Lincoln Electric Holdings Inc (LECO) 2010 Q2 法說會逐字稿

Greetings, and welcome to the Lincoln Electric second quarter 2010 results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Thank you, Kristina. And good morning to all of you, and thank you for joining us on Lincoln Electric's 2010 second quarter earnings call. Financial results for the quarter were released this morning, prior to the market's open. Lincoln's chairman and Chief Executive Officer, John Stropki, will start the discussion this morning and provide commentary on the quarter and the regions and segments.

However, before we start that discussion, I want to remind you that certain statements made during this call and our discussions may be forward-looking, and actual results may differ from our expectations. Risks and uncertainties that may affect our results are provided in our press release and in our SEC filings on Forms 10-K and 10-Q. Let me now turn the call over to John Stropki.

Thank you, Vince. And also, good morning to everyone. As we continue to experience moderate growth across a broad spectrum of global markets, Lincoln Electric is leveraging its industry-leading product portfolio and benefiting from a streamlined manufacturing footprint. Our strong financial performance in the second quarter is another impressive barometer that our global strategy is working.

We achieved significant sales growth in the second quarter as our new products continue to meet customer demands for improved operating efficiencies and our strategic acquisitions accelerated growth in targeted geographies. Total sales for the second quarter were $516 million, up 25% from the same quarter last year. On a sequential basis, revenue grew 9% compared with the first quarter of 2010. This marks the fifth consecutive quarter of sequential revenue growth for the company. During the quarter, our operating performance improved dramatically. Operating income, excluding special items, more than doubled to $49.8 million, a rate of 9.7% of sales, from $24.8 million, a rate of 6% of sales in the 2009 second quarter. Vince will provide more details of the numbers in a few minutes, but first I want to cover the highlights of the economic environment for our industry by region, review some recent developments in important end markets, and take a quick look at our segments.

First, the general economic and market sector prospects for the second half of 2010 appear to be stabilizing. Many of the economic forecasters are projecting moderate growth during the second half, with the more developed economies having growth rates in the low single digits, while the brick countries are expected to continue experiencing high single-digit growth rates in the second half. As we have discussed in the past, global steel production represents a key indicator impacting our future business level. As such, steel production continues to grow, as the World Steel Association reported June 2010 production at 120 million metric tonnes, or 18% higher than June 2009. China's production in June of 54 million metric tonnes represented over 45% of global production.

However, growth was not limited to just China. As US production was up over 65% for the comparable period, and European Union countries also had impressive growth comparisons led by Germany's 53% increase. Global steel capacity utilization rates are showing some modest decline, as June utilization was at 80.6% globally compared to 82% in May, and the forecasts for the remaining summer months are conservative. The outlook for the steel industry, as rated by Moody's, is stable over the next year and a half. With China and India and the emerging markets serving as the demand flywheels, and stabilizing demand in North America and developed economies driven by autos, construction equipment, and energy-related infrastructure needs.

Speaking of the transportation sector, the automotive light truck sector global production is forecast to exceed 64 million units, an 11% growth compared with 2009. Lincoln's strong offering of robotics solutions and application-specific consumables will continue to help us grow market share in this important segment.

Although China and India, and more recently -- excuse me, China and the US, and more recently India -- are the dominant automotive manufacturers, another particular bright spot is the sales for German car industry's Big Three -- BMW, Daimler Benz, and Volkswagen, and they have rebounded faster than expected. In June, their reported overall car sales were up 13% for the month. These manufacturers benefited from a weaker Euro and the growing number of luxury car purchases from China, and to a lesser extent, the United States. Our European operations are experiencing sales growth volumes as result of our strong product offerings in this region, and we have established ourselves as the supplier of choice with several key customers in this segment.

The global heavy fab industry is being supported by strong industry demand for mining equipment, transportation infrastructure, and power transmission projects. Increased demand in China and other regions of the world is resulting in significant capacity additions for this sector. As an example, Caterpillar has announced plans to accelerate expansions of its large mining truck capacity in Illinois, based on strong customer demands to equip new mining expansion projects in key emerging markets.

Global excavator demand is also exceeding supply. Caterpillar plans to increase capacity by 400% for excavator production in Jinzhou in China. Tomatsu has recently invested over $140 million to open an excavator facility in Russia, and in Bangalore, India, Volvo is expanding a facility in the support of excavator production. All great news for Lincoln Electric.

In the oil sector, prices continue to be volatile, in the $75 to $85 per barrel range. With the International Energy Association forecasting demand increases up to 1.5% through 2015, based on the projected 2015 demand, it is anticipated that leading energy companies will continue to increase capital spending on oil and gas exploration in 2010 and beyond. Prior to the BP oil disaster, nearly everyone was bullish on new projects being started in the Gulf. While the US oil exploration situation is uncertain in the near term, other regions of the world continue to drill, and the industry expectations are that much of the excess capacity from the Gulf moratorium will migrate to developed offshore reserves in Brazil, or to support other locations around the world.

