Lincoln Electric Holdings Inc (LECO) 2012 Q2 法說會逐字稿

Greetings and welcome to the Lincoln Electric Second Quarter 2012 Financial Results Conference Call.

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, Vince Petrella, Chief Financial Officer of Lincoln Electric.

Thank you, Mr. Petrella.

You may begin.

Thank you, Jesse, and good morning to you all.

Welcome to Lincoln Electric's 2012 Second Quarter Financial Results Conference Call.

We released earnings this morning prior to the market's open.

Additional copies are available on the Lincoln Electric website or by contacting our Investor Relations office.

Lincoln Electric's Chairman and Chief Executive Officer, John Stropki, will start the discussion this morning and provide commentary on the quarter.

Also joining the call today is Chris Mapes, Lincoln's Chief Operating Officer.

Chris will provide color on the regions.

After Chris makes his comments, I will give you some more detail on the numbers.

A PowerPoint presentation is part of today's discussions and is available on the Lincoln website under the investor tab as part of today's webcast.

The presentation will also be posted, along with a replay of today's webcast, on our website later this afternoon.

Before we get started, let me remind you that certain statements made during this call and in our discussions may be forward-looking and actual results may differ from our expectations.

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

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

With that, let me turn the call over to John Stropki.

Thank you, Vince, and good morning to everyone.

We are pleased with the overall financial results for the quarter.

Q2 of '12 marked the second consecutive quarter of record sales and our operating results were very solid; especially given the ongoing economic challenges in many of our key markets.

The ongoing commitment to our 2020 vision and our long-term strategy continues to drive our results and position the Company for continued success.

The strong contributions of our global workforce resulted in improved operating performance, increased sales, improved overall profitability, and strong operating cash flows.

We are very pleased with the overall quality of our earnings and results, which Vince will cover shortly.

As Vince mentioned at the beginning of our call, Chris Mapes has joined our discussion today.

Last Friday, we announced that Chris will succeed me as President and Chief Executive Officer of Lincoln.

I will remain as Chairman with the new title of Executive Chairman.

This leadership transition will be effective December 31 of this year.

It is a direct result of mine and the Board's conscientious focus on developing a deep, talented, and experienced management team for the Company.

We believe we have the strongest and deepest global team in our history, as a result of our ongoing commitment to hiring and developing the best people in our industry.

As COO and as a Director, Chris has demonstrated outstanding global leadership skills, broad strategic insights, and significant operational expertise.

The Board thoroughly evaluated Chris' qualifications as a director candidate before he joined the Board in 2010.

Many of the traits that made him an outstanding Board candidate are also the same traits that the Board and I looked for in a CEO.

I will be working closely with Chris into the next year to ensure a seamless transition for Lincoln's shareholders, employees, customers, industry associations, and community and government relationships.

Chris will cover the regions in a minute, but first let me comment on the general numbers and some of the trends we see going forward.

Sales in the quarter were up 6.4% to $744 million and operating income rose 20% to $96 million or to 12.9% of sales.

Net income increased 16.3% to $66.3 million, or $0.79 per diluted share; a very good result, as we are focused on maintaining the strength of our business and improving our operations, as evidenced by the margin improvements in our strong cash flow generation.

Even with some of the economic contractions, especially in Europe, and the moderating economies in China and India, we see several key areas and end markets where there is good activity and opportunity for us to continue to grow and to achieve our long-term success.

Several of our key industrial segments continue to show good growth, with the strongest industry segments being energy-related; namely, oil and gas from exploration, extraction, to transportation, as well as all types of power generation.

In the offshore segment, the market situation and the positive effects of ongoing funding for offshore projects improved with further investments by major international players and large nationalized oil companies.

As backlog grows for a number of large engineering and construction companies, Lincoln is and stands to benefit in the future, globally.

Here in North America, business in the Gulf Coast was very positive in both consumables and new equipment orders.

The trends for exploration and production, including subsea activities, remained very strong with significant investment and new contracts announced in the first half.

We are having strong interest in ongoing success with our newly introduced high alloy welding consumables around the globe.

In the pipeline segment, the first half of the year was essentially flat, but global forecasts for new pipeline construction is back on the upswing with 2013 and 2014 expected to be exceptional years for both on-shore and offshore products.

With the strong increase of shale oil in gas production, there has been a slight shift in the construction practices, with fewer miles of pipe being laid.

However, there are greater number of projects which tend to be shorter run of smaller diameter pipe.

Most of the shale pipelines are being welded with traditional technologies, such as engine drives and stick electrodes in the US, which plays to one of our many strengths.

There are also still a great number of global mega projects on the horizon, with most lines intended for long distance transmission of natural gas.

With the new abundance of natural gas, which accounts for 75% of the planned US projects, the prospects for the US exporting LNG, there is a movement to lobby for new LNG export terminals and for converting existing terminals from input to export capabilities here in the US.

In the pipe mill segment, demand in the Middle East remains very strong and we are pursuing those opportunities and winning important new business opportunity.

Our process and power [gen] segment experienced significant success in the quarter, with major project sales across all sub-segments; including LNG, nuclear, wind, thermal power, and process industries.

From our LNG success in Asia and Australia to our participation in the new nuclear construction in the US to wind power's success in the US and worldwide, Lincoln continues to gain share through globally coordinated and local focus segment efforts.

In automotive segment, overall global production of light vehicles is forecast to increase approximately 5% in 2012 to around 78 million vehicles, with most of that expanded production occurring in North America and China.

Although China's auto production is slowing as we enter the second half, the long-term forecast is still very positive.

Lincoln has a significant presence in many of the key global players in the very large chassis parts sub-segment and we continue to increase our involvement with OEMs in the US, especially in automation.

Opportunities for our welding consumables used in the automotive segment are improving with good long-term growth expected in Asia-Pacific, North America, and Europe.

