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Lincoln Electric Holdings, Inc. (NASDAQ:LECO)

Q2 2011 Earnings Call

July 21, 2011 10:00 am ET

Executives

Vincent Petrella – CFO

John Stropki – Chairman and CEO

Analysts

Chuck Murphy – Sidoti & Co

Tom Hayes – Piper Jaffray

Mark Douglass – Longbow Research

Walt Liptak – Barrington Research

Jason Rogers – Great Lakes Review

Steve Walter [ph] – KeyBanc

Operator

Greeting and welcome to the Lincoln Electric second quarter 2011 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Vincent Petrella, CFO of Lincoln Electric. Thank you. Mr. Petrella, you may begin.

Vincent Petrella

And thank you, Latania and good morning to all of you that are joining our 2011 second quarter earnings call. Results for the quarter, I am happier, 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 our company website.

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

John Stropki

Thank you, Vincent. Good morning to all of you on the call today. As the economies around the world continue to grow, we improved our performance and market position throughout the global markets. Second quarter sales were $699.3 million, an 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 %. As the 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 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 detail 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 some seasonal softenings in July based on annual vacation slowdowns within several key market segments. Margin improvements in the quarter were driven by improved pricing and the favourable impact of increased volumes on our overall manufacturing costs which were offset by significant material cost increases. (04:46) Seasonal 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 comparable, although the comparisons to prior years soften somewhat in the second quarter.

Industrial output rose moderately in June, up 0.2 tenths of a percent sequentially and was up 3.4% from June of 2010. Capacity utilization was at 76.7 %, the same as May, but still below its pre-recession highs. Purchasing Manager Index was 55.3 in June, up 1.8 points from May and marking the 23rd consecutive month of expansion in the manufacturing sector.

A recent survey by (inaudible) showed that industrial sector will continue to grow, although at a slower rate than during the past 12 months. Overall manufacturing activity still remains very 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. However, there was also some 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 cost 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 lie ahead.

Our sales and enhanced customer service efforts in the Middle East and Africa markets also 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 of the region have allowed us to press forward with market share gains despite the most recent (inaudible) difficult external factors. An important upcoming event mentioned in the previous call, Lincoln will be the global welding partner in the worlds event in London this coming August – October. We will showcase our V6 virtual welding system before estimated 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 this skills contest will be exclusively Lincoln. And students can try the V6 tech in the contest areas and we will also have the opportunity to feature this product at the General Assembly presentation.

Ahead of the London event, we are also participating in regional competitions in Skills France, Skills Netherland 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 (inaudible) businesses were masked by additional competitive pressures in certain consumable product were strained by weakening automotive production and a bit of a slowdown in the pipe build 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 improved performance trajectory of our businesses there.

As example, infrastructure and heavy equipment manufacturers offer important opportunities for us in China. Caterpillar, John Deere, Komatsu, Sony and a number of other heavy equipment manufacturers, both domestic and international, are moving ahead with major new plant and expansion plans in China. Beyond the important progress in building out our manufacturing capabilities and commercial footprint in China, we have also 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 business, 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 segment’s sales increased 34% in the quarter to $38 million, driven by significant sequential increases in Brazil, Venezuela, Argentina and Colombia. Brazil has attracted over $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, plans for ports, rail roads, airports, highways which need to be upgraded or constructed.

We are also leveraging our total welding solutions offering throughout all of South America to increase sales of both consumables and equipment. As examples, we would see the 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 a large cross-country pipeline in Colombia.

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 the 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 these cost increases. In the US, refrigeration and HVAC showed (inaudible) gains in the aftermarket 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 11% increase in May.

Our OEM business is strong; wholesale is up and industrial distribution grew as we benefitted 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 outperform 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 tonnes in June. And China’s crude steel production was nearly 60 million metric tonnes in June, up almost 12% year over. 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 and 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 expand and strengthen our teams. This year, we’ve 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.

Vincent Petrella

Thank you, John. As John pointed out, our second quarter of 2011’s financial results reflected a significant quarter over quarter improvement in revenue and operating earnings from the second quarter of 2010. Consolidated sales were 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 $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 expenses 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 a 11.4% of sales, compared with $51.1 million or 9.9% of sales in the same year-ago quarter, an improvement of 150 basis points. 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 was $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 in 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 by 1.3%. North America improved its EBIT margin in 2011 to 16.2% of sales, 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 topline 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’s second quarter included higher margins associated with the completion of the 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 increased sales by 9.2%.