Not very good news for US jobs, but a neutral impact from Lincoln global view. The pipeline and pipe mill sectors are critical to transporting oil and gas to end users, and long lead-time projects insulate this sector for quite some time. Significant programs continue to be funded in South America, the Middle East, Europe, North America, and Russia. And Lincoln has a very strong participation in this market, and we have introduced a number of new high-technology equipment and consumable products targeted to strengthen that already strong position.

On renewable energy, the administration has just approved the nation's first offshore wind farm. The Cape Wind project will occupy a 25-mile section of Nantucket Sound and will consist of 120 towers generating enough energy to power over 200,000 homes. Globally, offshore developments are accelerating rapidly, and are expected to far outpace land-based systems. Our leading position with this industry bodes well for our future, as such.

As we have mentioned in the previous calls, governments around the world are considering nuclear power as an important energy option and solution to lowering greenhouse gases while supporting rising energy demand. China's power generation sector is still accelerating its nuclear plant construction and expansion program, and we, simultaneously, are strengthening our position in this important market sector. Of the 32 nuclear plants scheduled for North America, two sites have started construction in the Southeast. Our products have been qualified at these sites, and we anticipate that Lincoln will be written into the design specification for a majority of these plants. Also, Bechtel and Babcock Wilcox recently announced that they will partner to certify a small commercial reactor to enhance getting even smaller utilities into the game, demonstrating the optimism for the future of nuclear power.

Clearly, this is a great opportunity for welding companies, and Lincoln Electric is positioning itself to be the welder of choice. Our broad product portfolio continues to provide the construction contractor with a competitive and complete array of specialty consumables, equipment, and accessories for all of these applications. Looking at the specific segment numbers, North America's sales in the second quarter were up 22% to $254 million, compared with the year-ago quarter. Overall, North America's sales growth continues to be aided by strong export sales, as a result of increased worldwide demand for our high-technology products designed, developed, and manufactured in Cleveland. Export sales of machines from the US were up 32% on a year-over-year comparison. And although China continues to be a major customer for these machines, we are now also experiencing strong growth in several other important regions of the world.

Overall sales growth has benefited from strong market acceptance of many of our new and enhanced products developed within the last 24 months. We have also successfully wrote out new product promotional campaigns aimed at enhancing our market position and customer awareness of our new product portfolio. Our Money Matters campaign has been very well received by our traditional North America distributor channels. In the US, economic indicators continue to show a recovery is clearly underway, with the USGDP expected to grow at an annual rate of over 3%. Manufacturing industrial production output, excluding high-tech, decreased in June by 0.4% from May, and is now 7.6% above the comparable level in 2009. The industrial recovery in the US is clearly stronger than the recovery in the general economy, as inventory builds and certain sectors are supporting the growth, and manufacturing production is predicted to grow 6% in both 2010 and 2011.

Finally, manufacturing capacity utilization rate, excluding high-tech, had a modest decline in June, down to 71.2% compared with 71.5% in May. In Canada, a solid recovery is underway, with GDP forecast in the 3% to 4% range. Key indicators are the Canadian automotive sector has improved. Also, the Canadian oil stands, with all their related infrastructure activity, is still attracting large investments, and now the Canadian shipbuilding sector may also be on the rebound, with the Canadian government budgeting $35 billion on a 28-ship fleet for Navy and Coast Guard vessels. In Mexico, after being the worst hit regional economy during the recession, a rebound in GDP growth is expected in the 3% to 4% range. The Mexican auto export market has led the rebound, with vehicle production increasing 79% year-over-year to 522,000 units during the first quarter.

Turning to Europe. Lincoln Electric Europe sales of $88 million in the quarter were down 4% on a year-over-year comparison. However, European sales volumes actually grew 4% on a comparative basis, but foreign exchange and pricing impacts resulted in a net dollar sales decline. Our European rationalization efforts are expected to continue to help improve operating results throughout 2010, especially if market conditions improve. The Euro zone continues to face economic challenges. In addition to the sovereign debt crisis facing Greece and Spain, a fragile economic recovery is the best outlook for this region. One bright spot, however, is the 2.6% growth in Germany's manufacturing output in May, which was aided by the country's automotive industry rebound discussed earlier. Expectations are for that trend to continue in the second half of 2010.