In the heavy [fab] segment, we show continued good progress, despite recent global concerns over the slowing pace in China and softening commodity prices.

The long-term prospects for heavy fab are still strong in all regions.

Ag machinery demand in the quarter for Asia-Pacific region was more than twice that of any other region in 2011.

China and India will be the primary nations fueling future market advancements in this region., although smaller markets, including Thailand and Indonesia, will also expand rapidly through 2016.

Demand will be driven by the technology advancements, as efficiency gains afforded by newer equipment with more sophisticated technology will make it attractive for farmers to replace their old machinery with new, more productive models.

Industry experts predict ag global demand will rise 6.7% annually through 2016 to $173 billion.

Growth will be driven primarily by gains in the rapidly developing nations, particularly China and Brazil.

In our automation business, which was one of the fastest growing businesses, we are seeing continued good growth.

Our automation sales were up over 30% year over year in this quarter.

Wayne Trails, our newest acquisition, which Chris will talk about in a minute, will be an important new engine for growth in this important segment.

There are also a number of economic measures that we serve as barometers for the arc welding industry and global steel production tops this list.

According to the World Steel Industry, June 2010 (sic-see presentation slides "2012") global crude steel production was down slightly from June of 2011, while China's production was flat year over year and the US production was up marginally.

The crude steel utilization ratio for the 62 countries that WSA tracks increased slightly to 80.4% from 79.7% in May of 2012, but was 2.5% lower than June of 2011.

That's a macro view of the business.

Now let me turn the discussion over to Chris.

Thank you, John.

Our North American welding segment posted very strong results with strong order trends continuing through the second quarter and into July.

Sales were up 29% year over year to $416 million.

US export sales rose over 20% with strong increases to the Middle East, Africa, and Asia-Pacific.

The impacts on sales from North American acquisitions from the past 19 months was significant, as we continued to execute on our strategy of aggressively pursuing strategic global opportunities.

We have completed five acquisitions in the North American market since January 2011, strengthening and broadening our product portfolio, as well as significantly increasing our automation capabilities.

We are excited about the acquisition of Wayne Trail during the quarter.

The company manufactures integrated automated systems and is located in Fort Loramie, Ohio.

The integration of this business is going very well.

Wayne Trail has just recently been awarded a $20.5 million contract from one of the major domestic auto makers to supply an automated laser welding and cutting solution for a new vehicle platform.

Wayne Trail was selected for its proprietary technology and expertise.

This contract is the largest single contract award ever made to Wayne Trail and Lincoln in automation.

In addition to its automation expertise, an added benefit is Wayne Trail has a long history of collaboration with IPG Photonics, the leading developer and manufacturer of high performance fiber lasers and a company with which we have an ongoing marketing alliance.

Taking a look at the overall macroeconomic picture, business conditions in our North American operations remained strong during the quarter.

Economically, industrial activity represented in key measures such as industrial production and capacity utilization across factories in the United States are running ahead of last year's comparable.

Total manufacturing industrial production in the US excluding the high tech segment was trending 5.9% ahead of 2011, as of June 2012, while capacity utilization was running at approximately 78%.

However, the Purchasing Managers Index and the Export Orders Index have declined in the last two months and both are indicating a contracting economy as of their latest readings.

As we have discussed, we are a very short cycle business from a visibility perspective.

Our growth has been impressive, although we continue to have an uneasiness about the macroeconomic landscape and the political uncertainty in many of our key markets.

Turning to our Lincoln Europe welding segment, which includes Russia, the Middle East, and Africa, sales for the quarter were down 18% to $114 million and were impacted by the general slowdown in the European economies, although our continued focus on margin improvement initiatives resulted in meaningful improvements in operating margins on the reduced sales.

Price management also had an impact on volumes, which we are actively managing.

Direct and indirect labor hours were reduced in the quarter, in line with current demand levels.

While the region produced an improved business result in the quarter compared to Q2 2011, it was not as strong as Q1.

Excluding foreign currency impacts, sales in our traditional core European business were slightly down in the quarter year-on-year and remain flat year-to-date.

Southern Europe, and particularly Spain where we have significant market share, had the highest year-on-year declines, with Eastern Europe and the UK showing positive growth during the quarter and year-to-date.

As John touched on in his remarks, our focus on key industry segments is generating positive results in terms of new business and strengthening relationships with key accounts across the region as we work with them to generate cost reductions and productivity improvements.

Our Russia manufacturing consolidation initiative is progressing on track and on budget with the expectations to have all production consolidated in one facility by early next year.

Planned restructuring charges were taken during the quarter.

We expect to see some of the cost reduction impacts commencing in Q4 and early into 2013.

The Middle East is one of the bright spots in the region with sales into the Arabian region up approximately 40% for the quarter, with products exported into the region from our plants in Europe, North America, and Asia.

Government spending in the post-Arab spring areas has helped fuel strong sales growth.

We have strengthened our management and sales team in this area, which is clearly producing positive results.

Our South Africa commercial company continued to produce strong results in the quarter; well exceeding prior year sales and operating margins.

Strong financial discipline and practices effectively mitigated potential impacts of the high volatility of the South African rand during the quarter to enable us to show strong profitability in both local and US dollar currency.

Despite a challenging economic backdrop in Asia throughout the second quarter, Lincoln Asia-Pacific continued to make some important progress in Q2.

Although sales for the quarter declined 16.8% year-on-year to $85 million, profitability improved as a result of our ongoing work to refine our business structure throughout the region.

As has been widely reported, the China market continues to suffer through a period of weakening demand.

Key markets, such as heavy equipment manufacturing and shipbuilding, are seeing both seasonal and cyclical weakness.

Lincoln China's business model, however, has continued to improve.

Our work through the course of last year to integrate our businesses into one commercial and administrative shared services structure has led to important gains in G&A efficiency and product line leverage.

