Lincoln Electric Holdings Inc (LECO) 2011 Q2 法說會逐字稿

Greetings and welcome to the Lincoln Electric Second Quarter Earnings Call.

At this time all participants are on a listen only mode.

A brief question and answer session will follow the final presentation.(Operator Instructions)It is now my pleasure to introduce your host, Mr.

Vincent Petrella, CFO of Lincoln Electric.

Thank you Mr.

Petrella.

You may begin.

Thank you, Latanya.

Good morning to all of you that are joining our 2011 Second Quarter Earnings Call.

Results for the quarter and half year were issued this morning prior to the markets opening.

Additional copies of the news release are available through the Lincoln Electric Investor Relations department or on the Company web site.

John Stropki, our Chairman and Chief Executive Officer will start off the discussion today, and provide color on the quarter and regions.

Today's call also includes a synchronized slide presentation which is available through the webcast and will be posted for replay.

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

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

Risks and uncertainties that may affect our results are provided in our press release and in our SEC filings.

Now let me turn the call over to John Stropki.

Thank you, Vince.

Good morning to all of you on the call today.

As the economies around the world continues to grow, we improved our performance and market position throughout the global markets.

Second quarter sales were $699.3 million, increase of 35.6% from last year's quarter and also represents the ninth consecutive quarter of revenue growth.

Equipment and consumable sales were both very strong and each ended up the quarter up over 35%.

Net income for the quarter rose 75% to $57 million and diluted earnings per share increased 79% to $0.68 per share.

We are very pleased with both the strength and the quality of the operating results for the quarter.

A number of factors contributed to the growth and strong results in the quarter, including market share gains, new product introductions and our ability to provide our end user customers and distributor partners with the welding solutions they need to be productive and successful growing their businesses.

All of this is made possible, of course, through our strong global management team and the dedicated workforce whose hard work and high energy keep us strong and growing stronger in the increasingly challenging global marketplace.

The significant increase in both sales and operating profit provide us with good momentum for the second half of the year.

However, given the ongoing global economic and political uncertainty permeating throughout a number of markets, we remain optimistic but cautious in our outlook for the rest of this year.

Vince will get into the financial details shortly but before that, I want to cover some of the highlights of the quarter as it related to our performance by segments.

First here in North America, business conditions in our north American operations remained strong during the quarter.

Sales were $322 million, up 26.7% from the prior year's period.

Export sales were also up approximately 21% to $56 million with exports to the BRIC countries continuing to show strength, growing over 37%.

Although order trends continued strong through the second quarter, we are seeing seasonal softening in July, based on annual vacation slow downs within several key market segments.

Margin improvements in the quarter were driven by improved pricing and the favorable impact of increased volumes on our overall manufacturing costs which were offset by a significant material cost increases.

Steel and commodity prices continued to trend higher although the increases are moderating at this time.

Industrial production and capacity utilization in the United States ran ahead of last year's comparable, although the comparisons to prior year softened somewhat in the second quarter.

Industrial output rose moderately in June up point two tenths of a% sequentially and up 3.4% from June of 2010.

Capacity utilization was at 76.7%, the same as May but still believe the pre-recession highs.

Purchasing manager index was 55.3 in June, up 1.8 points from May and marking the twenty-third consecutive month of expansion in the manufacturing sector.

A recent survey showed that the industrial sector will continue to grow although at a slower rate than during the past twelve months.

Overall manufacturing activity still remains fairly strong, even as the rate of expansion is slowing.

Europe and the Middle East.

Despite the sluggish demand environment in the European region, Lincoln continued to make progress in the second quarter with US dollar sales growing in excess of 60% and EBIT growing by more than 62%.

The Company's acquisitions in Russia were major drivers of the sales growth, along with FX translation effects.

There was important organic growth driven by the ongoing strength of the energy related segments, and to a lesser degree, the automotive segment.

We believe that the Company has made substantial progress lowering the costs of the region's manufacturing base, including our investments in Poland and other important ongoing global sourcing initiatives.

Our much leaner overhead cost base should allow the region to produce positive results in the more uncertain times that could lie ahead.

Our sales and enhanced customer service efforts in the Middle East and Africa markets delivered positive growth during the quarter, despite the significant political unrest that has spread over much of the region.

Our product strength in oil and gas segments, along with the continued growth in our commercial infrastructure in the region, have allowed us to press forward with market share gains, despite the most recent spat of difficult external factors.