Turning to South America, sales during the quarter were $28 million, which is an increase of 27% year-over-year. The region experienced strong growth in both consumable and machine sales. Volume growth in the region was over 40%, and pricing had a variable -- a very favorable impact in sales. However, these results were dampened by the foreign exchange impact, especially the significant devaluation of Venezuelan currency. Expectations are for continued improvement, as both countries in the region are forecasting positive GDP growth in 2010. Brazil has seen its GDP growth forecast revised from about 5% up to nearly 7%, with most other countries in the region expecting flat to low single-digit growth. Rising commodity prices and fiscal stimulus continue to support large scale mining, oil, and gas exploration, including offshore projects throughout the region.

In Asia Pacific, China's economy grew nearly 12% in the second quarter. Indicators are that China's growth will slow somewhat to 9% in the second half of the year, but still very significant growth in a major-sized economy. The region's positive economic environment benefited Lincoln Asia Pacific. Sales, including our Jin Tai acquisition, more than doubled in the second quarter to $84 million, compared with $38 million in the second quarter last year. Our operating performance continues to improve in the region as we continue our factory rationalization and acquisition integration initiatives, resulting in the region having significantly improved profitability.

Our new Hurley welding consumable plant is nearing completion. The plant, which is expected to give -- be completed and operational in the fourth quarter, will give us additional flux and steel wire capabilities to serve the heavy infrastructure spending in China. We are also expanding our consumable capabilities in Lu Wan County and in Changqing. Increasing labor costs and the slower productivity improvements are impacting industry in China and will drive technology shifts in manufacturing and engineering. Any shift towards higher efficiency in automation is a plus for Lincoln in the region.

India is still forecasting GDP growth of over 7%, compared with 6.7% in 2009. As I mentioned earlier, India's booming automotive sector and the pipe mill business are key segments supporting our rapid growth of our new Shanghai facility. As a result of market acceptance, we are making incremental equipment investments at our facility to expand solid wire capacity to meet these needs.

In other areas around the world, shipbuilding orders are seeing some signs of life, and Korea is showing positive signs, as well as welding machines orders recovering in Japan. Looking at our Harris Product Groups, our cutting, braising, and soldering products business. Sales in the quarter were $68 million, up 15% year-over-year. Our brass tech business in Brazil is continuing to grow market share and leverage our broader Harris equipment and consumable product offerings in Latin America through its extensive distribution network. Harris was also aided by higher pricing related to the increased commodity prices for silver and copper used in its consumable products. For WCTA, one of Harris's product segment businesses, overall retail sales at Home Depot, Lowe's, and other DIY outlets were negatively impacted by customers retrenching after the strong first quarter expenditures on home improvement products. Key drivers affecting the business growth going forward is the modest growth rate in the US for HVAC replacement market, new housing starts, and construction spending for residential and nonresidential products on a global basis. That's an update on the regions and the market segments.

Lincoln's global reach, both in terms of manufacturing footprint and our ability to transfer value-added customer solutions quickly around the world, is Lincoln's most distinct competitive advantage in the marketplace. In the past six months, we have signed several global agreements with market-leading companies in the heavy fabrication, pipeline, automotive, and offshore segments. These agreements makes us the supplier of choice with these key customers as they expand around the world. For example, one of these agreements allowed us to leverage our strong position with a large manufacturer of heavy equipment in North America to provide them with products for their expanding or new facilities in Brazil, Mexico, and India. This pull-through capability is a real and unique market advantage for Lincoln, as we accelerate our growth around the world.

Again, we are pleased with our quarterly and year-to-date performance in 2010. If market conditions in the industry continue to improve, we are exceptionally well-positioned to deliver continued improved financial results in the quarter ahead. Now Vince will cover the financial results in detail.

Thank you, John. As pointed out by John, our second quarter 2010 financial results resulted in a significant year-over-year improvement in revenue and operating margins from the second quarter of 2009. Consolidated sales were up 25% compared to the first quarter, and EBIT margins, excluding special items, improved to $51.3 million, a 109% increase. Second quarter also represented another quarter of sequential sales growth, as sales were up over 9% compared with the first quarter of 2010. On a year-over-year basis, quarterly sales in North America were up 22%. South America increased 27%, and Harris grew by 17%, while Europe declined by 4%. Europe's volumes did increase approximately 5%. However, pricing was down 4%, and foreign exchange decreased Europe's sales by another 4%. Asia's revenues in the quarter more than doubled, aided by the Jin Tai acquisition in China last year. Without the effects of the acquisition, Asia's sales still grew by 11%.

On a consolidated basis, volumes increased reported sales by 16% over the prior year, and foreign currency effects decreased sales by about 1%. The pricing impact on sales was essentially flat, and acquisitions contributed an increase of nearly 10% year-over-year. For the first six months of 2010, sales in North America were up 14%, South America increased 19%, and Harris grew by 17%, while Europe declined by 4%. Again, declines in pricing drove the overall decrease in sales dollars in Europe. Asia's revenues more than doubled, aided by the Jin Tai acquisition. Again, without the effect of this acquisition, Asia's sales grew by 13% in the half year.