We have seen exports continue to expand steadily, providing a stabilizing source of demand for our globally competitive China factories.

We feel strongly that this market and our execution of our strategy will provide increasing benefits over the long term.

In India, our young business there also continues to make good strides, despite weakening market conditions.

During the quarter, we completed the launch of our trading Company activities, which complement the sales of our locally manufactured product with our global product offering.

Our production set a record for Q2 for this facility and we are excited about our position in the market.

In the rest of the region, our Australian and southeast Asia businesses continue to perform well, as both areas are supported by strength in the long cycle segments of offshore and mining projects.

Looking forward, we expect to see some continued seasonal weakness in the region through the third quarter, while we are hopeful that the often discussed stimulus actions by the Chinese government begin to provide a new source of market support in the next few quarters.

Switching to the South America welding segment, on a year-on-year basis, Lincoln sales decreased by 1.7% to $37 million in the quarter, with most of the impact felt in Brazil and Argentina and partially offset by strong sales in Venezuela.

On a sequential basis, sales for the quarter experienced a decrease of 6.7% from the first quarter of 2012, also led by weaker sales in Brazil and Argentina.

2012 GDP growth expectations for the region have been revised down.

Brazil, the largest economy in the region, is expected to grow between 2% and 2.4% in 2012, down from earlier expectations of around 4%, representing a decline from the 2.7% in 2011.

Industrial production has contracted significantly in Brazil since late 2011.

The rest of the region has also moderated its growth rate.

Even though there has been a drop-off of industrial production year-on-year, there are a number of industry segments that continue to see growth and investment.

We continue to sell solutions-based products into the energy segments in Brazil, Argentina, and Chile as wind tower manufacturers take advantage of our Power Wave AC/DC submerged arc welding technology, as well as our flux wire combinations.

The offshore platform and shipbuilding industries continue to expand in Brazil and we are providing these industries the locally made consumables, such as cord wires, fluxes, and stick electrodes, as well as high-tech equipment sourced from Europe and the United States.

Oil and gas also remain strong throughout the region, especially in refineries and piping where we are supplying our Metrode units high alloy solution and Lincoln Electric's proprietary surface tension transfer, or STT, [type] root path technology.

Although the auto industry is off a bit, we have seen demand for qualified welders in every country and most industries; especially heavy fabrication, where we have sold a number of our VRTEX 360 virtual reality welding systems.

The technical trade schools are starting to see demand pick up and thus justification for investments in this best-in-class welding training technology is leading the sales of these units to schools in the region.

The South American region is part of our strategic growth strategy and Lincoln remains committed to addressing key industry segment and value-added solutions to our key global end user partners, as well as leveraging our complete global product portfolio of products.

At the Harris products group, sales in the quarter were down 7.3% to $91 million.

Consumable sales decreased 12% from prior year, primarily driven by a reduction of base metal costs.

Commodity market changes in materials such as copper and silver impact the revenue comparisons for our consumables products.

Our international sales outpaced domestic in the quarter.

Our equipment sales increased 4.6% from prior year and have benefited from stronger global sales and new product introductions.

These recent product introductions and cost reduction programs have allowed us to expand our margins in this product segment.

Growth from equipment and retail businesses has outpaced that of consumable [brazing].

For WCTA, one of Harris product segment businesses, representing the Lincoln retail segment, the do-it-yourself outlets were up 8.6% year over year driven from increased volumes.

New point of purchase sets drove higher same-store sales for our largest customers in this quarter.

Key drivers affecting the business growth going forward is the modest growth rate in the US for HVAC replacement products, new housing starts, and construction spending for residential and nonresidential products on a global basis.

We have seen some improvements from recent extreme heat in the North American market for these products.

Those are the regional highlights.

Before we get to Vince, let me comment on other activity we have underway.

During the quarter, we initiated cost reduction actions wherever possible throughout the organization, through rationalizations or consolidation.

For instance, our VERNON tool unit, our pipe cutting unit in Oceanside, California, is being consolidated into our Reno, Nevada-based Torchmate business, which was acquired a year ago.

We mentioned earlier the consolidation of our two Russian welding consumables businesses is progressing and in Asia-Pacific, we have started the process of rationalizing our Australian welding consumables business.

All actions are expected to be completed by early 2013.

Projected savings and restructuring costs will be covered by Vince.

That's a snapshot of what we see and anticipate in the industry in our various geographies.

We remain firmly committed to improving our operations and executing on our long-term strategic objectives.

With that, let me turn the call over to Vince who will provide more detail to the numbers.

Thank you, Chris.

Our second quarter 2012 financial results reflect a significant quarter over quarter improvement in operating earnings.

Consolidated sales were up about 6% and operating income improved to $96 million.

The second quarter also represented our 13th consecutive quarter of sales growth.

Incremental operating profit margins excluding special items were up 42% in the quarter.

The high incremental margins are attributable to an improved sales mix, as well as our efforts to pare less profitable business, particularly in Europe and Asia.

On a consolidated basis and compared with the second quarter of 2011, volume increased reported sales by 2.1%, pricing increased sales by 1.6%, and acquisitions contributed an increase of 6.3%.

Foreign currency effects decreased sales by 3.6%.

Second quarter gross profit margins increased to 30.2% compared with 28% in the comparable prior-year period.

The increase in gross margin resulted from improved pricing and favorable sales mix.

The quarter included a $1 million charge to cost of goods sold related to a labor law change in Venezuela, requiring increased severance obligations.

The quarter also included a $1.4 million charge related to the initial accounting for recent acquisitions.

SG&A expense for the quarter was $127.7 million or 17.2% of sales, compared with $115 million or 16.5% of sales in the prior year.

The increase in SG&A expense was driven by higher bonus accruals, increased costs from acquisitions, and higher spending related to employees' compensation.

Foreign currency translations decreased reported SG&A expenses by $4 million in the quarter.

