Lincoln Electric Holdings Inc (LECO) 2011 Q3 法說會逐字稿

Greetings and welcome to the Lincoln Electric third quarter 2011 earnings call.

At this time all participants are in a listen-only mode.

A brief question and answer and 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, Vince Petrella, Chief Financial Officer for Lincoln Electric.

Mr.

Petrella, you may begin.

Vincent Petrella: Thank you, Kevin, and good morning.

Welcome to the Lincoln Electric 2011 third quarter financial results and conference call.

Our results for the quarter were released this morning prior to the markets open.

You can obtain additional copies on the Lincoln Electric website or by contacting our Investor Relations department at 216-383-4893.

Lincoln Electric Chairman and Chief Executive Officer, John Stropki, will start the discussion today by providing commentary on the quarter and the segment.

A PowerPoint presentation is part of today's discussion, and will be available on the Lincoln website, and posted as part the replay.

But before but we start the discussion today, let me remind you that certain statements made during this call and in our discussions may be forward-looking, and actual results may differ from our expectations.

Actual results may differ materially from such statements, due to a variety of factors that could adversely affect the Company's operating results.

Risks and uncertainties that may affect our results are provided in our press release, and in our SEC filings on Forms 10-K and Form 10-Q.

Now let me turn the call over to John Stropki.

Thank you, Vince, and good morning everyone.

We are very pleased with the financial results we are reporting for the quarter.

The strong sales and operating results were achieved despite the ongoing and political uncertainty around the world in many of the key markets we serve.

Against this challenging backdrop, we continued to focus on our growth initiatives through strategic investments in new acquisitions, our new product introductions, increasing our commercial presence around the world, and adding new engineering and professional talent.

During the third quarter, we recorded our tenth consecutive quarter of revenue growth.

Sales rose 35.1% to $701.6 million, making it the highest sales quarter in our Company's history.

Equipment and consumable sales were both strong in the quarter, up over 30%.

Net income increased 71% to $55.5 million, or $0.66 per diluted share, compared with the same quarter last year.

Vince will get deeper into the numbers in a few minutes, but first I would like to touch on the quarter relative to our business segments and the general global economy.

First in North America, business conditions remain strong in the wake of the overall uncertainty in the macroeconomic environment.

Sales for the quarter improved 35% from the prior year to $345 million.

Export sales increased 27% in the quarter, and exports to the BRIC countries were up more than 37%.

Economically, industrial activity continues to run slightly ahead of last year's comparables.

Total manufacturing industrial production in the US was trending 3.7% ahead of 2010 as of September.

Capacity utilization was running at approximately 75.2%, nearly 15% higher than it was in June of 2009.

The purchasing manager index also continued to indicate a growing economy, although the third quarter measures were softer than the first half of the year, indicating a potential for some softening in the fourth quarter.

Strong order trends have continued through the third quarter and into the fourth quarter.

Our price increase of 5% for machines was implemented on October 3.

And this likely contributed to some modest forward buy.

During the quarter, we acquired Techalloy and Torchmate.

Techalloy manufacturers nickel and stainless weld wire and electrodes, Torchmate manufacturers cutting tables.

In Europe, the Middle East and north Africa and Russia, for the third quarter our European welding segment sales were $128 million, an increase of 49% over last year.

This strong sales growth benefited from the inclusion of our two Russian acquisitions.

In the backdrop of increased macro economic uncertainty stemming from the sovereign debt challenges throughout Europe, Q3 demand was uneven from both a geographic and a market segment standpoint.

Northern Europe markets remained steady, while southern European markets have softened.

Positive sales growth in the Middle East and west African countries, offset the impact of reduced demand related to the unrest in north Africa.

Demand in the Russian market has remained strong for both imported products, for the energy market, and those made at our recently acquired companies there.

And the integration of our two Russian businesses is progressing according to plan.

From a market segment standpoint, the automotive segments have remained stable.

Longer cycle energy-related segments have continued to provide a source of strength.

During the quarter, production commenced at our new electrode factory in Poland.