For the half year, volumes increased reported sales by 11% over the prior year's comparable period, and foreign currency effects increased sales by about 1%. Pricing decreased sales by 2%, and acquisitions contributed an increase of 9%. Please refer to the attachments to the press release for details of volume, price, foreign exchange, and acquisition changes by segment.

Second quarter gross profit margins increased to 28.8% of sales, compared with 25.7% of sales in the comparable prior year period. The increase in gross margin resulted from leverage from increased volumes, cost reductions, and rationalization efforts around the world. We did record a LIFO charge of $2.4 million in the quarter, reducing gross profit, reflecting our expectations for a rising costs environment. LIFO was a credit of $5.9 million in the second quarter of 2009. Cost of goods sold also included a $2.3 million charge related to the Venezuelan devaluation. Gross margins without this charge would have been 29.3%.

Now for the six month period, gross profit margins increased to 27.6% of sales, compared with 23.8% of sales in the comparable prior six months. Again, the increase in gross margins resulted from leverage from increased volumes, the cost reductions that we instituted, as well as rationalization efforts around the world. A LIFO charge of $5.3 million was recorded in the six-month period, reducing gross profits. We expect to continue to record LIFO charges during the remainder of 2010, approximating the run rate incurred for the first half of the year.

In the first half of 2009, LIFO credits were $5.9 million. Now, SG&A expense for the quarter increased $22 million to $101 million, or 19.6% of sales. The increase in SG&A expense was driven by higher bonus accruals of $7.3 million, as operating profit increased substantially on a year-over-year basis. Legal expenses were $4.1 million higher, and the acquisition of Jin Tai added another $1.6 million in incremental SG&A expense. Foreign currency translation increased reported SG&A expenses by $2.5 million in the quarter.

The prior year's SG&A expense included a gain of $2.1 million from a pension settlement. Excluding the pension gain from the prior year, SG&A as a percentage of sales was 19.8% in 2009's second quarter. SG&A expense for the six-month period increased $32 million to $189 million, or 19.1% of sales. Again, the increase in SG&A was primarily driven by higher bonus accruals of $18.9 million. Legal expenses were up $7.3 million, and the acquisition of Jin Tai added $3.5 million in incremental expense for the half year. Foreign currency translation increased reported SG&A expenses by $4.4 million, and the prior year's SG&A included the $2.1 million gained from a pension settlement.

Operating income for the quarter was $51.1 million, or 9.9% of sales, compared with $20 million in the prior year, 4.8% of sales. The quarter included special items of $1.2 million for rationalization actions in Europe to consolidate manufacturing facilities and a charge of $2.3 million related to the Venezuelan functional currency change and a devaluation in the Venezuelan currency of the Bolivar. Asia Pacific and Harris Products both realized gains on sales of assets of $4.3 million and $400,000, respectively. The prior year second quarter included a charge of $6.9 million, primarily related to rationalization charges associated with employee severance and headcount reductions. In addition, as previously noted, the prior year included a pension settlement gain of $2.1 million reported in the SG&A line. Excluding these special items in both years, adjusted operating income was $49.8 million or 9.7% of sales, compared with $24.8 million or 6% of sales in 2009. Please refer to the attachments to the press release for a reconciliation between operating income and adjusted operating income.

Operating income for the six-month period was $85.9 million, or 8.7% of sales, compared with $20.9 million, or 2.5% of sales in the same year-ago period. The 2010 first half special items were a net credit of $2.8 million in rationalization activities and a $2.3 million net charge from the Venezuelan functional currency change and currency devaluation. The prior year's first half included a charge of $18.6 million, primarily related to rationalization activities associated with employee severance and headcount reductions, offset by the $2.1 million pension settlement gain. Excluding these special items in both years, adjusted operating income was $85.4 million, or 8.7% of sales, compared with $37.4 million, or 4.5% of sales in 2009.

On a geographical segment basis and excluding special items, North America improved its EBIT margin to 14.3% of sales, Europe improved from a loss in the comparable quarter in 2009, achieving a 9% EBIT margin, Asia Pacific reported a 1.8% EBIT margin, while Harris Products Group rose to 3.7% EBIT margins. Finally, South America recorded a 3.5% EBIT margin in the quarter, again, all excluding special items. Geographical segment EBIT, adjusted for special items for the half year, was North America 13.2%, Europe 5.1%, Asia Pacific 1.6%, South America 4.5%, and the Harris Products Group 4.1%. Again, please refer to the attachments to the press release for details of our segment financial information.

