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Lincoln Electric Holdings, Inc. (NASDAQ:LECO)

Q4 FY07 Earnings Call

February 22, 2008, 10:00 AM ET

Executives

Vincent K. Petrella - Sr. VP, CFO and Treasurer

John M. Stropki - Chairman, President and CEO

Analysts

Walter Liptak - Barrington Research

James Bank - Sidoti & Company

Steve Barger - KeyBanc Capital Markets

Mark Douglass - Longbow Research

Greg Halter - Great Lakes Review

Seaver Wang - Utendahl Capital

Holden Lewis - BB&T Capital Markets

Operator

Greetings ladies and gentlemen and welcome to the Lincoln Electric Fourth Quarter and Year-end 2007 Financial Results. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions]. As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Vince Petrella, Senior Vice President and Chief Financial Officer for Lincoln Electric. Thank you Mr. Petrella, you may begin.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Thank you, Latonia. Good morning and thank you for joining Lincoln Electric's fourth quarter conference call.

Results for the 2007 fourth quarter and the full year were released this morning prior to the market's open. Copies are available through the Lincoln Electric website or by contacting Investor Relations at 216-383-4893.

Lincoln's Chairman and Chief Executive Officer, John Stropki is joining the call this morning and will provide commentary on the quarter and the year in a moment. But first let me remind you that certain statements made during this call and our discussions may be forward-looking and actual results may differ from our expectation. Risks and uncertainties that may affect our results are provided in our press release and in our SEC filings on Forms 10-K and 10-Q.

Let me now turn the call over to John Stropki.

John M. Stropki - Chairman, President and Chief Executive Officer

Thank you, Vince. Good morning everyone and thank you for joining us. We had a solid fourth quarter and completed our fourth consecutive year of record sales, record profit and record cash flow. Our global management and associate teams achieved these results despite challenging conditions in several key markets and geographies. Although there is still much uncertainty, in several key sectors and markets, we believe Lincoln Electric is especially well positioned to continue growing sales and market share.

As such in 2008, we will continue to focus our efforts and investments in the areas of higher growth potential and continue to build on the momentum of our record 2007 performance. Vince will cover the financials in details later in the call but I'll cover the high level results and the review our operations and the economic environment as we move forward into 2008.

First let me begin by reviewing a few key economic measures that we follow as indicators of the strength of our business. First, US industrial production increased 0.1% in January from the prior month but increased 2.3% year-over-year. Durable goods production was flat in January compared with December and increased 4.1% over prior year. The January US purchasing managers index increased to 50.7, up from 48.4 in December; mostly good news but clearly less positive than in past periods.

Returning to Lincoln, our overall sales increased 14.7% to $580.3 million in the fourth quarter. Operating income excluding non-reoccurring items increased 29.8% to a record 65.8 million in the quarter. Cash flow generated from operations increased 236% to 45.7 million. Sales for the company's North American operations rose 8.1% to 345 million in the quarter. US export sales in the quarter increased 11.2% to $46 million. Sales from our European subsidiaries grew 25.2% to 142 million, while our other international subsidiaries recorded strong sales increases of 22% totaling 102 million in the sales for the quarter.

Turning to the results for the full year, net income increased 15.8% to 203 million or 4.67 diluted earnings per share and the sales increase of 15.7% to a record 2.28 billion. The company's North American operation sales increased 7.3% to 1.4 billion. US export sales increased 26.2% to $194 million. Sales for the European operations increased 35% to $535 million and excluding acquisitions in local currencies, the sales of our European subsidiaries increased 17.5% for the full year.

Sales recorded by our international subsidiaries outside of Europe and North America grew by 22.6% to 381 million in the year. The 2007 sales reflects the success of our international expansion efforts as 55% of our sales excluding sales of equity affiliates were recorded in destinations outside of North America. As I said this will provide more details of the financials in a moment but I would like to cover your activities in the quarter and for the year for the region and segments.

First looking at North America, despite a slowing economic growth trend and forecast, our overall results and demand continue to be strong during the fourth quarter for our North American operations. However we do expect the overall North American economy to show some weakness in contraction in certain sectors during the first half of 2008. Order trends in our traditional US welding markets remained strong in the fourth quarter and into the new year. Across most product lines and distribution channels we saw good sales growth in 2007 fourth quarter compared to the 2006 levels. Sales increases in our traditional welding markets were driven more by volume than by price.

Equipment and consumable prices has been adjusted upwards effective February the 1st 2008 to respond to cost increases in key material groups like steel, copper, aluminum and chemicals.

Pricing and supply for key raw materials will present ongoing challenges during 2008 in all areas of our business. US export sales growth continues to be strong for key infrastructure development projects and preferred our higher technology products versus other competitive options. These large deal projects associated with oil and gas infrastructure and the overall energy sector continue to drive both sales and expansion of our global brand. The softer portion of our North American operations were Canada and our J.W. Harris soldering and brazing business.

Despite the positive economic statistics reported by Canada in terms of employment and GDP growth, the manufacturing sectors in Ontario and Quebec have been much more challenging. Additionally, we saw volume demand decrease year-over-year in our soldering and brazing products driven largely by the slowdown in the U.S. housing and HVAC sectors. These volume decreases were partially offset by price increases associated with the rising metal markets.

During 2007, we have been actively improving the supply chain processes; from our front-end planning process to our backend manufacturing and distribution capabilities. These actions had a significant positive impact on the record cash flow generated from our North American operations.

In terms of the short-term outlook for North America, demand continues to moderate with a longer term landscape somewhat more uncertain and mixed overall results. We'll be heavily driven by key end-user market segments and our ability to continue growing market share.

Turning to Europe, in Q4 several European economies lost momentum growing 2.3% on an annual basis and down from 2.7% in the third quarter. The main drivers for the weakening growth rates of consumer spending and slowing export growth as the strong euro continued to provide important constraints.

Europe's fourth quarter performance paralleled this trajectory, showing positive by slower growth for the quarter of 7.8% compared with the full year growth rate of 17.6% excluding the impacts of acquisitions and in local currencies. The full year results were somewhat aided by the acquisition of Metrode and SPAWMET. However, overall European operations contributed positive growth particularly in Eastern Europe where sales grew by greater than 30% year-over-year.

During the past year, the European region saw the initial benefits from the commissioning of our new Greenfield consumable plant in Poland. The primarily focus of this plant is to serve the shipyard in general construction markets with consumable products. It is also very well positioned to strengthen our manufacturing footprint for other consumable product categories and for serving other end user segments as well.

