patterns that we deal with in terms of between the second and the third quarter, and then there is currency issues that serve to increase our inventory levels. Other than that there is no unusual activity in the inventory area.

Okay great, thank you.

Thank you. I would like to turn the floor back over to Mr. Petrella for any closing comments or remarks you may have.

Thank you Chris, and thank you for joining us today. I look forward to reporting and discussing our results for the fourth quarter of 2010 some time in late February of 2011. Thanks again for joining us today. Good bye.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. And we thank you all for your participation. Good day.