Net income for the second quarter was $32.5 million, or $0.76 per diluted share, compared with $15 million, or 35% per diluted share in 2009 second quarter. Excluding special items, our net income was $32.9 million, or $0.77 cents per diluted share, compared with $14.5 million, or $0.34 per diluted share in the 2009 first quarter. The effective tax rate for the second quarter was 33.5%, and the half year rate was 32.7%. The effective tax rate is lower than our statutory rate, primarily because of income earned in lower tax rate jurisdictions. Operating cash flows for the quarter were $32.1 million, compared with $62.6 million in the prior year same quarter. Increased net income was more than offset by working capital needs to support higher sales levels.

Now, for the six months of 2010, operating cash flows were $47.7 million, compared with $134.2 million for the last year's half. Again, the increase in cash flow from net income was more than offset by investments in higher working capital required to support the increase in sales levels. Working capital efficiency did improve from 23.2% to 22% of sales at June 30, 2010, compared to the end of last year, December 31. During the first half, the company invested $23.5 million in capital expenditures.

At this point in time, we expect to spend between $40 million to $50 million on CapEx in 2010. Our depreciation and amortization expenses are running at about $57 million annualized run rate in 2010. During the first six months of the year, we paid cash dividends of $23.8 million. We also purchased $12.9 million of treasury stock under our share repurchase program. Our weighted average shares outstanding for the quarter end of June 30, 2010, on a fully diluted basis, was 42.708 million shares. Shares outstanding at June 30, 2010 were 42.434 million. We closed the quarter with a cash balance of $388 million, or a net cash balance of $264 million, and a total debt to invested capital of approximately 9.2%. The economic environment has improved markedly during the first half of 2010. The continuing breadth and speed of this recovery is, at this point, unknown. However, based on our current order and sales trends, combined with our significant and growing market presence around the world, we should continue to expect to have -- record strong operating results. That's the extent of my prepared comments. I'd like to open the call to any questions. Kristina?

Thank you.

(Operator Instructions)

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

Yes, hello. Good morning, John. Good morning, Vince. This is actually Joe Box in for Steve.

Hello, Joe.

I was actually just hoping to get a little bit more detail on your stabilization of volume comment that you guys had in the release. Does it seem like that's an across-the-board trend, or would you say that that's more isolated to a few specific segments?

I would say that it is more variable amongst the segments. As we tried to state in the prepared remarks, there are certain segments that are still doing exceptionally well. Not only better than they were this time last year, but appear to be accelerating. Construction equipment, automotive in particular, particularly automotive outside the United States. So the stabilization trend is what we tried to highlight there, is that we have seen very rapid growth, 25% sales growth in particular in the second quarter, and we just don't expect that year-over-year sequential growth to continue. We expect it to start flattening out a bit from the rapid growth that we saw in particular in the second quarter of this year.

Yes, I think that makes sense. Just a follow-up on that. You know, with those volumes starting to stabilize and the growth rate moderating, how should we think about normal seasonality? I mean, if you go back over the last cycle, it looks like your revenues in 3Q tend to slightly lower than 2Q. Do you think that we're going to see a reversion to that typical trend, or should we expect to see continued sequential growth in 3Q?

Well, that's a tough call, Joe. I mean, I think -- again, the whole economic environment is much more difficult to predict. You're absolutely correct in that the third quarter is traditionally lower than the second quarter, and if we were in a normal situation that would be very easily to predict. I would expect that we will see year-over-year growth, important growth, but we don't really expect it to be the same kind of sequential growth that we saw quarter to quarter to quarter.

Okay. Last quarter you guys had talked about a 3% to 5% price increase in all regions, pretty much across the board. It looked like you had some pretty good pull-through in both South America and Harris, offset by declines in North America, Europe, and Asia. Can you just talk about the disconnect and maybe give us a sense of what we should see on the pricing front over the next couple of quarters?

Yes, Joe, this is Vince. Let me start by talking about the two segments that are a bit of anomalies compared to the rest of the world, and that is that South America, which had a very large price increase. And the South America price increases are largely driven by the highly inflationary environment in Venezuela. So we operate in a hyperinflationary economy there, and it requires us to raise prices fairly dramatically to keep up with inflation. So that has driven South America the last few quarters, and will continue to drive an outsized pricing environment in that segment.

And then the Harris Products Group has, again, a significant amount of its sales tied to more precious metals, other than steel. They have a lot of silver and copper, and their pricing is driven up and down, as the case may be, by those commodities moving. And so the 9.4% increase in the Harris Products Group is largely driven by precious metals rising year-over-year by a significant amount. Now, the rest of the segments -- North America, Europe, Asia Pacific -- a little bit more traditional welding type of pricing environments. A stronger pricing environment in North America, where we decreased prices year-over-year 1.5%, a little more difficult pricing environment in Europe and Asia Pacific, where prices came down a little over 4%.