While the strong euro appeared as an increasing challenge throughout the course of the year, the European manufactures were still able to show very solid growth in exports of capital goods as the global infrastructure build remained strong. This pattern is clearly demonstrated by our Uhrhan & Schwill subsidiary which makes high-end automated welding systems for pipe mills.

Uhrhan & Schwill sales grew more than 20% in 2007 and entered 2008 in the full order book that stretches well into 2009. The increased sales and expansion of pipe mill capacity will present excellent opportunities for our submerged arc wire and flux products around the world.

2007 was a very good year for European manufactures including Lincoln Europe with all segments and geographies experiencing solid growth while 2008 looks to remain positive but not to the degree of this past year. With 2008 GDP projection now standing at substantially slower 1.8 to 2.1%, we expect the coming year to present a much more challenging demand environment in certain key market segments. However the energy and process segments show no sign of slowing and are expected to be strong contributors in the coming years.

Looking at the regions outside of North America and Europe and focusing on Latin America, South America continued the year-to-date trend with sales growth approximately 50% recorded in the fourth quarter. The oil and gas sector as well as the mining sectors continue to invest heavily as commodity prices remain at historically high levels.

Our expansion efforts in Columbia and Brazil allow for our full participation in the increased investment levels related to offshore mining and pipeline sectors. This expansion allowed for significant volume increases throughout the entire region. The level of construction activity in Mexico also increased in the fourth quarter as many new oil related projects began ramping up for 2008 production demands and the political issues affecting project work will result.

Turning to Asia Pacific, Asia continues to be the central focus point of our international expansion and significant sales progress was made in the quarter. The Heli joint venture agreement was signed in the fourth quarter of 2007 and then executed in February of 2008 which will drive... which will provide the region with high quality and large volume consumable manufacturing capabilities.

Additional investments continued in building out our manufacturing capacity and commercial distributor network in China and construction has begun well underway on our first consumable manufacturing facility in India. These markets also continue to drive a significant portion of our U.S. and European export sales along with sales for other local subsidiaries.

Market penetration into China and India grew by 35% and 100% respectively in 2007 compared with the full year of 2006. Import sales volumes continue to support our effort to develop the local commercial and manufacturing capabilities in these countries and the Asian region in general.

Australia recorded single digit growth in the quarter as the strength of the Australian dollar has affected our operations' ability to export in the world markets. Currency issues have not only effected the sales of our Australian business but also the profitability of that business as our Australian operations export a large portion of the manufacturing production to largely U.S. dollar denominated regions.

These issues are being addressed and we expect slow but steady progress during 2008. Lastly looking to the Middle-East and Africa. The Middle-East continues very strong with energy related projects, pipeline, offshore platforms and power plants booked several years into the future. Heavy-duty industrial welding machines and high-end consumables along with our newer welding technology which improves efficiency and throughput are still being ordered at robust and record pace. Related energy investments are strong in shipyards, cement mills, aluminum smelters, petrochemical plants and steel fabrication plants all making demand for welding products strong.

The standard year-end slowdown in the region was seen in December. The sub-Saharan Africa but with strong order control dated into 2008; again energy related projects, involving renewable wind energy as well as oil projects off the western cape have kept the demand for welding products steady. The steel industry also plans for solid growth and mining and shipyards and the infrastructure programs continue at an excellent pace.

With the world strong and growing appetite for energy and natural resources, both the Middle East and Africa should continue the robust space of welding activity. Many key projects are planned and committed over the next several years. That's the view of the company's regional results and relative market conditions for the last quarter and year. Now Vince will go over the details of the financial results.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Thank you, John. I'll take a look at some of the details of the fourth quarter and the full year. As John mentioned in his comments, our fourth quarter consolidated sales were up 15% over the prior year with North American sales increasing 8% and sales reported outside of North America up 26%.

Foreign currency effects increased reported sales by 5% in the quarter and volume increases contributed 6% to the sales dollars in the quarter. Pricing contributed 2% of the increase in sales dollars year-over-year. Acquisitions contributed about 2% as well.

The percent of gross profit in the quarter was 27.7% of sales, compared with 26.6% in the prior year same quarter. The increase in gross margins as a percentage of sales was attributable to favorable operating leverage caused by increased volumes, partially offset by a shift in sales mix to lower margin geographies.

SG&A expense was $95.1 million in the quarter or 16.4% of sales up 160 basis points from the prior year. The higher SG&A as a percentage of sales was primarily driven by a prior year's non-recurring gain associated with the sale of a property in Europe. Excluding this non-recurring item, SG&A as a percentage of sales actually decreased 10 basis points in the quarter.

Fourth quarter operating income was 11.4% of sales down 30 basis points from the fourth quarter of 2006. Excluding rationalization items and the gain on the sale of the property in 2006, our quarterly operating profit increased 130 basis points from 10% in 2006 to 11.3% for the fourth quarter of 2007.

The income tax provision for fourth quarter reflected an effective tax-rate of 28.8% compared to 16% in 2006. The prior year's tax rate was affected by certain non-recurring benefits.

Now turning to the full-year results. Full year consolidated sales were up approximately 16% with North American sales increasing 7% and sales reported outside of North America up 32%. Foreign currency effects increased reported sales by 3%; volume increases contributed 7% to sales dollar for the full year. Pricing contributed 4% of the increase in sales dollars year-over-year. And finally acquisitions added about 2% to the top-line.

Gross profit for the full year period was 28.4% of sales, compare to 28% of sales in the prior year. This year-over-year improvement in gross profit was due again primarily the favorable operating leverage caused by increased volumes, partially offset by a shift in sales mix to lower margin geographies.

SG&A expense for the full year was $370 million or 16.2% of sales, up 20 basis points from the prior year. Again, the higher SG&A as a percentage of sales was primarily driven by the non-recurring gain recorded in 2006, which reduced the prior year's SG&A cost. Excluding this $9 million gain, SG&A as a percentage of sales, decreased 25 basis points for the full year. The decrease was a result of increased sales volume leverage offset by increases in bonus expense and foreign exchange losses.

Full year operating income rose to 12.2% of sales from 11.8% in 2006, an increase of 40 basis points. 2007 included a European rationalization credit of $200,000 compared to a rationalization charge in the prior year of $3.5 million. Additionally, the prior year results included the $9 million gain on the property sales. Excluding these items, operating profit margins would have been 12.2% compared with 11.5% in the prior year.