An important upcoming event mentioned in a previous call, Lincoln will be the global welding partner in the world skills event in London in August -- excuse me, October.

We will showcase our VRTEX 360 virtual welding system before an estimate attendance of more than 200,000 people from 52 different countries around the globe.

This will be an excellent platform to demonstrate our unique welding solutions targeted to training the world's next generation of welders and welding engineers.

All welding equipment and welding consumables used in the skills contest will be exclusively Lincoln.

Students can try the VRTEX in the contest areas, and we will also have the opportunity to feature the product at the general assembly presentation.

Ahead of the London event, we are also participating in regional competitions in Skills France, Skills Netherlands, and Skills Spain.

In Asia Pacific, results for the quarter were mixed.

Improvement in our Australian and Indian operations were offset by more challenging market conditions in China.

During the quarter, the region sales improved 24.7 %, while profitability was essentially flat.

While overall macroeconomic indicators in China still remain very positive, GDP growing at 9.5% in the second quarter year over year, and industrial production rising 15% year over year, some capacity imbalances have developed in certain product segments which have put further pressure on margins.

Good progress in our machine and cord wire businesses were masked by additional competitive pressures in certain consumable product categories.

Sales were restrained by the weakening automotive production and a bit of a slow down in the pipe mill sector.

In addition, the Chinese government actions to rein in inflation by tightening credit markets has begun to manifest in some softening in other credit sensitive industrial segments.

While this will provide constraints to our progress in our Chinese business in the short term, we expect the longer term infrastructure requirements will continue to drive the positive demand evolution for our products and improve performance trajectory of our business there.

As example, infrastructure and heavy equipment manufacturers offer important opportunities for us in China.

Caterpillar, John Deere and Komatsu, Sany and a number of other equipment manufacturers, both domestic and international are moving ahead with major new plant and expansion plans in China.

Beyond the important progress and building out the manufacturing capabilities and commercial footprint in China, we have made substantial progress in developing our product portfolio and developing these globally competitive product alternatives in several key markets around the world.

We expect that these initiatives will drive the growth and profitability of many of our businesses, both inside and out of China going forward.

In India, we have completed the next phase of our plant build out, which added capacity and delivered improvements and efficiencies at our plant in Chennai.

Turning to South America, Lincoln Electric South America welding segments sales increased 34% in the quarter to $38 million, driven by significant sequential increases in Brazil, Venezuela, Argentina and Columbia.

Brazil has attracted $23 billion in foreign investments through April, which almost doubles the amount recorded during the first four months of last year.

This investment rate is expected to continue and to rise, as there are massive infrastructure projects planned for ports, railroad, highways which need to be upgraded or constructed.

We are also leveraging out total solutions offering throughout all of South America to increase sales of both consumables and equipment.

As examples, we received a number of major equipment orders in the quarter from key end users for petroleum related projects, and also received a very significant equipment and consumable order for the first phase of the large cross country pipeline in Columbia.

Moving over to Harris results, Harris sales in the quarter improved significantly, increasing 48% to $98 million on high volume, led by both equipment and consumable growth in the US, especially the general fabrication markets as well as good growth in Europe and Latin America.

Commodity costs, namely copper and silver, continue to increase, and we have been able to increase prices to reflect the cost increases.

In the US, refrigeration and HVAC showed gains in the after market segments as end users and customers upgraded their current systems to meet new energy efficient standards.

Industry associations report show that HVAC shipments were up each month so far in 2011, with nearly an 11% increase in May.

Our OEM business is strong.

Wholesale is up and industrial distribution grew as we benefited from a shift to alternate fuels.

Retail sales within the segment flat in Q1, were up in Q2 driven by very strong year over year results in June.

Our same store sales continued to out perform our industrial peers.

Internationally, we are seeing improved profitability due to the improved efficiencies of our new Harris plant in Poland.

Other important metrics that remain an effective barometer for economic impacts in our industry include global steel production.

The world steel institute reported global steel production continued to show solid year over year growth of 8% change in June.

Shipments by US and Canadian service centers rose 2.1% to nearly 4.1 million tons in June.

China's crude steel production was nearly 60 million metric tons in June, up almost 12% year over year.

That's a quick look at the activity in the quarter and the regions.

We still see global infrastructure expansion and end markets for welding products remaining strong globally.

That tracks with our focus on strategic global growth, especially in the emerging markets.