Can you give maybe a --

Joe, Vince was talking about the year-over-year price decreases. When we talked in the second quarter, the price increases that we were implementing would have been sequential price increases, and we think that in most segments that the more normalized sectors that Vince was talking about, we saw that sequential increase in each of those markets in which we implemented those price increases.

Okay. All right. That's fair. I appreciate the comments.

Okay. Thank you.

Our next question comes from the line of Mark Douglas with Longbow Research. Please proceed with your question.

Good morning, John and Vince. How are you?

Good, yourself?

Just fine. Vince, if we can talk about Asia a little bit. You know, their volumes are increasing, you have Jin Tai, your expanding capacity. Is a lot of the capacity expansion, quite frankly, the reason for a lot of the margin performance there still kind of lagging and then the profitability? And how should we think about incremental margins going forward? Are they still going to be kind of weak as you're still continuing to increase capacity?

Yes, I think they will be. It's not only the physical capacity of the plant, but we're building a business there, and it's still relatively early in the timeline of that business building. We're adding SG&A. We're adding capabilities throughout our organization, R&D. We're building a distribution network. So we're in the process of building a business in probably one of the most dynamic markets and most rapidly growing markets in the world. So, you know, certainly capacity utilization and some parts of the business are weak. We're adding, though, capacity in some parts of our business that are obviously in need of that, in our high growth and higher profitability parts of the business. So our expectations would be that we will continue to see an incremental improvement in EBIT and operating profit margins in the region. We will also tell you that it will be somewhat erratic as we take two steps forward and maybe one back from time to time, but we're confident that we will continue to improve our operating performance in that region over the intermediate and longer term.

And, Mark, a good example of that would be our India facility. We built a pretty significant footprint that we thought would meet the market demands for the next three to five years, but we didn't populate that with the production equipment for a five-year forecast, just the size of the facility. So we've got a fairly high fixed cost there in depreciation and the SG&A to support a new facility. As we add this incremental capacity that I talked about, that we committed to do, that will come with really no incremental SG&A or depreciation costs of significance and should allow us to accelerate the improvement of the margins in a facility like that. So as we go through these cycles of expanding these businesses, that's going to be a very consistent story.

Right. Is India actually exceeding expectations at this point?

I would say it's exceeding expectations from a volume side. We're ahead of where we thought we would be in terms of market penetration. Some of that's that the Indian economy is doing exceptionally well, particularly the sectors that are important to us, around infrastructure, construction equipment, automotive, pipe mills, those kind of sectors that we really focus that plan on. And secondly we're taking share faster than we thought we would. We've had some good local competitors, but I think that the investments that we made in producing a very high-quality product and building a very strong sales organization that can really support these global customers in a way that they're not accustomed to be supporting is allowing us to get the kind of traction that we're getting.

Right. And Vince, what's the split between consumables and equipment right now on sales?

About 66/34. Consumables 66%, equipment 34%.

Okay. And then finally on Europe, if we can talk about that a little bit. Nice, very nice improvement in Europe, as you're getting the benefits of all your rationalization there. Is that substantially complete, or do you expect some savings even if volumes are a little weak in Europe, if Europe continues to lag, could you still see some savings there in Europe?

Well, most of the rationalization activities are essentially complete in Europe. There will be, through the remainder of this year, some more costs trickling in, as well as some more savings coming through. But I will say that it was a particularly good quarter in Europe, and I would say for the rest of the year we'll be challenged to put up a 9% EBIT margin in that segment for the rest of the year.

Because of costs?

We had some -- no, we had some --

Material costs?

Some good margins on particular transactions and business units there that I don't think will be repeatable for the last half of the year.

Oh, okay. Thank you.

Our next question comes from the line of Tom Hayes with Piper Jaffray. Please proceed with your question.

Good morning, guys, this is Dan Garafalo on for Tom. Congrats on the quarter. Just as far as you just touched on -- just piggybacking off of Mark's question on the consumable and equipment machine split -- I was just wondering your thoughts on the progress in the CapEx environment globally as well as just any insights you might have by geographic segment. I know you had indicated some concern with regard to the domestic CapEx environment last quarter, and is there any incremental change in your view at this point?

Well, you know, it's a good question, and as far as that split is concerned, the color I can give you is that we saw a greater increase in year-over-year machine sales than we did consumables, but that wasn't necessarily the case in the first quarter of this year.

Yes.

So, that would tell in me that there's more activity going on in the capital expenditure world of our (inaudible) industry and that certainly bodes well for -- as a good indicator for future CapEx and machine expenditures, as well as follow-on needs on the (inaudible). So, that certainly is a bright spot to see that machines are starting to grow a little bit more rapidly (inaudible) than at this point in the cycle.

Sure. What would be the, kind of the normalized split that we would -- you would see?

Well, traditionally, it's been closer to 60/40.