The year-to-date and full year effective tax rate was 29.4% compared to 26.5% in the prior year. The higher effective tax rate was due to non-recurring tax benefits recorded in 2006 and higher income booked in 2007.

Now to our cash flows and the balance sheet. Our fourth quarter cash flow from operations rose $32 million to 45.7 million from $13.6 million in the prior year same quarter. This significant increase in our cash flow was driven by continuing improvement in working capital management, particularly inventories. For the full year period, cash flow from operations reached $250 million, a $131 million increase from the prior year's full year. Again, the solid improvements in income and working capital management drove this increase.

The company invested $62 million in capital expenditures in the full year period compared with $76 million in the prior year period. The 2008 capital spending plan will continue to focus on our previously announced capacity expansions, as well as ongoing improvements in our cost base. Other uses of cash flows in the year included the payment of approximately $38 million of dividend to our shareholders.

And finally during the fourth quarter, the company spent $15.5 million for the repurchase of 222,000 shares under the company's previously authorized and announced share repurchase program. In addition, the company has spent $18 million during the first quarter of 2008 to repurchase an additional 298,000 shares.

Weighted average diluted shares outstanding increased to 43,447,000 shares for the fourth quarter and our shares outstanding at December 31st, 2007 were 42,961,600

[Technical Difficulty]

Our return on invested capital rose to 20.5% at December 31st, 2007 compared with 19.9% at December 31st, 2006. The increase in returns is reflective of our operating income. The company closed the year with $88 million of a net cash position in its balance sheet.

That's the extent of my prepared comments, there's one other item that I would like to mention and that is that the company is having... conducting an Investor Day on March 7th, 2008 at NASDAQ and those of you that have been invited or interested in attending please do attend. We encourage you to see us in New York at NASDAQ on March 7th. For any further details on that, please contact our Investor Relations office and we will give you those detail.

So at this point, Latonia, I would like to open up the call for any questions we might have.

Question And Answer

Operator

Thank you. [Operator Instructions]. Our first question is from Walt Liptak from Barrington Research. Please proceed with your question.

Walter Liptak - Barrington Research

Hi, thanks. Good morning, Vince and John.

John M. Stropki - Chairman, President and Chief Executive Officer

Good morning.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Hi Walt.

Walter Liptak - Barrington Research

Congratulations on nice end to the year. And my first question is about the volume growth, the 6%. It looks like it accelerated and I wonder if I could get the details of what volume was up in North America, Europe and other, and I apologize if you went through that already. But I didn't catch you.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

No, we haven't and by the way, well, we will be filing our 10-K on Monday or Tuesday and you will be able to find these details in the MD&A section of our 10-K. But for the quarter, North America had approximately a 4% volume increase, Europe was about 8% and the other countries segment was roughly 13.5%. But I mentioned that in the aggregate for the consolidated company, we were up in pure volumes, 6% as you can see that the break down which show that the rest of the world including Asia, Latin America and Europe are still putting up year-over-year volume numbers quite a bit better than North America.

Walter Liptak - Barrington Research

Okay, yeah and so your volume in total went from 3.8 to 6, so it improved mostly... was there something one-time about the quarter in North America because it picked up pretty substantially from basically down a little bit to up 4%, did you do something to try and get the market to accelerate volumes?

John M. Stropki - Chairman, President and Chief Executive Officer

No, we didn't have any... no special programs or incentives or anything along that line.

Walter Liptak - Barrington Research

Okay why do you think you picked up?

John M. Stropki - Chairman, President and Chief Executive Officer

Well, I think again some of the sectors that we're historically strong in were stronger in the quarter and I think we, as I said in my remarks, I think we are continuing to capture market share in those sectors that are stronger than our competitors are and we positioned ourselves particularly well for those sectors that we view to be strong.

Walter Liptak - Barrington Research

Okay. Are you... we are 7 weeks or as into the first quarter, are you still seeing the same kind of volume trend or something happens so far this year in North America?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

I would tell you that through this week that our volumes in North America are relatively steady, with what we experienced in the fourth quarter.

Walter Liptak - Barrington Research

They are still growing in that 4% or so volume?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Walter, I wouldn't tell you... I can't give you a number like that. But I tell you, mid to low single-digit type of volume growth.

Walter Liptak - Barrington Research

Okay. I also wanted to ask a question about... you mentioned the working capital account. Working capital in the fourth quarter was extremely good. What happened there to get the receivables down, the inventory down et cetera?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

I would tell you Walt that... this was perhaps the first year that we really emphasized and put a focus on working capital management and particularly, inventory management. And I think towards the end of the year, we started to see some traction in our supply chain initiatives and our working capital focus and I think the easy part of it perhaps is over now and it's going to be a little bit more difficult going forward to achieve the same kind of improvements that we achieved in 2007. But at the end of the day, the improvement is squarely the result of focusing on improving our working capital management.

John M. Stropki - Chairman, President and Chief Executive Officer

Yeah, Walt and I would add that I think 2008 is going to be a very interesting year on working capital because we are focusing on the supply shortages that are occurring in some of our primary inputs of raw materials and we just not going to take any risk in that area. So we are liable to bump up our inventories a bit, until we get more comfortable in that area.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

And I would also add to that Walt, it's not only the tightness in supply, but our view of the key commodity input cost that we have in our business are likely to accelerate in 2007 more than what we've seen in the last 2 or 3 years. And so, we think it will behoove us to perhaps have a better inventory and days in inventory position on raw materials than what we've had in say 05, '06, '07 and I am sure you are reading all the same things that we are reading about ore costs and steel costs rising, and so we're going to be a little bit more cautious when it comes to our inventory quantities throughout 2008.

Walter Liptak - Barrington Research

Okay, yeah, that makes sense. And I guess one follow-on to that, okay, so you are generating a lot of cash, you are in the net cash position, how big is the share repurchase? Can you refresh on how much more stock can you buy back?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Well how much more, we have almost 10 million shares available.

Walter Liptak - Barrington Research

Okay.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

And we have a lot of capability to buy shares.

Walter Liptak - Barrington Research

Okay, is that going to be the primary use of your cash going forward because... how aggressively you'd be on that thing?

John M. Stropki - Chairman, President and Chief Executive Officer

We hope the primary use of our cash as acquisitions. I think we've said that all along and we go into 2008 with a nice queue of opportunities that we are reviewing.

Walter Liptak - Barrington Research

Okay. Okay thanks, I'll get back in queue.

Operator

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

James Bank - Sidoti & Company

Hi, good morning.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Hi James.