Operating income for the quarter at $96 million was 12.9% of sales compared to $80 million, or 11.4%, of sales in the same year-ago quarter; an improvement of 150 basis points.

The quarter included rationalization charges totaling $1.3 million and $1.4 million of charges related to the change in Venezuelan labor laws.

As Chris mentioned, rationalization charges include actions taken in Asia to restructure Australian (technical difficulty) operations, in Europe to combine two Russian manufacturing plants, and in North America, to consolidate two plant operations.

We expect these actions to result in $4 million to $5 million of annualized cost savings in 2013.

Excluding these special items, operating income was $98.7 million or 13.3% of sales.

Net income for the second quarter was $66.3 million, or $0.79 per diluted share, compared with a net income of $57 million, or $0.68 per diluted share, in the 2011 second quarter; a 16% increase in diluted earnings per share.

Excluding special items, net income was $68 million, or $0.81 per diluted share in the second quarter, a 19% year over year increase.

In addition, the translation effect of weaker foreign currencies had a negative impact on net income of $1.3 million or about $0.02 per diluted share in the quarter.

The effective tax rate for the first quarter was 32.4% compared with 30% in 2011.

The effective tax rate is higher than the prior year's rate, primarily because of the mix of income earned in higher tax rate jurisdictions.

This higher tax rate reduced our diluted EPS by approximately $0.03 per share from the prior year's rate.

Now moving to the segments -- on a year over year basis, sales in North America were up 29.4%, volume contributed 13.3%, prices increased sales 3.4%, acquisitions added 13.8%, and foreign exchange decreased sales by about 1.1%.

During May 2012, the Company acquired Wayne Trail Technologies, a manufacturer of automation and tooling systems.

Wayne Trails contributed $10 million of sales or about 3% of the North America segment sales during the quarter.

Our legacy automation business grew by over 30% in the quarter, as more and more customers see the productivity and quality benefits of automated welding solutions.

North America improved its EBIT margin in 2012 to 16.8% of sales, a 60 basis point improvement over the prior year.

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

The effect of recent acquisitions, including initial accounting charges, reduced North American EBIT margins by 100 basis points in the quarter.

Now Europe -- sales in Europe were down 17.8%.

Volume decreased sales by about 9%.

Price increases over the prior year contributed 1.7% to sales.

Foreign exchange decreased sales by 10.4%.

Volume declines were more pronounced in Southern Europe and Russia with volumes in Northern Europe relatively stable.

The foreign exchange impact was caused by the significant weakening of the euro against the dollar.

Excluding special items, Europe achieved an EBIT margin of 9.2% of sales; an improvement of 160 basis points.

The higher margins were the result of the improved mix and better pricing.

On a year over year basis, Asia-Pacific sales were down 16.8%.

Volumes contributed 17.1% of the decrease.

Prices increased sales by 1.2% and foreign exchange decreased sales by 90 basis points.

The volume declines were primarily related to weakness in construction and related markets in China.

Asia-Pacific's EBIT margin was 4.4% in the quarter compared with 1.2% in the prior year.

The improvement in EBIT margins was the result of strong performance in Australia and the improved mix.

Sales in South America were down 1.6%, volume reduced sales by 5.1%, price increases contributed 12% to sales, and foreign exchange decreased sales by 8.4%.

The volume decreases were the result of softening demand in most markets outside of Venezuela.

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

Excluding special items, South America's EBIT margin declined by 130 basis points to 8% of sales compared with 9.3% in the second quarter of 2011.

Weakening volumes and increased costs drove the margin deterioration.

In the Harris Products Group, sales were down 7.3%, volume increased sales by 4%, price decreases reduced sales by 7.8%, and foreign exchange decreased sales by 3.4%.

Price decreases were largely related to the decrease in metals cost, primarily silver and copper, from the prior year's same period.

Harris Products improved its EBIT margin by 50 basis points to 9.7%.

Strong volume increases in the equipment product line and good SG&A cost control led to the margin expansion.

Operating activities generated $81.7 million of cash flows in the second quarter compared with $28.8 million in the same period last year.

Cash flows for the quarter reflected improved working capital management and higher earnings.

Our year-to-date operating cash flows totaled $161 million.

The Company closed the quarter with a cash balance of $308 million, a net cash balance of $285 million, and net cash to invested capital ratio of a positive 21.8%.

The Company invested $26 million in capital expenditures in the half year.

We estimate 2012 capital spend of between $60 million and $70 million at this point in time.

Through June 30, we have contributed $36 million to our US pension plans and we expect to contribute a total of $60 million for the fiscal 2012 year.

In March, we announced a plan to allow participants in the US pension plan to select a one-time lump sum payment of their plan benefits.

The election period for the deferred vested participants will end in the third quarter and payments will be made in the fourth quarter of 2012.

The maximum possible payments could total up to $100 million if all participants choose the lump sum option.

In addition, a special item settlement loss of up to $38 million would be recognized in the fourth quarter if all participants choose the lump sum option.

This special item charge will be non-cash, reflecting the required accounting for deferred actuarial losses.

The new lump sum payment option will reduce the Company's future pension obligations and lower investment risk and expense volatility.

During the quarter, we paid cash dividends of $14 million and $28 million for the half year.

Our weighted average shares outstanding for the quarter ending June 30 were 83.527 million shares.

Finally, we've purchased $20 million of Treasury stock under our share repurchase program in the quarter and $40 million for the half year.

That's the end of our prepared comments.

Jesse, I'd like to open up the call for questions.

(Operator Instructions)

Thomas Hayes, Thompson Research Group.

Good morning, John, Chris, congratulations on your new positions.

Thank you.

Want to talk to you a little bit first on Europe.

Traditionally, going into the third quarter is a slower quarter, because of vacations.