Okay. Got you. And then just one quick follow-up question. Just in terms of -- you called out on the release, and I think you mentioned in your comments, kind of a benefit from recent product introductions. Is that something that you're able to quantify for us in any way?

I don't think we're in a position to give that kind of granularity on our product introductions.

Okay. I understand. Thanks, guys.

You're welcome.

Our next question comes from the line of Walt Liptak with Barrington Research. Please proceed with your question.

Hi, good morning, everyone, and nice quarter.

Thanks, Walt.

I wanted to follow up on a question you talked about with North America and the improvement that you're seeing. Are -- did you see sequential monthly improvement throughout the quarter?

Yes, we did.

Okay. And is that continuing into July?

Well, July is -- I would describe as a flattish, if -- to the June month, and -- which is, you know, a good result for us. We talked about earlier the first question in the call -- we typically see some slight downturn in the second quarter from -- I'm sorry, the third quarter from the second. Second is generally our best quarter of the year in normal circumstances. So sales are holding fairly firm. It's -- we'll likely see some slight decline, however, in the third versus the second quarter.

Yes, but Walt -- but just again to clarify the answer that I tried to give, is that, again, sequentially we have the year-over-year issue, that we have the month-over-month issue, and what we're seeing is the kind of increases that we've experienced year-over-year are continuing, but we are seeing the seasonality of the July/August forecast of softer months just because of traditional shutdowns in key customers and/or markets like Europe.

Okay. And thanks for that, but as I'm thinking about what the new normal is for you guys, I went back and looked at the North American revenue run rate. And it looks like for a long period of time in '06, '07, '08, you were doing about $350 million per quarter pretty consistently, which is $100 million below the run rate now. And I wanted to just ask you -- you're still running well below sort of that -- it's not even a peak, but kind of a long-term normal level. You know, what do you need to get back that other $100 million of revenue?

Well, I'll start by saying that there's no such thing as normal, but certainly for us to get back to where we were in those years, '07, '06, we need the economy to -- and the industrial economy, in particular -- to grow back to the kind of industrial production that we had during '06 and '07. And as you rightly point out, we are a long way from those peak volume levels that were achieved during the economic environment that we had before us in '06 and '07.

Yes, Walt, and I think it goes back to the comments we talked about in the prepared remarks about steel. I mean, steel capacity utilization has improved dramatically -- it's gone from a low point of the 50% range up to something in the neighborhood of 80% range, which is important in substantial growth. But in the 2007 -- the peak of the markets that you talk about, it was at 100% of capacity utilization, and probably at a greater level of capacity, because some capacity is taken offline. So, we feel very confident that we've gained shares in important sectors and we're growing business in important sectors, but those sectors have to get back to those levels of performance in order for us to achieve the level of performance that we had at those points in time.

Okay. Okay. Good. And the margin level at 15.9% in North America looked pretty good, and, you know, it's at a level that you've, in the past, you were at that $350 million run rate getting that kind of a margin. Do you care to talk about what you think your operating profit margin could be in North America at that $350 million level?

Actually, Walt, our EBIT margins for North America in the quarter were 14.3%.

Okay.

You can refer to the segment highlights in the press release, but in terms of what we would say on future EBIT and operating profit margin levels, it's our expectation that, based on the actions that we've taken over the course of the last year or so, that, at a minimum, we expect that volume levels that were achieved in that '06, '07 time frame, that on a consolidated basis, we ought to be able to improve our operating profit margins by at least 100 basis points, 100.

Okay. All right. And then if I can ask about pricing. Have you raised prices in the second quarter, either in the US or Europe?

There is some pricing that will trickle through into the third quarter, but the price increases weren't as broadly instituted as what we did in the second quarter, but we should see some marginal pricing increases in the third quarter.

Okay. And I'm sorry, how much did prices go up in the second quarter?

It was close to 4%, sequentially.

Okay. I see, and the benefits of that will hit in the back half of the year?

Well, the benefits hit in the second, and those will continue, obviously, through the last half of the year, barring any changes in the commodity and cost environment, as well as volume. So it's hard to predict at this point in time, but, yes, 4% now, and if everything stays exactly the same, that will be what we'll have to look forward to for the last half of the year.

Okay. Got it. Okay. Thanks, guys.

Thank you, Walt.

(Operator Instructions)

Our next question comes from the line of Michael Coleman with Sterne, Agee. Please proceed with your question.

Good morning.

Good morning, Mike.

Wanted to ask about -- you know, there's some pretty aggressive, or not necessarily aggressive -- but pretty robust growth assumptions for Brazil over the next five years. And if you could maybe parse out the exposure you have in Brazil, in your South American segment, as well as Harris, just to give us an idea of what the size of that business is today, and then what you think that business can compound at over the next, say, five years? Any thoughts on that?