James Bank - Sidoti & Company

Hi. Yeah, Vince, I guess I caught the tailwind in that. You repurchased shares in this past quarter?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Yeah, for the fourth quarter, we repurchased 15, we spent 15.5 million on shares for 222,000 shares and then during the course of the first quarter up to today, we repurchased $18 million worth of shares and took out of the market $298,000 in shares.

James Bank - Sidoti & Company

Okay.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

For a total of about 33 million.

James Bank - Sidoti & Company

Okay, and there is roughly... okay, I am sorry, there is 10 million shares left authorized.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Actually, I had that the other way around. We actually have close to 4 to 5 million shares available on existing authorization.

James Bank - Sidoti & Company

Okay. So 4.5 million left in the kitty?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Right.

James Bank - Sidoti & Company

Okay. And what was the average stock price you're buying in at?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

In the fourth quarter, it was 69.50 and in first quarter, it's close to $60. So on average, since we started to reinitiate our share buyback, it's about 64.30 on average.

James Bank - Sidoti & Company

Okay, terrific. And could you split Europe and other countries sales by absolute dollar for me?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

For the fourth quarter?

James Bank - Sidoti & Company

Yes.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Yeah. Total sales in Europe were approximately $142 million, and other countries was approximately $102 million.

James Bank - Sidoti & Company

Okay. And then for all three segments, can I have operating income?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

We report EBIT not operating income. But, for North America $54.8 million, Europe $14.2 million, and other countries $1.5 million.

James Bank - Sidoti & Company

Okay. So, the margin erosion in other countries then continues.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

It did through the fourth quarter. Looking at January we are starting to see in our opinion a bottoming of that and we believe that we have some programs in place in other countries segment that should start to turn that around as we run through 2008.

James Bank - Sidoti & Company

Okay. And the tax in 2008, should we still look for 29%, on average?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

I would tell you that we're going to be higher than that, we are likely be somewhere over 30%.

James Bank - Sidoti & Company

Okay. And you have taken the interest expense in the quarter, and I apologize, if you had gone over that, I would have missed it?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

I didn't go over that James, but the uptick is two-fold. There is some higher interest costs in our borrowings from non-North American business units and also we have during the course of 2007 the amortization of some previously terminated interest rate swap agreements that is now running out on us. So we have credits that have been recorded through interest expense, so they are starting to disappear out some terminated interest rate swaps.

James Bank - Sidoti & Company

Okay.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

And then we have finally, thirdly, swapped out some of the existing debt, variable rate debt and that has actually gone up a bit this year as well.

James Bank - Sidoti & Company

Okay. And lastly, your optimism seems to be a bid on the sense and I know you went over some macro data in your prepared remarks, John. Looking at GDP in the fourth quarter of 0.6%, you guys really on a GDP plus, you're practically at GDP 0.8, when just considering North America. So I guess, if I could may ask, what is it really about that's kind of causing a bit of trepidation, where you don't want to kind of give overbearing optimism heading into '08 especially when you do are involved in an infrastructure and the energy sector and the capital spending that's going in those sectors.

John M. Stropki - Chairman, President and Chief Executive Officer

Well, I think you hit it on the nose. I think we'll hope to be too optimistic with... our objective is to under promise and over deliver. I think there're just certain uncertainties that is very difficult for us to predict. As we said before, I think the company is a much different company than we've been as we went through other cycles like this that were not so tightly aligned durable goods as we have been in the past and the global aspect of our business as well as this huge build out of infrastructure around the world as relates to energy or mine either or the other, the other things that we talk about, is still very, very robust. So the challenge is trying to look at what the blend of may be the downside of durable goods and the upside of that is in... what does it end up being in terms of that blended equation.

James Bank - Sidoti & Company

Okay.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

And I would also add to that James that till then, if you've been following us during the course of 2007, we've seen a fairly consistent pattern of our year-over-year comps are falling from first quarter of 2007 to mid sort of teen, double-digit volume improvements and dropping down in the second quarter and dropping down again in the third quarter. It has as Walt pointed out, some of our volumes have been bolstered ever so slightly in the fourth quarter. We continue to see that stabilization in the first quarter of 2008.

But I would describe ourselves as somewhat cautiously optimistic that the trend line of year-over-year volume comps has slowed and flattened out and we are hopeful that it stabilizes itself and actually see some improvements going through 2008. But we're speaking from some experience during the course of '07 where volumes continually decreased from a comp a year-over-year basis, and only in the fourth quarter and starting into the '08 first quarter, we're seeing some stabilization.

James Bank - Sidoti & Company

Okay, that's helpful. And I understand the 2006 is a remarkable year in its own at 23% sales growth. I understand that '07 had given you a little bit of pause, but that... those comps were very helpful. Thank you, both.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

And the last thing I might add on volumes is, we've been very focused on North America, Walt's questions and your questions, I think have centered around that. But if you look at our European business, the volumes there are continuing to fall. For example, in Europe the full year's volumes were up 15%, in terms where the comps are falling. And the fourth quarter was up 8%. And if you were to look at the first quarter and second quarter, the volumes would have even been higher from the European standpoint.

And so when you look at the whole picture, we have stabilized in North America. Europe's volumes on a comp basis continue to come down from high double-digits to single digits. Our other countries; Asia and Latin America seem to be holding up with some consistent volumes, but the mix is... leaves us to be a bit cautious on our outlook.

James Bank - Sidoti & Company

Okay, no, I understand. Thank you.

Operator

Our next question is from Steve Barger with KeyBanc Capital Markets. Please proceed with your question.

Steve Barger - KeyBanc Capital Markets

Good morning.

John M. Stropki - Chairman, President and Chief Executive Officer

Hi Steve.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Good morning.

Steve Barger - KeyBanc Capital Markets

I would like to dig into that Asian or other country margin a little bit more. Is it a function of less pull-through, more competition, rising material prices. Can you just give us a little more color on what's going on there?

John M. Stropki - Chairman, President and Chief Executive Officer

Well, I think it's a factor of all of the things that you mentioned, with the exception of volume. We really don't have a significant volume concerns at this point other than we maybe a little bit behind the curve in getting some of our capacity build out to engage in some of the ongoing rolls in China. But I think we are rectifying that pretty quickly, I talked about the early acquisition and we very quickly ramping up production of submerged arc flux into the marketplace. We are a little bit behind on MIG wire, addressing that as quickly as possible and I think we are well positioned on cored wire.