Just wondering how you guys are thinking about Europe now with the mix of general slowing and the seasonal slowing.

You're exactly right, Tom.

The third quarter in Europe is always the slowest quarter because of the August shutdowns in the Western, particularly the Southern Western, countries in Europe.

I would expect that the slowing that we've seen seems to have stabilized, but I think there's still a tremendous amount of uncertainty relative to the economic and the fiscal stature of the EU and what changes that might present.

So the forecasting of a short cycle business like we're in under these volatile political and economic times becomes quite challenging and problematic.

I believe that we think we're doing the right things.

We're focused on the right segments within Europe and in those areas that we believe have the long-term future for the Company, we're strengthening and growing our position.

Okay.

You guys have done a really good job this year of maintaining pricing, actually growing pricing.

Just wondering your thoughts about being able to maintain that momentum?

Like you said, John, it's coming into a period of a little bit more pronounced slowing.

We've said for many, many years that our focus is on the value-added side of our business and our target is the customer that really appreciates the value that Lincoln brings to the equation.

Vince commented and Chris commented that we made significant progress in improving the margins in the quarter and that was a direct result of shedding low margin business that we don't put into that category.

That'll be our focus on a go-forward basis.

And if you go back to the comments that I made about the individual market segments where we see very positive not only current but long-term type of views, those are all value-added segments and that's where we're going to continue to put our energy and muscle behind.

Okay.

Tom, I would just add to that, that certainly with our growth rates moderating and some volume declines in international markets coupled with the softening that we're all seeing in commodity prices, the rate of price increases will be certainly more difficult moving forward in the short term.

One last one, Vince.

You had mentioned that you expected benefits from the restructuring of $4 million to $5 million.

We saw $1.3 million in cost associated with that this quarter.

I was just wondering what your thoughts were as far as the cost side of that for the next two quarters?

Yes, we'll have another somewhere between $3 million to $6 million of additional costs before we fully rationalize those three locations.

Thanks, guys.

Walt Liptak, Barrington Research.

Wanted to ask about Europe, too.

In your comments on the last question, you said that Europe, you thought, was now stabilizing.

But I wonder if you could talk a little bit more detail about what happened during the quarter on a month-to-month?

Did Russia or Spain get substantially worse?

What kind of color can you give us on the trend that's been occurring there?

I would just comment that from the first quarter to the second quarter, we saw significant deterioration in Spain; in Portugal in particular.

As Vince mentioned, those are markets where we have a very significant market share, so obviously we're more directly impacted by that than we would be in markets where we're not as strong.

The Russian circumstance is one of us having to move a fairly significant plant and relocate it into an existing facility that requires significant change in the layout of that facility.

The Severstal business and I think we commented on this when we bought it, had a very important market share, but that it was not hugely profitable.

It's been our focus to shed the unprofitable side of that business as we make the move.

When we complete the move we will reconfigure our marketing strategy to be sure that we get high utilization and maximize profitability of the newly configured Russian consumable business.

We're quite optimistic, not only in our capabilities to do that, but also in the important growth that we forecast for that market long-term.

Okay.

Yes, thanks for that.

That's an important thing to point out because the euro profits looked good, even though the revenue was a lot lower than I was expecting.

Can you quantify how much of a headwind that Russian relocation was during the quarter in terms of millions of dollars of revenue?

I would just say that Spain and Russia represented the predominant part of the decline on a sequential basis and year-over-year in our European segment.

Walt, if we look at our core European business and we break that down to the, one, the market and two, the kind of equipment in consumables that we consider to be normal, regular flow of products, year-over-year for the full year and in for the quarter, those businesses are relatively flat.

We've got a few markets that are up a little.

We've got a few that are down.

We have a few product categories that are up a little and a few that are down.

Again, if you take Spain and Russia out of that, that would have been the scenario that we see.

It's hard to predict that Spain could get any worse than what it is, unless there's a total collapse of the euro.

While we'll have another six months or so in reorganizing this Russian business, I think the prospects for growth in steel and in welding consumables in Russia is very positive because of the high demand in the energy sectors there.

Okay, got it.

You should see some kind of a sequential improvement out of Russia?

Yes.

I would emphasize just on the Europe sequentials, that the third quarter is almost always weaker in terms of volumes and sales levels in the second quarter, Walt.

Because of the shutdowns in August, almost the whole month of sales are lost in the third quarter in our European segment.

I wouldn't expect the third quarter of 2012 to be any better than the second quarter and it's likely to be a lower quarter because of that seasonality.

Okay.

Just looking at sequentials in Europe, Spain and Russia might have cost you $12 million in revenue during the quarter?

Is that the number you're thinking of?

It was more than that.

Okay.

That answers the question of your competitors had better revenue numbers, organic growth numbers, in the 7% to 9% range coming out of Europe during the quarter.

It sounds like you'd attribute the difference to this Russia situation, as well as Spain and Portugal.

Yes, I would say we have a different situation in Russia, Walt, and that our exposure in the rest of the continent may be a little bit different than others in the industry.

Spain is one of our biggest markets in the continent.

Okay.

Thanks.

Mark Douglass, Longbow Research.

Congratulations, Chris.

Thank you.

Moving on from Europe to Asia, I assume that was incrementally worse than maybe what you were anticipating.

Can you talk a little bit more about some of the markets that you saw pretty significant declines in?

In Asia-Pacific and do you think that market has stabilized as well or do you think there's more to go?

We certainly saw softness in the Asian market across a host of the segments.

We certainly feel that we'll continue to see some seasonal and cyclical weakness in the shipbuilding area.

We have seen a little softness compared to where we had expected in the automotive segment.

But really, I think that the broader execution that we're working on in Asia and specifically, China is ensuring that we're positioning the portfolio for the growth that we see in that market moving forward.

Certainly, although the general market was down as we expressed in our comments, certainly some of that top line compression was driven from some activities that we had in the marketplace to make some improvements in the portfolio.