As we focus on growth to help build our global organization for tomorrow and for the future, we continue to extend and strengthen our team.

This year we recruited an engineering and sales training class of 38 of the best and brightest from universities and colleges here and around the world.

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

Thank you, John.

As John pointed out, our second quarter of 2011 financial results reflected a significant quarter over quarter improvement in revenue and operating earnings from the second quarter of 2010.

Consolidated sales are up about 36% and operating income improved to $80 million.

Second quarter also represented our ninth consecutive quarter of sales growth as sales were up 17% compared with the first quarter of 2011.

On a consolidated basis and compared with the second quarter of 2010, volume increased reported sales by 17.2% and foreign currency effects increased our sales line by 5.4%.

Pricing increased sales by 8.4% and finally, acquisitions contributed an increase of 4.6%.

Second quarter gross profit margins decreased to 28%, compared with 28.8% in the comparable prior year period.

The decrease in gross margin resulted from the acquisitions of lower margin businesses in Europe and the price cost pressures in the Asia-Pacific segment.

The prior year included a $2.3 million charge related to the devaluation of the Venezuelan currency and the change to highly inflationary accounting.

LIFO charges in the quarter were $3.6 million compared to $2.4 million in the second quarter of 2010.

SG&A expense for the quarter was $115.5 million or 16.5% of sales compared with $101 million or 19.6% of sales in the prior year, an improvement of 310 basis points.

The increase in SG&A expense was primarily driven by higher bonus accruals of $11.3 million, as operating profit increased substantially on a year over year basis.

Foreign currency translations increased reported SG&A by $3.5 million in the quarter as the US dollar weakened on a year over year basis.

Operating income for the quarter at $80 million was 11.4% of sales compared to $51.1 million or 9.9% of sales in the same year ago quarter, an improvement of 150 basis point.

The prior year's quarter did include a net credit of $1.3 million for special items.

Excluding these prior year special items, operating income was $49.8 million or 9.7% of sales in 2010.

Net income for the second quarter $57 million or $0.68 per diluted share, compared with a net income of $32.5 million or $0.38 per diluted share in the 2010 second quarter.

That's a 79% increase in diluted earnings per share on a year-over-year basis.

Excluding special items, net income was $32.9 million or $0.39 per diluted share in the 2010 second quarter.

The effective tax rate for the quarter was 30%, compared with 33.5% in 2010.

The effective tax rate is lower than the statutory rate primarily because of income earned and lower tax rate jurisdictions.

Now moving to the segments.

On a year over year basis, sales in North America were up 21.1% due to volumes.

Prices increased sales by 4%.

Acquisitions added 30 basis points to sales, and foreign exchange increased sales 1.3%.

North America improved it's EBIT margin to 16.2% of sales, a 190 basis point improvement.

Strong volume leverage and good cost control drove the margin expansion.

Sales in Europe were up 14.6% due to volume.

Our Russian acquisitions added 27% to the top line sales, and price increases over the prior year contributed 6.8% to sales.

Foreign exchange increased sales by 15% on a year over year basis.

Excluding special items, Europe achieved an EBIT margin of 7.6% of sales.

The prior year second quarter included higher margins associated with the completion of long-term contract revenues.

On a year over year basis, sales in Asia-Pacific were up 13.7% due to volumes, prices increased sales by 1.8% and foreign exchange increased sales by 9.2%.

Excluding special items, Asia-Pacific EBIT margins were 1.2% in the quarter compared to 1.8% in the prior year same quarter.

Sales in South America were up 17.4% due to volume.

Price increases contributed 9.5% to sales, and foreign exchange increased our sales in that segment by 7.1%.

Price increases in South America are above the group average because of higher inflation rates primarily in Venezuela.

Excluding special items, South America improved its EBIT margin by 580 basis points to 9.3% of sales compared to 3.5% of sales in the second quarter of the prior year.

Strong volume growth and good cost control drove the margin expansion.

Compared to 2010, sales in the Harris Products Group were up 9.7% due to volume.

Price increases contributed 35% to sales and foreign exchange increased sales by 3.5%.

As discussed in previous calls, our price increases were largely related to significant increases in metal cost primarily silver and copper.

Excluding the special items, Harris products improved its EBIT margin by 550 basis points to 9.2%.

The strong volume increases and good SG&A cost control led to the expansion in margins on a year over year basis.