We have the currency issue in Australia that we talked about. We talked about that in the third quarter. We had some changes that we could make in the fourth quarter that captured a little bit of momentum there, but we're being much more aggressive in that in 2008 to address those currency issues that we had. But as I mentioned, we will also be challenged with Australia from an export basis, will be very challenged, where they are selling in U.S. denominated dollar because of the roll up of their currency issues that are associated with that.

Steve Barger - KeyBanc Capital Markets

Just from a competitive standpoint, are you seeing new entrants over there or more aggressive move by some of the legacy players in China, as they kind of jockey for market share?

John M. Stropki - Chairman, President and Chief Executive Officer

Yeah, I think some of both, I mean, I think we said very early on that until the consolidation process becomes more mature in China that there're always going to be the smaller local players that are fighting for survival and they fight for survival based on price dynamics. I think the other interest dynamic that's taking place in China is steel prices in China are ramping up at a pace that's even faster than that of some of the other world markets.

Steve Barger - KeyBanc Capital Markets

Right

John M. Stropki - Chairman, President and Chief Executive Officer

As the Chinese steel companies try to capture some share and also with some of the lesser efficient operations were taken off stream and then the capacity challenges pushes a bit. So there is going to be some give and take in that in terms of the timing, but where people are on the steel price increases and when they implement consumable price increases to be reflected with that.

Steve Barger - KeyBanc Capital Markets

Yeah. And you talked about potentially increasing your inventory position to offset some rising steel prices, but is there anything else you can really do to hedge on a global basis or are you just kind of at the mercy of prices then you have to pass through?

John M. Stropki - Chairman, President and Chief Executive Officer

Yeah, there is... other than buying forward in inventory, there is really no steel hedge market. There were some talk about it, but I think with what's going on now nobody is going to enter into that this particular point in time. And I mean if you're following with what's going on in steel pricing its almost everyday there is a new announcement of some other kind of an increase, driven by again material cost. I mean, just this week, several of the large countries and or companies settled on a 65% increase for iron ore and the talk is the coking coal will be a 100% increase. And if you do the math on that, that will translate into anywhere from $150 to $200 return input cost increase for the steel companies and that's they are clearly going to pass that through.

Steve Barger - KeyBanc Capital Markets

Sure.

John M. Stropki - Chairman, President and Chief Executive Officer

And it will be our ability to execute our price increases, both from a time and from a magnitude that will determine a big part of how successful we are. And I think we demonstrated the last time we went through robust steel increase cycle that we were very effective with that; we plan to do the same thing this time.

Steve Barger - KeyBanc Capital Markets

I guess the difference would be that you have more international exposure potentially with more competitive markets on that side, which potentially that hinders that process or do you think that naturally that those local players will have to pursue the same aggressive tactics in terms of pricing.

John M. Stropki - Chairman, President and Chief Executive Officer

We think that we are very well positioned from a steel price side of things because of our global spent and the relationships that we've build up over the years. We think that some of our competitors, both domestic and internationally, are not so well positioned. We are hearing of people having to buy in the spot market, may be even have a supply, supply kind of issues. And I think that that gives us a bit of an advantage.

Obviously, we can't control what competitors do and the Asia market is by far the most competitive market and by far the most diversity in terms of the scatter of competitors in that marketplace and I am sure, we will see some irrational behavior in that market.

Steve Barger - KeyBanc Capital Markets

Okay. Coming back to the U.S. market, are you seeing any increase in imported consumables from low cost countries or low share countries, I should say, and what you sense in terms of those market share potential for those new guys, if any?

John M. Stropki - Chairman, President and Chief Executive Officer

My gut reaction is we are seeing less of it, not more of it because again as I said, the steel which used to be a very low price commodity in places like China is now globalizing to more of a much more world view. We operate in China and we are seeing bigger and more frequent and rapid increases in the fuel cost there than what we are seeing in our more mature markets. That obviously, has a big impact on there capabilities there and I think we have said a number of times that welding consumables are not labor-intensive kind of products. They are raw materials intensive products.

Transportation costs are becoming increasingly challenging from that part of the world and I think that some of the channels that we are looking at those options have taken a look at the challenges that presents from the supply chain situation and recognizing they don't want to be in a risk of putting their revenues at risk and their customer relationships at risk over unreliable supplier base.

Steve Barger - KeyBanc Capital Markets

Right, that makes sense. Okay, one last and then I'll jump back in queue. Can you talk about your inventory levels of your North American distributors right now, maybe sequentially or year-over-year, what's your sense on where those guys are?

John M. Stropki - Chairman, President and Chief Executive Officer

My gut reaction is it, it's a fairly black line kind of situation, I don't think that we have any field of distributor's increase or decrease inventories throughout the year for any particular reason. And if we announce the big price increase, there may be a small forward buy, we may have got a little bit of that in January, but we already see that level are off because they don't have the space or the cash or really the appetite and as long as they feel that they can raise prices in the market and I think everybody is, because everybody is going up, there is just not a lot of appetite for heavy inventory build ups. So I don't see... we've been asked that question a lot of times and as such no evidence of any kind of an inventory build or any kind of inventory reduction on the part of the distributor either.

Steve Barger - KeyBanc Capital Markets

Okay, thanks gentlemen.

John M. Stropki - Chairman, President and Chief Executive Officer

You're welcome.

Operator

Our next question is from Mark Douglass with Longbow Research. Please proceed with you question.

Mark Douglass - Longbow Research

Good morning gentlemen.

John M. Stropki - Chairman, President and Chief Executive Officer

Good morning

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Good morning.

Mark Douglass - Longbow Research

Hi. I have a question about the North American market again, it kind of went opposite of what I thought it would do. Exports did not grow as much as I thought they would have, and the signs exports, it actually did quite nicely. Any particular reasons you attribute to exports slowing in the fourth quarter?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Exports are still very strong. There is a... any slowing is the slowing in the rate of growth that we had during the course of the first three quarters of 2007. We still have a very strong order intake and sales level going into 2008 from an export standpoint. So, we don't see them slowing per se, but we did... might be put up some very significant year-over-year comps during the course of '06 and '07 from the export line standpoint.

So we're still optimistic that our export business will grow and grow rapidly in the double-digit type of pace arena for sometime to come. But admittedly, the fourth quarter was not quite high from the year-over-year perspective as what we've been seeing over the course of the last two or three years.

Mark Douglass - Longbow Research

All right. Do you think there was some timing?

John M. Stropki - Chairman, President and Chief Executive Officer

I think it's always challenging on the export side around the holiday seasons.

Mark Douglass - Longbow Research

Right.