This new facility allows us to further streamline our manufacturing footprint in the region, and position us well from both a cost and quality perspective to better serve the growing markets in central and eastern Europe.

While our overall results in the region held steady, in what was a seasonally weaker third quarter, the future direction of the market remains quite uncertain, as the ongoing debt crisis clouds the view for many of our key segments and customers.

As I mentioned in our last call, Lincoln is a key global partner for the World Skills Organization.

The organization's global competition event was held in London a few weeks ago, and was attended by more than 200,000 people.

Lincoln was the exclusive supplier of welding equipment and consumables in the welding and braising competitions, and we demonstrated our advanced welding solutions, as well as our virtual reality welding system, the VR Tex 360.

For Asia Pacific Q3, Lincoln made modest but important progress.

With sales rising 23% to $98 million year-over-year.

In China, the summer season brought its normal softening along with some anecdotal evidence of more than seasonal weakness in some key segments.

The tightening credit markets are being felt throughout many segments, as the Chinese government tries hard to tame the stubbornly high inflation rate.

In addition, weakening demand in the western export markets has provided for additional constraints to growth in China.

Lincoln's China third quarter sales grew by more than 15%.

But with profitability improving substantially more.

During the quarter, we launched our shared service commercial company in Shanghai, which is an important milestone in configuring our China operations for maximum fixed cost leverage and market effectiveness.

Despite the weakening external environment referred to above, our exports out of China continue to make very good gains.

In other parts of the region, our young Indian company made important progress along its growth and profitability development crew.

While our Australian company delivered its best quarter for quite some time.

Going forward, the long-term outlook in Asia continues to look promising.

The Chinese government continues to demonstrate discipline in controlling inflation, while focusing on long-term growth prospects, and the important energy and infrastructure needs of its region.

According to the Flash numbers from HSBC, the Chinese manufacturing Purchasing Managers Index in October was at 51.1, up from 49.9 in September, marking a five-month high.

Another metric the China Manufacturing Output Index is at 51.7, up from 50.3 in September, and is at a six-month high.

In South America, Lincoln has benefited from our focus on key industry segments and our value-added solutions approach.

The region continues to be driven by infrastructure investments and large scale projects in the oil and gas, mining, ship building, as well as overall infrastructure build-out.

We have also continued to leverage our complete global product portfolio of products in South America, gaining key share in key markets in both equipment and consumable product categories.

Our South American welding segment sales were up 29.7% to $44 million.

On a sequential basis, sales for the quarter increased 17% over 2011.

Robust growth in Brazil, Venezuela, and Argentina led the results.

Changing over to the results for our Harris Product Group.

The Harris Product Group finished the quarter strong with sales of $86 million, up 34.5% from the same period last year.

However, this business segment continues to be challenged by the stagnant home sales, which are not forecasted to show significant change until late 2012.

Harris equipment sales remained strong with significant growth in the US market.

Momentum from the acetylene shortage with customers shifting to alternative fuel equipment moderated through the third quarter, as acetylene supplies stabilized.

Retail sales for the segment's retail business, WCTA remained consistent in a very difficult market.

Sales were up 13.5% over the third quarter of last year.

As I mentioned, there are a number of events and activities that contributed to our growth and sales.

Several of our welding industry segments where we participate showed strong growth in the quarter, and improving potential for the future.

The heavy fabrication industry, for example, continues to recover as the overall global construction increases and high commodity demand drives investment in the mining market.

The most recent update in the earth moving and construction equipment manufacturers global production suggests that 2011 will exceed the production of 2006.

Many construction equipment OEMs are reporting strong backlogs and significant investments in new capacities.

For the agricultural market, we see a very similar story.

Increases in global population continue to drive the market, and it is projected that the agricultural output must double by 2050 just to keep up with population growth.

Activity in the automotive sector is improving, pegged to market-specific geographies.

Globally light vehicle production in 2012 is forecast to grow over 7% to 80 million units with most regions predicting an increase in output above GDP.