Our operating activities generated $28.8 million of cash flows in the second quarter compared to $32.1 million in the same period last year.

Cash flows for the quarter reflected the need for higher working capital to support the significant increase in sales levels.

The Company closed the quarter with a cash balance of $338 million, a net cash balance of $241 million and a net cash to invested capital ratio of 17.6%.

The Company invested $29.4 million of capital expenditures in the half year.

Our 2010 capital spending plan should approximate our annual depreciation and amortization expenses.

We estimate at this point in time that 2011 capital spending for the year will be between $60 million and $70 million.

During the quarter we paid cash dividends of $13 million, and our weighted average shares outstanding for the quarter June 30, 2011 were 84,105,000 shares on a post split basis.

Finally, we purchased $12 million of treasury stock under the ongoing share repurchase program in the second quarter of 2011.

With that, that's the extent of my prepared comments.

I would like to open the call for any questions.

Latanya?

Thank you.

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

(Operator Instructions)

One moment please while we poll for our first question.

Our first question comes from Chuck Murphy with Sidoti & Company.

Please proceed with your question.

Good morning, guys.

Good morning, Chuck.

First, let me congratulate you on an impressive quarter, particularly in light of your European competitor's results.

Thank you.

My first question was just -- can you maintain the share gains that you saw in the quarter and, if so, how will you do that?

Well, we not only believe that we are going to continue to gain share and hold share but to accelerate our share gains.

We think we have the right strategy.

We believe we have the right products and we have the right people in place that will allow us to do that in the important market segments and geographies that we have chosen to evolve our strategy in.

All right.

Your competitor mentioned that the financial issues of the European countries is going to have a spillover effect into the real economy.

I was wondering if you have seen any sign of that?

I think your question related to our ability to take share, not to address exactly what the specific economic models are.

I mean, obviously, we can't control the economies around the world but what we can do is control our success within the economies around the world.

I meant it as a separate question, not in relation to the first question.

I mean, are we concerned about what we read and see in Europe?

Sure.

I think everybody is.

And until the debt crisis is firmly resolved and the economies are put on a more stable track, that will be an ongoing issue that we will all have to deal with.

I think, again, the opportunities that we see are certain of the very strong export economies of Europe, particularly Germany, relates to high-tech products.

And their automotive sectors are areas that we focused our attention and we seem to be doing quite well in those areas.

But yes, we are concerned about what we see in Europe.

Have you necessarily seen it show up in the orders, though?

Yes, I would say if you look at the quarter's progression, clearly June the final month in the quarter was the softest quarter -- softest month from a year-over-year volume standpoint.

We have seen that continue into the July period.

It's obviously early in this quarter, but from a sequential standpoint, our European business saw a slowing in volumes.

And just to remind everyone, that we know this quarter in Europe is particularly soft because of the traditional August shut-downs through much of the Western European markets.

Got you.

Okay.

My last question was just in regard to your comment that the kind of normal slowing in third quarter order patterns, is that to say that we should expect, at least directionally, that sequentially we will be down for the third quarter?

Well, our normal seasonality, Chuck, would -- over the past several years would suggest that the second quarter tends to be our best quarter in earnings.

And the third quarter is generally a bit less than that based on plant shut-downs and summer vacations that basically occur around the world.

The sales line can hold up near the second quarter but from an operating profit standpoint because of the issue of covering your fixed overheads with lower production levels, it's seems to be a lower profitability.

Eight out of the last 10 years of our business, the second quarter has been our highest quarter of the year and the two times that it wasn't was when we were in a downturn in 2001 and 2009.

Just one other point, Chuck, again relating to the second quarter, as it relates to geographies around the world, this year Ramadan, which will have a pretty significant increase in the Middle East is in August.

We will have that compounded by the European holiday season.

Got you.

Thank you, guys.

Our next question comes from Tom Hayes with Piper Jaffray.

Proceed with your question.

Thank you, good morning, gentlemen.

Congratulations on the quarter.

Good morning, Tom.

Two questions.

It looks like there was solid growth from the recent acquisitions in the European market, I guess Russia specifically.

Can you provide color on how well the integration is going?

Are we done with that market opportunity and is that product out of your more cost effective Poland facilities?

You had three questions there so I will try to cover all three of them.

The first is that how is our integration going.

We are very early the integration process.

We believe that it represents a very significant opportunity by merging the two businesses in one location and capturing significant overhead improvements and efficiencies as a result of that.