John M. Stropki - Chairman, President and Chief Executive Officer

Lineup, containers and shipping and the holiday fell in the middle of the week and that would be the only thing that would be impacted from a timing side. As Vince said, I mean we have a very good backlog of export orders and we expect that to continue throughout the year.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

And I can say through the middle, or tail end of February for the first two months, we are seeing somewhat higher year-over-year growth than what we've booked in the fourth quarter, so.

Mark Douglass - Longbow Research

Okay, okay good. Yeah and then the uptick in North America was a pleasant surprise, it's your seasonally weak quarter and sequentially, you beat the third quarter, so at least with the... not including exports?

John M. Stropki - Chairman, President and Chief Executive Officer

Again, I think that those are being focused on those segments that are strong right now and the fact that we are stronger in those sectors of high technology products, rentals was build very strong. Again oil and gas, those areas are things that Lincoln has a very strong competitive position and I think as other competitors have and will report their results, you will see that we have captured some nice share in the quarter.

Mark Douglass - Longbow Research

Would you say a lot of that is in submerged arc because that certainly is a key?

John M. Stropki - Chairman, President and Chief Executive Officer

I call it more heavy fabricating than just submerged arc, I mean submerged arc is part of that but the heavy fabricating sector right now versus the lower end commercial or the retail sectors that are doing better and we'll get stronger in those areas.

Mark Douglass - Longbow Research

Right, right. And secondly on the euro, your North American EBIT margin has a nice uptick. The European EBIT margin slit a little bit. Is that --were you experiencing some cost price reasons that you didn't say North America or obviously, it won't be the same type of problems that you would have say in Australia trying to ship to the dollar denominated places and capacity expansions or...?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Well, Europe's fourth quarter tends to be slowest with holidays occurring in the fourth quarter. So we would, it's not unexpected that the third quarter would be a bit better from an EBIT margin standpoint in the third quarter or any quarters during the year, running up to the fourth quarter.

Mark Douglass - Longbow Research

Okay.

John M. Stropki - Chairman, President and Chief Executive Officer

Nothing new

Mark Douglass - Longbow Research

Nothing new... great, well thank you.

John M. Stropki - Chairman, President and Chief Executive Officer

Okay.

Operator

Our next question is from Greg Halter of Great Lakes Review. Please proceed with your question.

Greg Halter - Great Lakes Review

Good morning guys.

John M. Stropki - Chairman, President and Chief Executive Officer

Good morning.

Greg Halter - Great Lakes Review

I wondered if you have any input on what kind of impact currency may have had on your operating income or net income or both in the quarter.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Well, hang on a second Greg; let me look that up for you. For the quarter, operating income benefited by about $800,000 and net income by about $600,000 from the translation of the results this year compared to the prior year's range.

Greg Halter - Great Lakes Review

Okay. And looking at some of the markets specifically in North America, I wondered if you provide any commentary you may have on the auto, construction housing, things of that nature.

John M. Stropki - Chairman, President and Chief Executive Officer

Well, I guess I would... and I would cover this a little bit, but may be define it as best as I can. And the factors that we see is doing quite well now and I didn't forecast it for 2008, Ag equipment is booming, I heard where Deere has very extended deliveries, they are adding capacity to address the growing markets in the backlog type situations. Again, the pipe mills are extremely strong, running maximum capacity and expanding. Transportation vessels, ships and barges are in the same kind of situation and then any thing that has to do with power generation, whether its wind towers, LNG, power plants, again its all they could to try to keep up with the demand.

Steel building seems to still be relatively strong, although the trends look to be flattening, not growing, but still pretty strong faces. And then on the weaker side, obviously, we have the automotive situation, which everybody follows, who follows closer than us I would say. Construction equipment as it relates to retail or housing is slow, but construction equipment as it relates to mining, commodities and big products are still doing quite well.

Commercial products, water heaters, anything inside the housing, HVAC, obviously is quite weak and I think it will stay week throughout at least this year and the retail side of our business is I would say somewhat flat, although I think we are doing much better than the retail sector in total is doing because we have a new product reduction there that's it's doing quite well, sales are still fairly good.

Greg Halter - Great Lakes Review

Okay. And percentage of your business between equipment and consumables is it still falling around the 40-60 split?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Yes, it is around 60-40, it hasn't changed much for quite sometime.

John M. Stropki - Chairman, President and Chief Executive Officer

You may see some distortion of that again this year, the steel prices continue to escalate up, obviously, we will be accelerating the revenue side of the consumables that are much faster pace than the equipment side. And that could move the needle a little bit, but it generally settles back in once that's rationalized.

Greg Halter - Great Lakes Review

And talking about price, you discussed a price increase on February 1st. Can you discuss the magnitude of that increase?

John M. Stropki - Chairman, President and Chief Executive Officer

Boy, at equipment side I would say it was in the 3.5 to 4% range. On the consumables, it was much higher and much greater dispersed. Our welding flux is an example that primarily chemicals went up 15 to 20% and welding consumables were probably in the... the other welding consumables were in maybe say, 5 to 8% and there is more of that coming.

Greg Halter - Great Lakes Review

On top of the February 1st?

John M. Stropki - Chairman, President and Chief Executive Officer

Yes

Greg Halter - Great Lakes Review

Okay

John M. Stropki - Chairman, President and Chief Executive Officer

I would expect something I guess the second quarter of the year, if not sooner.

Greg Halter - Great Lakes Review

All right and what proportion of your debt is at a fixed rate and obviously the other piece being variable and what's your average interest rate in the quarter?

John M. Stropki - Chairman, President and Chief Executive Officer

Most of it is fixed. And Vince is looking up the numbers.

Greg Halter - Great Lakes Review

Okay.

John M. Stropki - Chairman, President and Chief Executive Officer

And I think the blended average is somewhere around 6%.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Yes, actually the weighted average effective rate on our debt after taking into account our swaps is approximately 6.4% for the year.

Greg Halter - Great Lakes Review

For the year, okay. And...

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

And so the bulk of it is still fixed, but we have swapped out a fair amount as well.

Greg Halter - Great Lakes Review

Okay. And on your balance sheet, I know historically you've had long-term investments, you just have a selected balance sheet data here. Do you have anything in the long-term investment category currently?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Yes, we do. We have long-term investments that are of a non-operating nature that in that long-term other asset category.

Greg Halter - Great Lakes Review

Okay.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

That the income or the gains that are generated off of that are reflected in other income, below the operating profit line. So does not aid or serve as a detriment to our operating profit.