Production capacity investments continue to be strong in China, India, Latin America, Mexico, and the United States.

Adding to the increased forecast in output is the fact that in the US, the average age of cars and trucks on the road is more than ten years old.

And those drivers will need to replace their vehicles much sooner rather than later.

In power generation, nuclear is still the focus including Poland, Lithuania, Finland, India, China, and Saudi Arabia.

With just announced plans to build 16 nuclear reactors over the next 20 years, at an estimate cost of $7 billion US dollars per plant.

We have received welding consumable orders for the two plants under construction in the United States.

In South Carolina and Georgia.

Lincoln is the preferred supplier of the arc welding equipment and consumable products for both of these nuclear plant projects.

Wind energy, although the growth is slowing, is still moving forward.

The French government recently announced plans for investors for a $13.6 billion project to build the country's first offshore wind power facility.

This project calls for the installation of over 600 wind turbines at a number of sites along the French lengthy Atlantic Coast.

Wind farms are set to be become an increasingly important source of energy for the European Union.

It is predicted that wind farms could supply as much as 49% of the EU's electricity by 2050, from today's current 5%.

If true, wind would outstrip coal and nuclear combined.

I should mention that we dedicated our own wind tower here in Cleveland at Lincoln Electric's World Headquarters and major operations.

The 2.5 megawatt system will supply electricity to our main manufacturing campus, and will save approximately $0.5 million in electrical costs annually.

In the Pipeline sector, Keystone XL Pipeline project is moving through a thicket of issues.

Approval of this $7 billion project is crucial to aiding our country's energy needs, creating jobs, and having significant economic impact in the US and Canada.

The pipeline would carry crude from the Alberta oil sands to Texas refineries.

Looking at the offshore.

Emerging countries like Brazil are focused on exploring their own oil and gas reserves.

So tapping these reserves is resulting in new offshore construction.

In the more mature markets, North America and western Europe, expertise for subsea engineering is high, and these regions are also benefited from supplying critical components to the emerging markets.

All of this provides opportunity for Lincoln Electric and our welding solutions, especially developed for this segment.

One important issue that will have a positive impact on several of our industry segments, and our customers in those segments is the recent approval of the free trade agreements with South Korea, Colombia and Panama.

That is a look at the segments.

There are several key metrics that remain an effective barometer for economic impacts on the industry and global steel production utilization is one of the most important.

The World Steel Association in its short range outlook for 2011 and 2012, is forecasting that apparent steel usage will increase by 6.5% in 2011.

Following a 15.1% increase in 2010.

The World Steel Association is also forecasting that the world steel demand will grow by a further 5.4% in 2012.

According to the World Steel Association, in 2012 the emerging and developing economies will account for 73% of world steel demand, in contrast to only 61% in 2007.

As I mentioned a moment ago, we acquired two new businesses in the quarter.

Torchmate and Techalloy.

Torchmate give us an entry point into the plasma cutting table market, and Techalloy strengthens our specially alloy consumable offering.

During the quarter, we added to our existing strong executive management team by naming Chris Mapes Chief Operating Officer.

Compress is an extremely capable manufacturing executive, with broad industry and international experience, and is no stranger to Lincoln.

He joined the Lincoln Electric Board while a member of the executive management at AO Smith.

An opportunity came up where we could secure his talents, and we did.

Chris joined our team on August 1st, and is already actively involved in our global business.

I would also like to announce that just last evening, Vince Petrella, Lincoln Electric's Senior Vice President and Chief Financial Officer, has been named CFO of the Year by the Crain's Cleveland Business magazine, a local business news weekly.

One last note.

We would like to extend an invitation to all of you to visit our booth at Fabtech, the industry's trade show being held November 14 through the 17 at McCormick Place in Chicago.

You will have an opportunity to see our latest welding solutions and products showcased to a large customer audience.

With that, let me turn the call over to Vince.

And thank you very much, John.

As John highlighted, our third quarter 2011 financial results reflected a significant quarter-over-quarter improvement in revenue and operating earnings from the third quarter of 2010.