That will take several quarters to be completely implemented, depending on our need to build out infrastructure and the timing of that.

We are very bullish about the opportunity that this acquisition presents us in Russia.

We have a major position now in a very strategically important market.

We are going to have great growth opportunities in leveraging the existing product lines of those acquisitions with our other products from around the world.

And to your point, yes, a lot of that additional product will come from our equipment and consumable factories in Poland.

I would add to that, Tom, that the top line has exceeded our expectations early on in our acquisition and integration process.

The second quarter, Russian acquisitions contributed about $23 million to the top-line and on an annualized run rate, that is over $90 million of additional sales.

There is still significant integration requirements from a manufacturing standpoint to combine those two businesses into one.

Early on, the margin contribution is not up to what our expectations are.

We think that will improve over the next year, 18 months as we more fully integrate the manufacturing operations.

That additional $23 million of sales from our Russian businesses had a detrimental impact of about 70 basis points on gross margins in the quarter and about 40 basis points on operating profit.

So, we expect that business to improve our operating profit and gross margin profile in the next year to 18 months.

Great, thanks for the color.

Secondly, if I could, on the SG&A run rate, if you strip out the bonus and the FX impact, it looks like your base SG&A was about $100 million which I think was pretty flat year-over-year despite almost $185 million of higher revenue.

I wanted to see if I was thinking about that the right way.

Is that type of leverage sustainable and could we expect to see similar bonus accruals the rest of the year?

I think we will see similar bonus accruals to the extent that the profitability maintains as current run rate, that is what we will likely accrue under our formal bonus programs.

I think we will continue to see the kind of leverage that you see on the SG&A line.

Our G&A costs have been relatively stable on a year-over-year basis.

The selling costs are a little more variable that move up with volume levels and certainly the biggest variable is the bonus accrue always that move up with profitability.

But I expect that this will continue through the last half of 2011 and into next year.

It has been a very well managed SG&A line in my opinion.

Tom, I would also comment, we talked about this in the past that as we moved into more of the emerging market areas and have grown our presence there, those are much lower SG&A businesses.

So, while the gross margin is lower, the SG&A is substantially lower and that blended mix has an impact on the total SG&A percentage for the company.

Lastly, Vince, do you have the split between machines and consumables for the quarter?

Yes, hang on a second.

It was about 65-35, Tom, maybe a little higher on the consumable side.

65 consumables?

I have actually 68-32.

Thanks, guys.

Our next question comes from Mark Douglass with Longbow Research.

Please proceed with your question.

Good morning, congratulations.

Mark, thanks.

John, you talked about the market share gains.

Were those necessarily on particular products or product lines or regions or both?

I think it's -- a sum of all of the above.

I mean, we talked a lot over the course of the last several years about our intensive effort on new product development and introductions.

I think we have been very fortunate, by the choices that we have made of understanding our market segments and picking the segments that we felt would grow and those that represented the best opportunity in putting our energy into those new growth areas rather than spending a lot of time and energy on the old areas that we think are going to become less important, either particular product segments or geographies.

We hit the sweet spot on the product development side.

Any time you have a major competitor going through significant turmoil, it is going to create opportunity in the market.

We are looking at those opportunities and we expect to capitalize on them.

Okay.

You talked about the -- some of the issues in China.

Is shipbuilding still causing some consternation there and maybe trying to move some of the product lines or product manufacturing to other applications.

How is that progressing if that is the case?

China is a big story and still we believe a very good story from a long-term perspective.

If you look at almost any data point relative to the infrastructure commitments and build-out, they are almost staggering in terms of the opportunities that are going to be presented in those markets.

We have seen a little bit of a short-term kind of, what we believe, is a blip, again driven by the Chinese effort to rein in inflation.

Automotive sales were actually down for the first time in June for a very, very long period of time.

And we think there has been a little bit of a slow down because of the reining of the investment structure on the build out in the heavy construction equipment side.

But, you know, that is fine.

We are not in China for the quarter or for two quarters.

We are there for 20 years.

We think that the model that we are building there is going to position us exceptionally well to capture significant share and take -- dramatically improve our position.

The third element of that is, I made a brief comment, we are developing a product portfolio which we will produce in China and use for exports to other emerging markets around the world in the mid-sector of our industrial customers.

And early returns on that have been very promising and we think it will continue to accelerate.

Okay.

So, right now things progress, you just see continue, better absorption in some of your green filled plants, consolidation in China.