We've executed on many of those in Q2.

Certainly believe that we're positioned for the growth that we think we see in that market moving forward.

Would that be a lot of it?

I know in the past, you've talked about shipbuilding was really significant.

It's slowed and you're trying to ship a lot of your production, but move more towards end markets outside of shipbuilding.

I guess that's what you're referring to in terms of broaden the product portfolio and market exposure?

Yes, continuing to really expand into some of the other segments, as John mentioned earlier, that have a need and a desire for higher value-added applications for our products.

We certainly, we believe achieving that in Asia.

I also would say that consolidation of our shared services structure in China, which we've completed in the last several months, we believe strongly will be an enormous catalyst for us to be able to effectuate business there in that region and globally more effectively.

The Management team there has done a very nice job of completing that for the Company over the last few months.

Mark, to Chris' point, the work that we've done with the regional headquarters and our ability to import globally produced products to fulfill a much broader segment of the Asian, in total, but the Chinese market, in particular, is really starting to show some good progress.

Our exports into China were actually up, despite the slowing economic conditions there.

We think that's a direct result of broadening our distribution to open up our global portfolio to a large group of Chinese-specific distributors who serve an important market segment there that we've never really participated in.

Okay.

Would you all say that the product lines are moving towards -- are more profitable than the shipbuilding as well?

Is there a mix benefit?

I think there's a mix benefit from two perspectives.

One, there really is no shipbuilding activity right now.

It's come to almost a complete standstill.

There are some shipyards that are fulfilling past contracts, but if you look at the new contract portfolio for shipyards, it's nonexistent.

That was always a very challenging portfolio, when we made a very conscious effort to move away from that, which we think is good because of your comment that the product that we're going to produce in those facilities will be different products that will be higher value-added than the more generic products that are used in the shipyard segment.

We also believe that the segments that we'll be approaching and focusing on will be much more organically growth-oriented than the shipbuilding industry that will be slow for the foreseeable future.

Okay.

Vince, a couple questions.

Was there any LIFO gain or expense in the quarter than what's the consumable equipment mix?

Yes, there was a LIFO credit in the quarter of about $1.4 million.

The mix on machines or equipment versus consumables now is about 65% consumables, 35% equipment; slight shift towards equipment.

Consumables were down a little more in the quarter versus equipment?

Is that fair?

Consumables were relatively flat and actually, equipment was up double-digits without acquisitions.

Okay.

Thanks.

Liam Burke, Janney Capital Markets.

John, with the overall uncertainty in the markets, are you seeing acquisition pricing becoming more favorable since it is a big part of your strategy?

I would say that we're seeing the pipeline maybe emerge with some people who had been sitting on the sidelines.

But it's my experience and we're early in the stages of that, that people's expectations for valuations change very slowly.

That will be an ongoing dialogue that we'll have to have.

It will be very much product-specific in terms of how we see the long-term value and market-specific in terms of how we view those markets over the more medium term that will determine valuations.

But we remain optimistic and I think that our track record, particularly in North America in the last year with the five acquisitions that we made and all of which are performing very well and ahead of expectations, that we're optimistic that, that pipeline is going to continue to stay pretty full.

Okay.

Thank you.

You mentioned part of the second half of the year you'd expect more product introductions and acquisitions to offset weakness in Europe or help partially offset it, rather.

Is Europe a major focus in the product introductions or are you looking across the board worldwide across all markets?

I would say we look across all markets.

Products that are used in different geographies are sometimes different, but when we look at the important segments that we focus on -- energy, construction equipment, transportation and stuff, there's a commonality that goes across most of those segments.

Generally, they're global customers that we're focused on.

An introduction of a product to specifically serve the oil and gas industry would have reach across all of the geographical type of segments because of that commonality.

There are some uniquenesses in the product developments in Europe and Asia and North America that are very much market-specific.

As we see markets start to soften, our focus would move from supporting existing product lines to introducing new product lines to give us that opportunity to capture a larger share of maybe a shrinking market.

Thank you, John.

Holden Lewis, BB&T Capital Markets.

Congratulations, both Chris and John.

Sounds like should be pretty seamless.

That's fantastic.

We hope.

Wanted to ask, since we've beating up the revenue stuff with Europe and Asia pretty well, I think we can move now on to the profit side.

In past downturns, you actually took losses I guess, from an operating margins perspective; Europe, briefly, there in 2009, and then Asia, of course, where you had pretty significant operating losses.

Can you just talk about what you've done to improve the profit generating elements of the Company?

What we're trying to get down to is, as volumes come down and pricing softens, is it likely that's going to generate losses?

Or the progress that you've seen in your margins in recent quarters suggest that maybe your floor is somewhat higher.

Just trying to get a feel for that.

Yes, Holden.

Thanks for that question.

We do believe that we've improved our businesses, particularly in the international arena, significantly in all aspects of execution.

We've lowered our cost base.

We've been paring costs in both Europe and in Asia aggressively.

We've aggressively moved to manage our pricing much better with our existing customer base.

I believe that the numbers speak for themselves in terms of the quality of earnings that we've delivered in this quarter.

In the face of a 17% decline in volumes in Asia-Pacific, we expanded our margins significantly.

The same is true in Europe where we lost about 9% in pure volumes and we still expanded our margins there.

It's quite gratifying to all of our teams around the world that we've improved the quality of our business in both Europe and Asia-Pacific.

With that, we firmly believe that if we were to have a similar downturn to what we experienced in 2008 and 2009, which we don't, at this point, foresee, we will have a higher trough earnings capability across all of our operations.

Again, as a reminder, our trough EBIT operating profit margins in 2009 were 7% on a consolidated basis and we're quite confident that, with the softening in world markets and the potential eventual natural cyclical decline, that we will achieve a much higher trough EBIT earnings ratio.