Well, Brazil has certainly been a very important driver of our South American growth. It is one of the bright spots in the world in terms of industrial and welding activity. That part of that region, Brazil, is roughly half of the business that we do there, so it's an important part of that business in South America. It will likely continue to grow on a year-over-year basis, as a component of that South American segment. It is the largest, by far, economy in South America, and it happens to be one of the most rapidly growing. So we think that there's a very bright future for Brazil over the longer term.

Okay. And do you have -- also, do you have exposure to Brazil through your Harris business, as well?

Yes, we do, but it's not reported in the South American segment.

Great.

It's reported in the Harris segment, because, again, our welding business is managed and reported on a geographical segment basis, and the Harris Products Group is managed and reported on a global basis. So we don't throw the Harris business into South America.

Okay. And is that a large portion of the Harris, or relatively small, or --

No, it's a much smaller part of the Harris business than the welding business.

Okay. I think last quarter you highlighted that you expected to have a greater focus on acquired -- or acquisitions supporting your longer-term growth. I think you even said something on the order of, historically if it added three percent, it might add a few more points going forward. Do you have an update in terms of where you're at on your acquisition strategy and so forth?

Nothing to update you on. But yes, I confirm that historically, we've added about 3%, and we have as a goal to try to improve that to, on average, 5%. We did, as a reminder, add 10% to the top line from our acquisition of Jin Tai in China in July of 2009, so we had a good year in 2009, and 2010 isn't over yet.

Right. Have you seen any change on -- in terms of seller expectations of businesses over the last 60, 90 days, out there?

I think -- it's my belief that the gap is narrowing from what it was a year or so ago, where it was a pretty vast difference in opinions of valuation, but there's still always work to be done to narrow that gap to become more successful in the acquisitions process, but I think it's better today than it has been since the downturn began in the fall of 2008.

Okay. Thank you.

You're welcome.

Our next question is a follow-up question from Walt Liptak with Barrington Research. Please proceed with your question.

Hi, thanks. Vince, during your commentary, you called out legal expense. I'm sorry, could you give me that number again, and maybe provide a little bit more color on it?

Yes, for the quarter, it was $4.1 million, and for the half year, I believe it was $7.3 million of higher legal costs, and those legal costs are primarily related to the protection of our intellectual property. We've become much more aggressive in ensuring that we protect the value of the brand and the technology and the intellectual property that we create and is rightfully ours, so that's primarily the reason for the higher legal cost.

Okay. And that was not -- that was included in the EPS number, the adjusted number?

Yes, it's in -- it is not a special item, per se. I'm just highlighting for you why the SG&A increased year-over-year. I'm hopeful that that legal cost number will come down as we get through some of the cases that we're working on. But we did not exclude it as part of the adjusted operating income calculation. It's in the numbers.

Okay. So the $7.3 million in the first half does or doesn't reoccur in the back half of the year?

Well, I hope it's a little bit less than that in the last half of the year.

Okay. And the -- you mentioned the LIFO gain in the second quarter. Is that right?

Actually, that was the prior year we had the LIFO credit.

Oh.

Yes, so just to rehash that, the second quarter had a charge of $2.4 million.

Okay.

And the first half had a charge of $5.3 million. The prior year, you might recollect, when commodity prices were falling in 2009, we had a credit of $5.9 million, or income, in the second quarter and the first half of 2009. So we had a flip here. We flipped our cost position by over $10 million year-over-year in the US LIFO calculation.

Okay. And I guess how do prices look in inventory and incoming prices at this point? Are you going to continue to have the LIFO charges in the back half?

Yes. Well, that's our prediction at this point in time, is that we will continue to book at this type of level, so all -- if we were to take our snapshot today and give our predictions of input costs and inventory levels, we would expect to record something in excess of a $10 million LIFO charge for 2010. But, again, I will caution you and emphasize that that number could change, depending upon any changes in input costs through the last half of the year.

Okay. Got it. Okay. Thank you.

There are no further questions in the queue at this time. I would now like to turn the floor back over to management for closing comments.

Okay. Again, we would like to thank everybody for joining us, and just one final comment.

I would like to mention that over the last few weeks, Lincoln Electric has been featured on ABC News, PBS, MSNBC, and, yesterday morning, on Fox and Friends. And all of these outlets did a very positive stories on the well-known Lincoln guaranteed employment policies, as well as other aspects of our unique culture and business model. As many of you know, a recently published book called "Spark" by Canadian economic writer Frank Koller gives a portrait of our company through interviews with the current and past employees. We have now established links to all of these stories on our Lincoln Electric website through our Facebook and Twitter page and would encourage everybody to browse those for your pleasure.

Thank you much, and we'll look forward to talking to you when we release our third quarter earnings.

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