You are seeing modest improvements in the EBIT market in Asia-Pacific.

I would think for the short term, modest improvements is the right term.

As we said, there will be peaks and valleys in the cycle of that, depending on a number of factors but we remain tremendously bullish about the long-term opportunities there.

Final question, you mentioned that both equipment and consumables hit the 35 better than the 35% sales growth.

Is it correct then to infer that equipment volume gains have been much better than consumables?

I mean, presumably, pricing consumables is a lot stronger.

Yes, they have been, on the margin.

Additionally, the -- excluding acquisitions, because the 35% includes our Russian business.

If you were to exclude the acquisitions equipment would be up 35% and consumables would be up about 28%, 29%.

So, yes, our machine equipment business has been growing more rapidly this year than our consumable volumes have been.

I would say, Mark, that is in all areas of our business, too.

I mean our equipment portfolio out of Europe, primarily out of Italy and Poland and then obviously, our US, And again, we are making a pretty important improvements in our equipment sales out of China, also.

Okay, thanks.

Our next question comes from Walt Liptak with Barrington Research.

Thanks guys.

Good morning, and great quarter.

Thanks.

I wanted to ask about the question that probably most people would like to know.

With Charter PLC having the problems they are having, under pressure, I wonder if we can get a comment from you about your history with the company and if you could possibly try to buy all or part of Charter?

We are reading the newspapers every day, Walt.

As you know, we don't generally comment on our competitors and what is happening with them either in terms of any acquisition or divestiture opportunities that they have may talk about in the marketplace.

Okay.

You have a long history.

The Company has a whole lot of resources ten years ago looking at Charter.

Is it something that would you safe you have already tried that and there is other opportunities for the Company, or are you open to opportunities?

I believe John said we would have no comments on it.

All right.

And let me try again on Europe.

The volumes were better than I expected despite the things going on there and pricing is good.

Are you -- with the cautious outlook that you have for the second half, are you expecting that pricing will get tougher and/or volumes coming in?

Or is there enough to offset with the market share gains and the sectors that you spoke of?

In John's comments, he mentioned that steel and commodity costs have risen significantly this year.

But we are seeing a moderation in that pricing.

So, that would tell me at this point in time that the biggest of the price increases are probably behind us.

But, of course, what happens in the last half of the year will drive what we do in pricing.

Where we stand today, it doesn't look like, at this point, that we see on the Horizon, significant input costs, increases in our largest commodity buys.

Okay.

From a volume standpoint, I commented on an earlier question that, yes, we have seen some sequential slowing in Europe.

John pointed out that Ramadan and the normal declines in the third quarter will likely put pressure on volumes in our European segment for the third and the last half of the year.

Walt, if you went around the world geographies and back to where we were in the peak of 2006, 2007 cycle, depending on what part of the world you are talking about, clearly Europe has moved the least in recovering their overall economic strength.

You still have a very high unemployment rate in Spain and Portugal.

Obviously, Greece is a near disaster.

So, the predictability is much more challenging.

Again, our focus is in winning in whatever market we have got.

It's going to be a tough market but we think we will win it.

Great.

Thanks for that color.

I wonder if I can ask one more about the tax rate.

What can we expect from the tax rate.

Is it a little bit lower this quarter>

It should be running around 30%, Walt.

As I cautioned before, that is highly dependent upon our mix of earnings around the world in the last half of the year.

But we would expect at this point in time based on our forecast of the rest of the year that we ought to be around that 30% rate.

Okay, great.

Thanks, guys.

Our next question comes from Jason Rogers with Great Lakes Review.

Please proceed with your question.

Good morning.

Good morning, Jason.

I wonder if you can talk about Japan if you are seeing any early benefits from the infrastructure rebuilding that's going to be needed there.

You know, Jason, we are still a pretty small player in Japan.

I'm pleased with the performance that we are getting but it's off of such a small base that we would not be a huge recipient of any major economic growth within the Japanese market.

That being said, as the infrastructure does start to be rebuilt, we do have pretty good positions with some of the heavy equipment manufacturers in that part of the world and I would guess that it's not going to be all just domestic equipment that is part of the rebuilding effort.

It does represent an opportunity, but I don't view it as being a huge opportunity for us in the short term.

Okay.

That's helpful.

Looking at the US, are you seeing any opportunities -- you hear a lot about the infrastructure needed in this country with bridges and so forth being structurally deficient.