Consolidated sales were up 35% and our operating income improved to $74.8 million.

On a consolidated basis, and compared with the third quarter of 2010, volume increased reported sales by 16.3%, and foreign currency effects increased our sales by 3.7%.

Pricing increased sales by 6.9%, and acquisitions contributed an increase of 8.2%.

The sales increase from acquisitions is the largest impact on the top line since 2005 when a 7% increase in sales was recorded for acquisitions.

Second quarter gross profit margins decreased to 26.4% compared with 27.7% in the comparable prior year period.

The decrease in gross margin resulted from the acquisition of lower margin businesses in Europe and North America.

Acquisitions and the related initial acquisition accounting effects reduced gross margins by 130 basis points in the third quarter compared to the prior year.

The prior year did include an $815,000 charge related to the devaluation of the Venezuelan currency, and the change to a highly inflationary accounting policy.

SG&A expense for the quarter was $110.6 million, or 15.8% of sales, compared with $95.6 million, or 18.4% of sales in the prior year, an improvement of 260 basis points.

The decrease in SG&A expense as a percentage of sales is the result of fixed overhead leverage in the underlying business, as well as the addition of acquisition businesses with lower SG&A expense structures.

The increase in SG&A dollars, were primarily driven by higher bonus accruals of $8.2 million as operating profit increased substantially on a year-over-year basis.

Foreign currency translations increased recorded SG&A expenses by $2.6 million in the quarter.

Operating income for the quarter at $74.8 million was 10.7% of sales, compared with $48.2 million, or 9.3% of sales in the same year ago quarter, an improvement of 140 basis points.

Acquisitions and the related acquisition accounting effects reduced operating margins by 70 basis points in the third quarter.

The prior year's quarter included $1.1 million of special charges, excluding these prior-year special charges operating income was $49.3 million, or 9.5% of sales in the 2010 period.

Net income for the third quarter was $55.5 million, or $0.66 per diluted share, compared with a net income of $32.5 million, or $0.38 per diluted share in the 2010 third quarter.

That is a 71% increase in diluted earnings per share year-over-year.

Excluding special items, net income was $33.6 million, or $0.39 per diluted share in the 2010 third quarter.

The effective tax rate for the third quarter was 27%, compared with 33.2% in 2010's third quarter.

The effective tax is lower than the statutory rate and the prior year, primarily because of the mix of income earned in lower tax rate jurisdictions.

Now moving to the session on a year-over-year basis, sales in North America were up 21.6% due to volume.

Prices increased sales by 4.2%, acquisitions added 8.8% to sales, and foreign exchange increased sales by 50 basis points, or 0.5%.

Acquisition revenue primarily relates to the July 29th 2011 acquisition of Techalloy, the company that John mentioned in his comments, a specialty alloy consumable business.

North America's EBIT margin was 14.1% of sales in 2011, that is a 110 basis point decline from the prior year, the effect of the acquisitions and the related initial acquisition accounting effects decreased EBIT margins by 120 basis points in the quarter from the prior year.

Sales in Europe, were 12.1% due to volume, our Russian acquisitions added 23.5% to the top-line sales figures, and price increases over the prior year contributed 4.4% to sales.

Foreign exchange increased sales by 9.4% due to the year-over-year weakening of the US dollar.

Excluding special items, Europe achieved an EBIT margin of 7.8% of sales, compared with 6.4% in the prior-year same quarter.

On a year-over-year basis sales in Asia-Pacific were up about 14.2% due to volume, prices decreased sales by 1.4%, and foreign exchange increased our sales in Asia by 9.4%.

Excluding special items Asia-Pacific's EBIT margin was 1.9% in the quarter compared with a loss in the prior year.

Sales in South America were up 19.3% due to volume.

Price increases contributed 6.9% to sales and foreign exchange increased sales by 3.4%.

Price increases in South America are above the welding segment's average because of higher inflation rates, primarily in Venezuela.

Excluding special items South America's EBIT margin was 9.1% of sales, compared to the same amount in the prior year.