Greg Halter - Great Lakes Review

Okay. And last one, you had mentioned the capital spending for '08, but I am not sure you indicated a range that that may fall into?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Our range to start of the year is going to be fairly broad one, between 60 and 70 million.

Greg Halter - Great Lakes Review

Okay great, thank you very much.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

And Greg, I think I realize on your question concerning Europe, appreciate that the European geographical segment did have the $9 million gain on the sale of property in the prior year.

Greg Halter - Great Lakes Review

Okay.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

And so that's what you might be looking at from year-over-year quarter basis in terms of Europe's EBIT profit was aided by... almost half of that associated with the gain on the sale of property.

Greg Halter - Great Lakes Review

In the prior year.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

In the prior year and so if you review that from an apples-to-apples basis; actually European EBIT has risen a bit on a year-over-year basis, excluding the gain on sale of property.

Greg Halter - Great Lakes Review

Okay, great. Thank you for clarifying.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

All right.

Operator

Our next question is from Seaver Wang with Utendahl Capital. Please proceed with your question.

Seaver Wang - Utendahl Capital

Hi good morning. Just want some details on what's going on with European rationalization of the orders you have, certain projects I guess you guys are completing, details there. And then I guess, the second question is just about retail in general, it's coming back, a little bit about the new product you mentioned, if you can give me growth rate?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

All right. Steve, this is Vince. To start on, the rationalization program and in Europe, it's all but... been wound down with the finalization of our move from Ireland to a new plant in Poland for our cutting apparatus business. And you see a small credit in the quarter because we recognize the partial supplement on a pension scheme that we're winding down in Ireland. We have no other programs that are active from a European rationalization standpoint that Irish to Poland rationalization has been going on now for the better part of two years and the Polish plant is up and running and the Irish plant has been sold as debt to our gain that we recorded in the prior year.

So we still need to completely line down the pension program so there might be some additional credit that we book during the course of 2008. But everything associated with that rationalization program has been completed except for finalizing the pensions and there are no other active programs that we are working on or have been approved to move forward currently in Europe.

Seaver Wang - Utendahl Capital

Okay. And the... just details on retail?

John M. Stropki - Chairman, President and Chief Executive Officer

I don't... I didn't quite understand your question when you say the details.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

We refreshed our machine product line in the retail group.

Seaver Wang - Utendahl Capital

Home Depot, Lowe's.

John M. Stropki - Chairman, President and Chief Executive Officer

Yeah, I mean... I think that's been stated. I mean we've had a product line that is in... for both of them on the shelves for probably close to 5 years and we totally redone that product line and modernized the look of the feels and the features of that. We've added some additional products and some cases gained additional space in the larger, more active stores, and we're quite optimistic that that will give us pretty good result.

Seaver Wang - Utendahl Capital

Okay. But... I mean you attribute the lack of new products, that's the reason why it kind of faltered a little bit?

John M. Stropki - Chairman, President and Chief Executive Officer

Well I wouldn't say that it faltered, but I mean... we have the great run up, and while retail sales in total were doing very good, we were going quite well with it. When retail sales started to slow, we were fortunate that we were ready with this new product line and that stopped any slide and held us, I would say, equal with where we had been.

Seaver Wang - Utendahl Capital

Okay.

John M. Stropki - Chairman, President and Chief Executive Officer

Focus and continue to grow.

Seaver Wang - Utendahl Capital

Thanks.

Operator

Our next question comes is from Holden Lewis with BB&T. Please proceed with your question.

Holden Lewis - BB&T Capital Markets

Thank you. Good morning. Can you... you are going back... the last time raw material were spiking and then we saw... I guess given a little history lesson and what should... we can expect this time. If I remember in your last time obviously it was good for revenues because you could accelerating your pricing piece and you kind of indicated that would happen. On the other hand, it tended to erode the gross margin just as the math worked out. So dollar wise, it was largely unchanged. So, I guess, can we expect to see the same things that in percentage terms, the gross margin comes under pressure as the revenue accelerates. Do you think that you can fully offset the raw material stuff pretty quickly or is there going to be kind of a meaningful lag, I believe there was last time.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Well actually Holden your memory is fairly accurate. What we did have happened and first time we would have to say that our compression and margin will largely be dependent upon two variables. One, the significance of the raw material price increases on their own. Now you might recollect in 2004, the price of the steel that we purchased went up in one year approximately 80 to 100%. And in that particular year '04 we saw almost monthly prices increases from our steel vendors and we were behind the trend during the course of 2004. So we did lose certainly a bit of margin and quite a bit more from a compression standpoint as raw material prices rose dramatically and we tried to keep up with it with quite a few price increases as well.

So it wasn't until fourth quarter '04 or running into 2005 that we believe we caught up and we are able to deliver the same gross profit dollars to our bottom line that we are able to deliver on a consistent basis prior to the dramatic increases in steel prices.

Now we do have a bit of experience under our belt. It wasn't that long ago that we went through 2004. So I would tell you that the organization is better prepared and poised to more rapidly raise our prices as steel costs rise. However it remains to be seemed how rapidly those steel costs may rise and how often. So if we get into a situation where steel prices are rising again on a monthly basis it will be a challenge for us to keep up with that but we are certainly experienced in that dynamic running out of 2004 and '05.

But we... to remind you, we had a margin compression in '04. We estimated of upward of 300 basis points simply by grossing up the P&L if you will by raising prices to try to match and stay on top of raw material cost increases.

Holden Lewis - BB&T Capital Markets

And if memory serves, I think that you had price increases back then of like 8 to 9% annually. I mean you wouldn't expect something of that magnitude at this point and so any sort of weakness with gross margin obviously wouldn't be of that magnitude either.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Well in some... we had price increases far exceeding 8 or 9% on our consumable side of the business. We rose... we raised prices double digits a couple of times during the course of that year. But again, Holden, it's... the variable, it's dependent upon our price increases or what will raw material cost do and we plan on being fairly active and aggressive and passing those costs through to our constituents.

Holden Lewis - BB&T Capital Markets

Right.

John M. Stropki - Chairman, President and Chief Executive Officer

What I would also say, Holden, that as I mentioned earlier, I mean all of our domestic and international competitors were faced with the same or worst situation and we are seeing evidence all around the world of primary competitors increasing their selling prices which we didn't see the early evidence of that back in the earlier period that you were talking about the 2003, '04 period.

Holden Lewis - BB&T Capital Markets

Okay. All right, great. Can you also comment, I guess, about... you... in your writing and in your dialogue you sort of mentioned that you are going to focus on investment with higher returns in 2008 and I guess I presume that you are always focusing on investments with the highest returns of course and so I guess I am curious about since the statement's there, are you changing how you're looking at any of these projects?