Okay.

But one of the things that happened this quarter was that your revenues started coming down pretty aggressively, but the pricing held up pretty well.

Maybe talk about sequential pricing, whether that began to soften or whether we're just seeing the effect of costs.

But achieving the type of margin you think you can in a weaker environment, does that rest heavily on the ability to maintain price in a weak environment?

Or is that not the primary determinant in how your margins are ultimately going to act?

I would put that at the top of the list, Holden.

That's also how aggressively we're able to take costs out.

Certainly, there is a fair amount of fixed cost in any manufacturing model and that's difficult to pare down.

But what happens on the pricing line is certainly the most powerful determinant of what our margins will be in the downturn.

But I would continue to emphasize that the important factors driving that pricing capability are --one, what volumes are in the industry in general, what level of capacity utilization we're experiencing.

And then finally, those two factors drive the third, which is what's happening with raw material prices.

Certainly as you follow those prices, you can see, around the world, the important inputs of steel and other commodities are falling and they're led by China, to a lesser extent Europe and not quite flowing through in earnest in North America.

But as raw material prices fall in the future, that will certainly put pressure on pricing and the ability to hang on to that pricing is certainly a key determinant of what our margins will be in a softer environment.

Okay.

Just the last thing on that is, you referenced the mix.

Could you tell us exactly what about the mix is more favorable versus how it's normally been in reducing the margins?

Our equipment business grew by over 10% and our consumable business was relatively stable.

And most of the business that we shed was in consumables that was marginally profitable.

That mix certainly helps our margin profile.

I would add to that, Holden, again, if we talked about the particular market segments that were strong, again, oil and gas and energy, those are generally very product-specific, high margin kind of products.

We expect that trend of the greater participation in that mix, as well as the big demand that we're seeing on the automation side that we've talked about, which is also very good margins, just to continue as people look to shed production costs, offset shortages of skilled workers and improve quality by using automation as a tool.

Chris mentioned specifically the Wayne Trails acquisition.

That is a very good margin business.

It now has a pretty significant backlog in its portfolio and we see demand only increasing as we work to integrate that business into Lincoln and offer up a broad Lincoln product portfolio into their portfolio.

Okay.

Great.

Thanks, guys.

Steve Barger, KeyBanc Capital Markets.

Just to follow up on that last conversation, Vince.

As you look at 3Q, and we're a month into it, and you're looking at volumes, utilization, raw materials, is it fair to say that you expect pricing will remain positive in the back half outside the US or even inside the US or is there some risk to that?

Our overall consolidated price increase on a year-over-year basis was 1.6% and North America led the way in the core welding business with a 3.4% increase.

That was largely in line with what our expectations were.

I would say with what we're seeing in raw material costs right now and what we're forecasting into the rest of the year, that these increases will abate in the last half of the year.

Abate towards zero?

Are you still thinking it remains positive?

Are things moving quickly in the marketplace right now?

Certainly raw material prices are, in places like China, are declining fairly rapidly.

It will be difficult to eke out positive pricing in the last half of the year.

Got it.

From a competitive standpoint, are the bigger, more sophisticated players remaining rational at this point?

I don't know that I can comment on our competitors' rationality.

There's nothing notable I can share with you in terms of irrational behavior at this point in time.

Fair enough.

I would also, Steve, just make a follow-up comment to that.

Certain markets, the global international players have a very significant share of the market and you have a certain market dynamic that's driven by that.

There are other markets in Asia, in particular, where there is no global international player and there are a lot of local players.

And that market dynamic is obviously significantly different than you would see in a mature consolidated market like North America.

Understood.

To that point, are you seeing things change more rapidly in Asia right now?

Are some of the competitors getting more aggressive given some of the volume declines?

The market has always been very, very competitive.

The customers always are very short-term cycle buyers.

They follow steel pricing and they move as they see steel moving up and down the curve.

I wouldn't say we're seeing any significant shift in terms of how that market evolves.

Again, as we talked earlier, we think we know where we want to play and how we're going to play and I think we'll be pretty consistent with that.

What I would just emphasize again, Steve, Asia-Pacific, really focused on China, is the most stressed geographical area because of the highest volume declines in the industry, as well as the biggest raw material price declines.

Those coupled together make that the most challenging markets that we face today.

Okay.

Earlier you were talking about 3Q being lower than 2Q from a top line perspective in Europe due to shutdowns.

But just as you look at your order book, and I know it's short cycle, but should we be thinking about that general pattern for consolidated sales given how end markets are acting?

Would you expect revenue to be down sequentially?

That's fairly common as well.

The third quarter tends to be a lower volume and revenue quarter than the second.

In Europe, it's simply the most pronounced of any region in terms of quarter-to-quarter decline.

Okay.

In North America specifically, you're kind of facing a tough revenue comp.

Should we be thinking that North American sales can still see double-digit organic growth based on what you see right now or is that moderating towards more single?

I wouldn't be able to make that kind of a forecast at this point in time, but certainly growth rates are moderating and double-digit would be a very fine result for us in the third quarter.

Got it.

Thank you.

Greg Halter, Great Lakes Review.

Relative to the pension situation, any indication on how many takers you have for that program so far?

It's still early, Greg, and the deadline for responding is the end of August.

There's a fairly low percentage of the total available participants that can elect this option that have responded to-date.

Many of the responses are likely to come in, in August and even perhaps the latter part of August.

There's a very, again, small percentage of elections that are in right now.

It's not, in our view, indicative of what might eventually happen.

At the end of the third quarter, we'll have that count and we'll be able to give you a final result in the third quarter call.

Okay.

What was pension expense on the P&L in the quarter?

The expense was about $11.8 million in the quarter as compared to about $8.8 million in the prior year.

We had a $3 million increase in pension expense in the quarter on a year-over-year basis.