Compared with 2010 sales in Harris Product Group were up 2.1% due to volume, price increase contributed 30% to sales, and foreign exchange increased sales by 2.2%.

The price increases were largely related to the significant increase year-over-year in metals cost, primarily silver and copper.

Harris Product's EBIT margin was 5.6% compared with 6.3% in the prior year same quarter.

Margins declined as a percentage of sales, due to margin compression effect of higher metals cost.

Operating activities generated $84.8 million of cash flows in the third quarter, compared to $56 million in the same period last year.

Cash flows for the quarter reflect a much higher level of earnings in 2011 compared with 2010.

The Company closed the quarter with a cash balance of $321 million, and a net cash position of $227 million.

Our cash to invested capital ratio is a positive 16.9%.

The Company invested $50.7 million in capital expenditures for the nine month period ending September 30th this year, we estimate that the 2011 capital spend should finish the year at about $65 million.

That is roughly in line with our annual depreciation and amortization expenses.

During the quarter, we paid cash dividends of $13 million, and our weighted average shares outstanding for the quarter ending September 30th were 84,549,000 shares.

And finally we purchased $14.3 million of Treasury stock under our existing share repurchase program.

That is a total of over 455,000 shares, at an average price of $31.43.

That is the extent of our prepared comments.

Kevin, I would like to open up the call for any questions today.

Thank you.

We will now be conducting a question-and-answer session.

(Operator Instructions).

One moment please, while we poll for questions.

Our first question is coming from Mark Douglass from Longbow Research.

Mr.

Douglass, please proceed with your question.

Good morning, gentlemen.

Morning, Mark.

Hi, Mark.

Congratulations Vince.

Thank you very much.

Was there a LIFO expense in the quarter?

Yes it was about $1.3 million, and the year-to-date LIFO expense is about $7.5 million.

So we brought down our expectations of the inflationary impact of input costs in particular materials, so that $7.5 million should give you an idea of what our annualized run rate should be for the full year, but $1.3 million in the quarter.

Okay.

And then are you starting to see some cost relief on steel?

I know you weren't really seeing it last quarter, but any indication that that might be coming down the pike?

We are certainly seeing a flattening of the cost curve on the major material inputs that we have yet to see, at least in our major buys of rod and steel a decline, but certainly a mitigation of the increases that we were seeing earlier in the year.

But certainly copper is --?

Yes.

(Overlapping speakers )But copper is not our biggest input obviously.

Right.

We buy hundreds of millions of dollars of steel rod a year, and copper is relatively inconsequential compared to steel.

And much more volatile too.

Right.

Right.

Looking at North American EBIT, the acquisition expenses there, any of them one-time?

Or is that mostly amortization?

Yes, there is about $1.8 million that I would categorize as one-time in the quarter.

$1.8 million.

That won't repeat itself, that represents a step-up accounting and roll out of the step-up of inventories.

Okay.

That is helpful, so assuming volume levels are maintained you would see a little bit, because the leverage is a little light --?

Right.

-- relative to what maybe given what is your perspective on acquisition.

Okay.

That is helpful.

Thank you very much.

No problem.

(Operator Instructions).

Our next question is coming from Holden Lewis from BB&T Capital Markets.

Mr.

Lewis please proceed with your question.

Thank you.

Good morning, guys.

Good morning, Holden.

In Asia, talk a little bit about the margins, the operating margins held up very well, which was kind of surprising only because it looked like the pricing was somewhat negative.

So I think you made some moves into various businesses in the Asia Pacific region performing perhaps better than anticipated from a margin standpoint, just historically it has been unusual to see sort of pricing weak and margins improving, so I wanted to get a little more feel for what was taking place in that region?

I would say first Holden, we focused, and I mentioned in my comments about our central services company, we have had a lot of focus over the last six months on the cost base in Asia, with the idea that we were probably a bit ahead of the curve on a capacity and an investment side of things in the sales and marketing arena, and we wanted to pull that back and get a clear view of what the middle term view of the Chinese economy in particular was going to be.