I wonder if you are seeing any kind of benefits with that area.

Well, I would agree that there are huge needs.

We talk about that a lot within our industry and with our elected representatives.

I would say that, you know, until our government figures out how to pay the social security checks, they will not be investing the kind of money that they should in infrastructure.

But it is going to happen.

It needs to happen.

It must happen.

We will, unlike Japan, be a major recipient of the gain in that area of the business.

We are very, very strong in infrastructure and all elements of infrastructure.

And we talked, as an example, on the energy sector that the two nuclear power plants that are under construction in the US, we have established a major platform there and we are doing exceptionally well in the early stages of that.

As that momentum continues, we expect to be a major recipient of it.

But there is still too much talking and not enough doing at this point in time.

Right.

Looking at the acquisition environment, I just wonder if I can get your latest thoughts on that area, and regions you may be focused on currently.

We are constantly, Jason, looking at the right opportunities at the right price.

If you look at the M&A marketplace today, the activity has come back significantly from the declines that occurred in 2009 and 2010.

And as far as our focus, if it lines up with our strategy, our strategy is that we want to identify properties that give us strength in emerging markets.

And the BRICs are certainly something that we continue to be keenly interested in.

And we are also focused on those areas that will extend our product portfolio to keep our leading position in being the broadest and deepest provider of welding and cutting and automated solutions to the world.

And we will stick to the knitting, and we will add-on businesses that we understand and will strengthen our position in our core business.

So, that is what we have been saying for a long time.

That's what we will continue to focus on and deliver on.

And it's just a matter of finding the right properties that extend that strategy and probably, most importantly, at the right prices as well to improve our returns and shareholder value.

Finally, Vince, do you have the shares that were purchased in the quarter, either the number or the average price paid?

Yes, we spent $12.4 million in the quarter and the average price was around $36 -- give me a moment and I will get the exact number here.

Yes, we purchased in the quarter, 365,000 shares for $12.4 million.

Okay.

Thanks a lot.

Actually about $34 a share.

$34.

I'm sorry.

$34 a share.

Appreciate it.

(Operator Instructions)

Our next question is from Steve Barger from KeyBanc.

Please proceed with your question.

Good morning, guys.

Hello, Steve.

Just wanted to talk about the incremental contribution margin.

Obviously a very big revenue quarter, incremental came in around 16%, so, below the level you talked about being achievable on the last call.

Sounds like you are being more cautious on 3Q.

Should we think about mid- to high-teen incremental margins as being right in the back half?

That is probably correct.

The second quarter our incrementals were hurt by the Russian acquisitions that I talked about in the call and afterwards in some of the questions as well as the negative incrementals, if you will, in the Asia-Pacific region.

We added over 20% to the sales line and our margins and profitability actually declined slightly.

And that certainly hurt our incrementals in the quarter.

The other core businesses, including North America, showed some nice improvement and Europe did, and Harris, and South America, but the Asia-Pacific and the European acquisitions hurt us.

Right.

I know you were talking about Asia earlier.

I had to hop off for a second.

Was the issue there more competitive in nature or more end marketer or -- if you already talked about it, I can check the transcript.

It was a little bit of both.

John talked about it in his comments as well as I.

It was a little bit of both.

The price cost issue -- we had our lowest price increases of any segment or business unit in the Asia-Pacific region and that region is having the greatest challenges on the price cost issues.

Right.

And, John, I did hear you say that there is more challenging market conditions there now.

Last night one of the Chinese PMI industries slipped sub 50.

If Chinese growth were to come in lower than people expect, would your strategy be to get more aggressive on price to take share and jump start that, or would you focus on remaining profitable for however long that lasted?

Steve, I think the part you missed is we talked about the fact that our focus in China is really on the long-term, not on the short-term.

Okay.

So there are other competitors there, and I wouldn't see that we would gain much by lowering our margins trying to take share because the market moves too quickly.

We are going to do the things that allows us to be profitable over the long term, not focus on short term incremental kind of gains.

Got it.

Thanks very much.

There are no further questions in queue at this time.

I will turn it over to Mr.

Petrella for closing comments.

Thank you, Latanya.

Thanks for joining us on the second quarter call.

We think we made significant progress toward meeting our strategic and operating objectives and we very much look forward to talking to you again after the third quarter in October of this year to give you another update on that progress.

Again, thanks for joining us today.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.