Excluding special items, Asia-Pacific EBIT margins were 1.2% in the quarter compared with 1.8% in the prior year’s same quarter. Sales in South America were 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 were 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 with 3.5% of sales in the second quarter of the prior year.

Strong volume growth and good cost control drove the margin expansion. Compared with 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 costs, 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 SGF&A cost control led to the significant 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 and net cash balance of $241 million and a net cash to invested capital ratio of 17.6%. The company invested $29.4 million in capital expenditures in the half year. Our 2010 capital spending plan should approximate our annual depreciation and amortization expenses. We estimate that at this point in time the 2011 capital spending for the year will be between $60 and $70 million.

During the quarter, we paid cash dividends of $13 million. Our weighted average shares outstanding for the quarter ending June 30, 2011, were 84,105,000 shares on a post-split basis. Finally, we purchased $12 million of Treasury stock under our 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. Latania?

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator instructions) Our first question comes from Chuck Murphy with Sidoti & Co.

Chuck Murphy – Sidoti & Co

Good morning, guys.

Vincent Petrella

Good morning, Chuck.

John Stropki

Good morning.

Chuck Murphy – Sidoti & Co

First let me congratulate you on a very impressive quarter, particularly in light of your European competitors’ results.

John Stropki

Thank you.

Chuck Murphy – Sidoti & Co

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?

John Stropki

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

Chuck Murphy – Sidoti & Co

Alright. Your competitor mentioned that the financial issues of the European countries is going to have a – effect into the real economy, I was wondering if you’ve seen any sign of that?

John Stropki

Well, I think your question related to our ability to take share and 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.

Chuck Murphy – Sidoti & Co

(inaudible) separate question, John, I mean, the relation to the first question?

John Stropki

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’ll 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 that 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.

Chuck Murphy – Sidoti & Co

So, maybe necessarily you’ve seen (inaudible) jump in the orders as well?

John Stropki

Yes, I would say if you looked at the quarter’s progression, clearly June, the final month in the quarter was the softest quarter from – softest month from a year over year volume standpoint and we’ve 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.

Chuck Murphy – Sidoti & Co

Okay.

Vincent Petrella

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

Chuck Murphy – Sidoti & Co

Got it. Okay. And my last question was just in regard to your comment that you’ve seen the kind of normal slowing in third quarter order patterns, is that to say we should expect, I guess, at least, directionally that sequentially we’ll be down for the third quarter?

John Stropki

Well, our normal seasonality, Chuck, with the – 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 shutdown and summer vacations that basically occur around the world. The sales line can hold up near the second quarter, but from an operating standpoint, because of the issue of covering your fixed overheads with lower production level is to be at lower profitability. Eight out of the last ten 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.

Vincent Petrella

I guess, one other point, Chuck, 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 in August, so we’ll have that compounded by the European holiday season.

Chuck Murphy – Sidoti & Co

Okay. Thank you, guys.

Operator

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

Tom Hayes – Piper Jaffray

Thank you. Good morning, gentlemen. Congratulations on the quarter. Two questions, one, it looked like you had solid growth from your recent acquisitions in the European market, I guess, Russia specifically, I am just wondering maybe if you could provide some color on how all the integrations are going, are we done with that kind of market opportunity, and (inaudible) Poland facilities?

Vincent Petrella

Well, our – let me – three questions, so I’ll try to cover all three of them. First is that, how is our integration going on, we are early in the integration process, we still 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 some 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 great growth opportunities in leveraging the existing product lines of those acquisitions with our other products from around the world and your point, yes, a lot of that additional product will come from our equipment and consumable factories in Poland.

John Stropki

And I would add to that, Tom, that the – the topline has exceeded our expectations early on in our acquisition and integration process. The second quarter Russian acquisitions contributed about $23 million to the topline 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. And early one the margin contribution is not up to what our expectations are and we think that that’s going to improve over the next year, 18 months as we more fully integrate the manufacturing operations. That $23 million of sales from our Russian businesses had a detrimental effect of about 70 basis points on gross margins in the quarter and about 40 on operating profit. So, we expect that business to improve our operating profit and gross margin profile in the next year, 18 months.

Tom Hayes – Piper Jaffray

Great. Thanks for the color. Secondly, if I could, just 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 is pretty flat year over year despite almost $185 million of higher revenue? Just wanted to see if I was thinking about it the right way, is that type of lever sustainable and could we expect to see similar bonus accruals for the balance of this year?