So that has had an important impact.

Secondly, the type of business that has remained strong in China, the infrastructure business, mining and expansion in the mining arena in Australia has had a big impact on our high-margin type of products that we import and sell into that region, and good profitability associated with that element of it.

Okay.

The mix was part of it, but you also sort of re-evaluated, I guess, the spending behavior, and just maybe scaled back that investment, is that what I am hearing there?

We are making steady, albeit, slow progress in improving our business there.

Building our infrastructure, building our product portfolio, gaining competencies in our manufacturing operations, and so it is a reflection of us just slowly improving the business in China, and then John, in John's prepared comments he mentioned that our Australian business had a very good quarter, and one of the better quarters that we have seen out of that business in some time, and they had nice margin expansion.

That is a very mature business in Australia.

It has been around for the better part of 75 years, so it can gain leverage and good incrementals when volumes improve, and sales increase, so it is a collection of improvements in the region, but in terms of China, we are making slow and steady progress.

Okay.

The last element I would add to that is that, and it was also covered briefly in the remarks, is that we have had very good success on exports from China into other markets of the world at very good margins on the export side.

Okay.

So I guess sort of broader picture, we have talked before about when do you slow the rate of investment, begin to farm all of the heavy investment that you have made?

Is this sort of what we are seeing that you are sort of in that sort of farming mode, or is this maybe reflective of maybe just some doubts about the intermediate term growth of those markets which you are doing on the cost side?

I think it is a little both.

We build out a lot of capacity footprint, and after we get the brick and mortar side of it, we get much better flexibility on adding the actual capacity increases that we need, so we don't have the heavy investments there.

We have matured in terms of our local competency, and that has allowed us to redefine the cost base from an expat side of things, and focus more on our local resources, and as the economy has taken a bit of a pause, we have slowed our growth expectations for the future and the investments, but in no way would I want to leave the impression that we are not still strongly committed to that being a very important growth trajectory for the Company, and we will continue to invest there as needed.

And is this sort of philosophical shift if you will also true in the other areas where you are investing heavily, where you are getting to the point where you can start farming it, like Eastern Europe and Latin America, or are those still more heavy investments and maybe earlier in the sort of investment curve?

Well, from an investment standpoint, Asia will continue to lead the way, and will attract the bulk of our investment, albeit from a relative standpoint perhaps at a little slower rate than what we have experienced over the past two or three years.

The other markets will need to continue to mature in their developments that I outlined earlier in my comments, but certainly I would emphasize that Asia and China in particular will continue to attract a disproportionate amount of our investment at least in the next couple of years.

Okay.

Alright.

Great.

Thanks, guys.

Thank you.

Our next question is coming from [Ponvu Tipness] from Mountain View Research Associates.

Hi, guys this is [Shavon Giffowold].

Hello?

Yes, we are here.

Hi, and good morning.

I actually understand the softness in China and the seasonal weakness that you spoke about the inflation index and stuff, but Asia has always been quite low, and it has been like quite low for a long time.

What new strategies or initiatives do you have in place to ramp up Asia in the coming future?

Well, as far as new strategies, I would say that we have a fairly long-standing strategy of building our business in Asia through two avenues.

The first being, searching for acquisitions that make sense, that fill a geographical need as well as a product line need to carry out the Company's long-standing strategy of providing a complete solution-selling approach to end users and through marketing channels in whatever geographies we participate in.

And then secondly, developing on an internal basis our own capabilities in those markets, and so by way of history, China, we have done a little bit of both.

We have bought some businesses there, and we have also started up some new greenfields, and those take a fair amount of time to mature, and execute that strategy.

India is an example of where we follow the path of a greenfield.

We have not acquired any businesses in India, but about 2.5 years ago now opened our first consumables plant in the Indian marketplace, and we are in the process of building that business around our manufacturing capabilities, supplementing those manufacturing capabilities with import products from around our world, and we will continue to follow that strategy of building out complete and fulsome capabilities from product, selling, marketing and manufacturing standpoint.

So that process will continue into the foreseeable future.