As I've talked in previous calls, that's split between COGS and SG&A, but the SG&A cost increase for pensions was $1.3 million.

Okay.

You would expect that figure, assuming that you have 100% or anywhere near that, that $11.8 million number to come down, assuming you have a large portion that would take the offer?

It won't necessarily come down, but it would be less volatile in the future.

Okay.

Do you have an estimate on how much of the consumable business that you referred to was shed in the quarter and if there's more of that to go?

We don't have an estimate of the amount of consumables that were shed in the quarter, but we think that we're not completely through that process and we will continue to see that shedding during the remainder of this year.

We're still in the process of consolidating those two Russian plants that we expect there to be a continual paring there and we're not through.

Yet, in Asia-Pacific and China, in particular, in trying to reposition ourselves towards more profitable segments of that market, shedding less profitable parts of the business.

I think we'll see that continue through the last half of the year and probably taper off in the first half of next year.

Okay.

Thank you.

(Operator Instructions)

Walt Liptak, Barrington Research.

I wanted to ask about the share repurchase, Vince.

It looks like you're doing about $20 million per quarter the last two quarters.

With your stock down today, can you just refresh us on how much is left and just what your aspirations are with the repurchase?

We'll certainly be buyers when the window opens at the end of this quarter.

We have a fair amount of shares available, over 3 million, so there's no shortage of shares available, existing Board authorization and even that, in my view, isn't limiting.

If we do run out, we'll ask our Board to reauthorize additional shares in due course.

And we will continue to be a buyer in the last half of this year.

As you can see, we have ratcheted up our buying in 2012 and I would expect that to continue into the future.

Okay.

But the program right now is not $20 million per quarter, it could be whatever you think is appropriate?

It's whatever we think is appropriate.

That was our number for the first and the second quarter and it's not a bad assumption for the last half of the year.

But we remain open to increasing that amount if we see fit.

I just want to get a couple quick ones in on the acquisition.

In the press release it had $50 million in revenue.

Is that LTM or is it more with that contract that you talked about on this call?

No, that's total acquisitions.

Chris mentioned that we had done five deals in North America in the last -- just shy of a couple of years.

It not only includes Wayne Trails, but it also includes our acquisitions that were made in last year's second and third quarter.

Okay.

In the press release from May 17, you've got $50 million for Wayne Trails revenue.

Right.

That was the latest 12 month Wayne Trails revenue.

Did that include the $20 million contract in it?

No, that hasn't even started yet.

Okay.

Over the next 12 months, it's going to be something in excess of $50 million?

Wayne Trail sales will be higher than $50 million in the next 12 months.

The purchase price from your cash flow looks like $27 million?

Yes, that's not the complete purchase price, Walt, because there are some holdbacks.

The total purchase price was a little over $31 million.

Okay.

John, I think, mentioned the profitability as being very good.

Is it above Lincoln margins -- operating margins?

It is above Lincoln's operating margins.

Okay.

This is going to be --

Remember, we did have some initial accounting charges of $1.4 million that came through the quarter.

Once that all gets cleaned up, we think it'll have a very good margin profile.

This is going to get reported in North American segment?

Yes, it will be in North America.

Are the margins above North American margins?

I'm not going to give you any more detail on that, Walt.

Okay.

All right.

Fine.

Thank you.

Stanley Elliott, Stifel Nicolaus.

Real quick on the acquisition side, it's certainly been very active this year.

Is there a tradeoff with some of the restructuring things that you're going to be doing now as opposed to continuing with the momentum on the acquisition side in the back half of the year?

How do you think about that?

I don't know that I see a tradeoff, Stanley.

We're going to continue to execute our strategy and improve our business.

One of those strategies is buying companies that fit our product or geographical niche requirements.

And the second one is continually improving our cost position and the operations of our existing businesses.

We don't see those as at all related.

We will do both and we will do them both concurrently and we think we can do both of those well concurrently.

Last question from me, on the inventory on the year-over-year decline, was that more finished goods, raw materials?

A little more color on that, please.

It was across the board.

Some of that was translations, as particularly the euro weakened significantly, it translates into lower inventory dollars.

But it was largely across the board in terms of the effect on categories of inventory.

Thank you very much.

Holden Lewis, BB&T Capital Markets.

Just wanted to touch base on expectations for production and any risk you might have from underabsorption.

Obviously, things have sort of cascaded lower pretty quickly here.

Your import levels are flat, but do you feel like you need to adjust your production going forward to the new global realities or how are you viewing your inventory and production levels?

That's a good question, Holden.

We are adjusting our production levels to meet current demand.

Certainly, lower production levels will have ultimately an impact on the absorption of those fixed overheads.

That will certainly result in a headwind to our business going forward, but we will aggressively manage our costs down to meet current productive needs.

At current levels of demand, how long do you think you need to under-produce demand to get inventories where you envision them being?

Is this a one quarter hit or something that might take a couple quarters, all other things being equal?

We're managing our inventory levels right now to current demand.

I wouldn't say there's a period of adjustment that's required, Holden, over the next quarter or two.

It's happening currently.

We have reduced, based on the previous question, we've taken down our finished goods inventories in line with what our expectations are and raws and [whips] have come down to some extent as well.

I wouldn't say there's a significant adjustment period to come, but we're continuing to adjust our production levels in all of our plants around the world and particularly in the slower regions to meet existing demand.

I wouldn't say there's any period of adjustment from this point on.

I would add, Holden, that we still have certain markets, North America being a good example, where our year-over-year demand numbers are still positive.

Depending on what happens in the rest of the world and how that might impact the North American export business, we still view the second half of the year to be reasonably positive for North America.

Okay.

Great.

Thanks, guys.

There are no further questions at this time, Mr. Petrella.

Thank you very much.

Thanks for joining our call today.

We very much look forward to talking to you at the end of October and reviewing our third quarter operating results.

Thank you very much.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.