John M. Stropki - Chairman, President and Chief Executive Officer

No.

Holden Lewis - BB&T Capital Markets

Have you sort of taken some off the table, changed the mix of what you want to do, any sort of changes in where you've been and how you've been approaching it so far?

John M. Stropki - Chairman, President and Chief Executive Officer

No, I think what I said was we were going to continue to focus our efforts and investments in areas of higher growth potential.

Holden Lewis - BB&T Capital Markets

Got it.

John M. Stropki - Chairman, President and Chief Executive Officer

And not necessarily the higher returns. And we recognized what markets are growing and we are taking a very long term view towards those and making the strategic investments in those and it goes back to our story that we tell many times as... that we have to build the infrastructure in those growth markets in order to capture the long-term return and that's where our focus is.

Holden Lewis - BB&T Capital Markets

Right. And to that point I am trying to kind of asking is that just kind of a boiler plate statement or does it reflect that you have made or you have been taking some stuff off the table, given what you have seen in the macro. Are... is there any changes in your investment sort of philosophy given what your --

John M. Stropki - Chairman, President and Chief Executive Officer

We haven't taken any good investment opportunities off the table.

Holden Lewis - BB&T Capital Markets

Okay. And then I guess lastly can you give a little bit of color, you referred to steps you are taking to improve the Asian margins. Can you give a little bit more color on sort of what those steps are and how quickly they should begin to brighten and move the margin up again?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Well, let's say there's 2 or 3 primary initiatives that we are working on in our Asian theater and the first... it is better price realization and we've taken actions to raise prices on certain product lines that we have strength in market share and strength in end-user markets.

We are working at balancing our production requirements better against our market needs. And the third is we continue to look at areas of cost reduction and improvements and efficiencies to help our cost profile in the region as well.

But as I have mentioned in the past and certainly in our third quarter conference call comments, we are going to continue to be expanding our manufacturing, and our distribution, and our selling capabilities in the region. So we will clearly for some time become... be faced with the headwinds of adding cost ahead of a pricing and a margin dynamic that will deliver the kinds of returns that we've come to expect in other parts of our business.

But I would put at the top of the list, Holden, the managing of the... pricing a little more aggressively and actively than what we had seen in the third and fourth quarter. As far as your question on timing, as I said in some of my earlier comments, I think we are starting to see what I would view as the bottoming out of the decline and EBIT margins from this region that we experienced during the third and fourth quarter and I think we will start to see during the first half of 2008 a restoration of somewhat slightly higher margins in that other country's segment.

Holden Lewis - BB&T Capital Markets

Okay. And then just lastly the better pricing you are referring to, that's obviously... you expect that to be above and beyond what you need to do from a raw material standpoint?

John M. Stropki - Chairman, President and Chief Executive Officer

Yes.

Holden Lewis - BB&T Capital Markets

Got it. Great, thank you.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

You are welcome.

Operator

Our next question is from Walt Liptak from Barrington Research. Please proceed with your question.

Walter Liptak - Barrington Research

Oh, thanks. I am glad I made the cut, we are [ph] a little bit long. But --

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Walt... this is your last question Walt.

Walter Liptak - Barrington Research

All right. Can I do a last one and then a follow-on? The... let me take a shot at this. About Asia, what... for the full year, what was the EBIT margin? We don't know it was 1.5 for the quarter.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

I am sorry, could you ask that again?

Walter Liptak - Barrington Research

Oh, for the... in other countries, what was the operating profit margin for the full year.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Okay. Hang on.

Walter Liptak - Barrington Research

And then the question for you and for John. Given the pluses and minuses, the expansion, et cetera in Asia, how many basis point improvement can we expect or would be reasonable to expect in 2008? 200 basis points, 300 basis point of operating profit improvement?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

The answer to your first question, the other country's segment delivered 4.9% EBIT margin for the full year.

Walter Liptak - Barrington Research

Okay. And can that get up to 7 or 8, 9% in 2008?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

I am not going to make those kinds of forecasts.

Walter Liptak - Barrington Research

Okay, I thought I would try.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

But, yes, try and try again. Look what I will reiterate and what we have said on a number of occasions on the past is that we have a track record of strategically penetrating geographies where Lincoln has little or no market share. We have a track record of building our infrastructure, importing our products into those markets and steadily but surely gaining market share and margins as we grow our footprint and deliver to the marketplace the full suite of Lincoln products across the consumables and machine spectrum.

So I... as much I like to make predictions, I can't say when that may occur in the other country segment or Asia for that matter or China more specifically. But we are confident that our model works and we've shown and demonstrated over our history in penetrating Latin American markets, European markets and last of which Asia and the subcontinent that we are able to gain share, fill our complete product portfolio out to end users and distribution and drive that operating profit margin up to what you see in the rest of the business.

Walter Liptak - Barrington Research

Okay. All right, that's great. And then if I do a follow-on to earlier another question.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Last one.

Walter Liptak - Barrington Research

Cash... with the cash on the balance sheet, what kind of interest income can we expect? What kind of rate are you getting on that?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Well right now I'd say it around 4.5% is what we are getting.

Walter Liptak - Barrington Research

Okay. All right. Thank you.

Operator: Our next question is from James Bank with Sidoti & Company. Please proceed with your question.

James Bank - Sidoti & Company

Hi guys, a real quick one. The... if I could take a cumulative absolute dollar for J.W. Harris in the soldering and brazing, that goes into HVAC more than residential area, as well as the products that go into the Canadian automotive sector. Could you give us a ballpark as to the breakdown percentage of revenue that those two items are on a cumulative basis?

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Well we don't report that publicly James, so I'd be remiss to provide you with those types of figures. But I would say that it is clearly less than 10% of our aggregate business.

James Bank - Sidoti & Company

That's perfect. Thank you.

Operator

There are no more questions in queue. I would like to turn the floor back over to Mr. Petrella for closing comments.

Vincent K. Petrella - Senior Vice President, Chief Financial Officer and Treasurer

Thank you very much Latonia and we do appreciate your participation in this fourth quarter and full year call. We look forward to seeing those of you that are coming to New York for our NASDAQ conference on March 7th, and hopefully we're... if we miss you there, we will talk to you on our next call for the first quarter 2008. Thank you very much.

Operator

Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

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Source: Lincoln Electric Holdings, Inc. Q4 2007 Earnings Call Transcript
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