Okay.

That is so helpful.

Another one is for Europe.

The conditions are quite uncertain, but then with the wind power technology you spoke about in France, how do you plan advantage of that?

Advantage of what?

I didn't catch --

The wind power technology in France the 600 windmills that you were talking about?

Well, we have a very, very strong position in the wind tower segment on a global basis, both on the welding equipment, and on the welding consumable side, so we are well ahead of the curve in the opportunity, or the ability to take advantage of any opportunity in the wind tower segment, and as that unfolds, in whatever part of the world it unfolds, I assure you we will be there with a very strong portfolio, again both in equipment and consumables.

That is really helpful.

The last question for the tax rate, can you comment on the tax rate for the full year?

Well, the tax rate for the full year obviously would be in the high 20s.

High 20s.

Okay.

Okay.

Thank you so much, and it was a great quarter, guys, congratulations.

Thank you.

Thank you.

Thank you.

Do we have anymore questions, Kevin?

Yes we do our next question is coming from Greg Halter from Great Lakes Review.

Congratulations.

Thank you very much Greg.

I wondered if you could come on your relationship with IPG Photonics from maybe a products revenues application standpoint?

Well, we are very early in the relationship and in the development of our strategy as it relates to hybrid laser, and our association with IPG.

I would say that the early returns from a market-receptive side have been quite strong.

That we have had continuous flow of customers from varied different types of industries coming in, and wanting and suggesting the opportunity to work with Lincoln in the development of hybrid lasers on a go-forward type strategy.

From a revenue side there has been very little at this point, and quite frankly we wouldn't expect a lot in the short order, but we do view it as being something that has got a lot of upside, and a long track yet to run.

And any particular applications that you can talk about?

Overlay has been a particular area.

We are replacing powders with hybrid lasers and traditional wire usages that appears to offer some significant advantages.

The welding of light gauge and non-ferrous type of materials.

I mean, it is a fairly extensive portfolio of things, Greg, that we are looking at.

But again, it is still very early in the development side, and I wouldn't commit that any of those will be the absolute strength of the process, but we are quite optimistic that we will find the sweet spot and be able to take advantage of it.

Okay.

Sounds intriguing.

Relative to competition, we are obviously all aware of the ESOB situation.

Any commentary that you may have on disruptions on their end, that may have had a positive impact on your business?

No, we generally don't comment on the competitive landscape other than talking about our success.

There hasn't been much recent news about what the status of that transaction might be, or what part of the cycle they are in, completing or finalizing whatever the transaction might exist with.

We focus on the market regardless of the competitive activities, and think that we are perfectly capable of competing with our existing portfolio of competitors, or any change in the landscape of that portfolio.

I think earlier in the year there were 120,000 miles of pipeline planned.

Is that figure still accurate?

Or has there been some bias upward or downward?

Is it progressing along the ways you thought it would?

I don't recall the exact number, Greg.

I would have to go back and pull out my notes, but based on what I am seeing in terms of incoming orders for welding consumables and equipment for pipeline activities, it appears to be very robust.

Now it is market specific, but in most areas of the world it looks quite promising.

Obviously we are excited about the Keystone project here in North America.

We think that would be very good for the US and Canada in total, but it would be exceptionally a good opportunity for us on both the equipment and consumable side, and we are quite hopeful the State Department will approve that project and get on with it.

The US needs to be better aligned with Canada, and this is a great opportunity to do it.

Okay.

That sounds like a very good opportunity, and obviously there has been a lot of discussion about welder shortages, and you have come out with some products on the trainer side, and so forth.

Any updates you can provide there, whether or not it's having some impact in terms of helping the shortage, or if this is going to be something that continues for years maybe?

Well, I think that there is a lot of investment being made on the part of the trade unions and the vo educational facilities, and then those training institutes that focus just on welding in adding capacity.

And I am quite optimistic that those needs will be addressed.

I commented on the World Skills event, which had 32 different countries competing in the competition.

I talked to a lot of the experts that were there, and the educators that were there, and they are quite optimistic that those shortage needs will be addressed, and they are seeing that the technology in welding has shifted, that it is making a much more exciting career path for people.

So there is good news on that front, and our virtual reality welder continues to be the most exciting training tool ever introduced in the welding industry.

And relative to the Fabtech that is coming up, I think I read the attendance figures, expected attendance figures are supposed to be up, and I think way up.

Just wondering what we could possibly expect from Lincoln from that, although I am not sure you want to put that out there before the show?

Well, what you should expect from Lincoln will be to have the most professional booth in the show, the most dynamic display of equipment and consumables, and the most professional group of technical salespeople to support those products in the face of our distributor and end user partners.

Okay.

Great.

Good luck on a good show.

(Operator Instructions).

Our next question is coming from Holden Lewis from BB&T Capital Markets.

Thank you.

Just so I am clear on the gross margin.

The gross margin decline from 28% in Q2 to 26.4% in Q3, it sounds like 30 basis points of that is from sort of one-time, the $1.8 million, is only about 30 basis points from one-time, and the rest of the decline is largely just a blending in of these transactions?

Yes, the rest of that decline that I discussed in my prepared comments are adding lower margin businesses to the mix.

The acquisition businesses that we added at the end of July have lower margins than the base business at this point in time, and that was the degradation in margin and operating profit from acquisitions.

Now that is obviously not considered one-time, but certainly our objective will be to integrate those businesses, and work at improving their margins and profitability.

Right.

Got it.

And margins were reasonably stable versus Q2 if you make that adjustment, right?

Down slightly.

Stable with the prior year, down from Q2.

The other factors that affect us between Q2 and the third quarter are some seasonality factors that we have talked about in previous years, that sales can hold up and maybe even improve, but we have a number of factories around the world that are not making products, and therefore not absorbing overhead, and therefore having more period costs that depress margins.

So there is a bit of seasonality.

Our second quarter is always our best from a margin standpoint, and then third will tend to tick down a little bit, and then contributing to that tick down are some acquisitions that just came in in the third quarter.

One-time items and continuing lower operating profit base.

Okay.

(Inaudible)

Operating base.

But we should be thinking about a base in that 26.5 range with the acquisitions in there?

That's what we did in the third quarter.

Yeah.

Okay.

And with respect to pricing, you said you are sort of seeing law materials flatten at this point.

You put in a pretty good increase in October on the machinery side, I guess it was.

You are seeing flattening conditions, what is the impetus to put the pricing increase through?

And what were sort of the price cost relationship in Q3 and what are you anticipating in Q4 and going forward?

On the equipment side you can appreciate Holden there are a lot more equipment costs that might affect what our equipment cost other than steel.

And commodities are a relatively minor part of our equipment portfolio.

Electronics and the like can have a much bigger impact.

And then it is also a realization that we needed to catch up a little bit on cost increases that had occurred earlier in the year that were necessary to pass through to the market, to recover the input cost escalations earlier in the year.

Okay.

And with regards to the consumable side, do you feel like you are caught up there?

Even though I think things like [root tile] are moving up right?

We don't look for any major changes in the consumable pricing in the fourth quarter, unless there is some major shift in the current landscape on either the steel or the high-value nickel, stainless kind of products, I think we are fairly well positioned for the rest of the year.

In terms of that price cost relationship is it flip positive in Q4 and beyond based at current levels of price and cost?

Or how do you look at that versus Q3?

We believe it will improve in the fourth quarter.

The dynamics of input cost and pricing should give us some incremental improvement on price costs in the fourth quarter.

Got it.

Okay.

Thanks guys.

Thank you.

It appears there are no further questions.

I would like to now turn the floor back over to Mr.

Petrella for closing comments.

Thank you, Kevin.

And thank you all for your continuing interest in Lincoln.

And your time on the call this morning.

I look forward to speaking to you after our fourth quarter in the new year in 2012.

This does conclude today's teleconference.

You may disconnect your lines at this time, and have a wonderful day.

Thank you for your participation.