John Stropki

Yeah, I think we will see similar bonus accruals to the extent that our profitability maintains its current run rate, that’s 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 bit more variable that move up with volume levels and certainly, the biggest variable is the bonus accruals that move up as profitability. 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 item.

Vincent Petrella

Tom, I would also comment, we’ve talked about this in the past, as we moved into more of the emerging market areas and have grown our presence there with a much lower SG&A businesses. So, while the gross margin is lower, the SG&A is substantially lower and that blend of mix has a big impact on the total SG&A percentage for the company.

Tom Hayes – Piper Jaffray

Last one, you know the split between machines and consumables for the quarter?

Vincent Petrella

It was about 65/.35, maybe just a little bit higher on the consumable side, but that’s a –

Tom Hayes – Piper Jaffray

65 consumables?

Vincent Petrella

Yes, actually 68/32.

Tom Hayes – Piper Jaffray

Great. Thanks, guys.

Operator

Our next question comes from Mark Douglass with Longbow Research. Please proceed with your question.

Mark Douglass – Longbow Research

Hi, good morning. Congratulations.

John Stropki

Thanks, Mark.

Mark Douglass – Longbow Research

John, you talked about the market share gains, were those – that’s only in particular products or product lines or regions or both?

John Stropki

I think it’s kind of some of all of the above. I mean, we’ve talked a lot over the course of the last several years about our intensive effort on new product development and introductions, I think that we’ve 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 and putting our energy into those 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. And so, we get the sweet spot on that product development side. Any time you would a competitor going through significant turmoil, it’s going to create opportunities in the market and we are looking at those opportunities and we expect to capitalize on.

Mark Douglass – Longbow Research

Okay. And you talked about the issues in China, are you – is the shipbuilding still (inaudible) some confirmation there and I think you mentioned before , maybe trying to move some of the product lines – other applications?

John Stropki

Well, China is a big story and still we believe a very good story from a long-term perspective. You look at almost any data point relative to the infrastructure commitments and the 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 lift, again, driven by the Chinese capital rain and 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 slowdown because of the raining of the investment structure and build-out in the heavy construction equipment side. That’s fine. We are not China for the quarter or two quarters, we are there for 20 years and 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. And then the third element of that is a data we’ve commented, 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’s just going to continue to accelerate.

Mark Douglass – Longbow Research

Okay. And then bring out your – things progress, you just – you continue to better sourcing and (inaudible) consolidation in China, so you are expecting modest improvements in EBIT margins in Asia-Pacific?

John Stropki

Yes, I would think for the short term, yes, modest improvements would probably be the right term. As we said, there are going to be kind of peaks and valleys in the cycle of that depending on a number of factors, but we remain tremendously bullish about the long-term opportunities.

Mark Douglass – Longbow Research

Okay. Final question, you mentioned that the building equipment and consumables hit the 35 – 35% sales growth, is it correct then to infer that equipment volume gains have been much better than at consumables, because always pricing in consumables is a lot stronger?

John Stropki

Yes, I have – Mark – additionally theexcluding 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, our machine equipment business has been growing more rapidly this year than our consumable volumes have been.

Vincent Petrella

Mark, that’s 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.

Mark Douglass – Longbow Research

Okay, thanks.

Operator

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

Walt Liptak – Barrington Research

Hi, thanks, guys. Good morning, and great quarter.

John Stropki

Thanks.

Walt Liptak – Barrington Research

I want to ask about – the question that probably most people would like to know, we start with PLC, having the problems with (inaudible) I wonder if we can get a comment from you about your history with the company and if you could possibly (inaudible)?

John Stropki

We are reading the newspapers every day, Walt, and as you know, we don’t generally comment on our competitors and what’s happening with them either in terms of any acquisition or divestiture opportunities that they may talk about in the marketplace.

Walt – Barrington Research

Okay. I mean, you have a long history – the company had a lot of resources 10 years ago looking at Charter, is it something that you would say that you’ve already tried that and there is other opportunities for the company or are you open to opportunities?

Vincent Petrella

I believe John said we will have no comment on it.

Walt Liptak – Barrington Research

Okay. And let me try again on Europe, the volumes were better than I expected despite the things going on t here and pricing is good. Are you – with the cautious outlook, I guess, you have for the second half, are you expecting pricing is going to get tougher and/or volumes coming up, or is there enough to offset with the market share gains and the sectors that you are (inaudible)?

Vincent Petrella

In John comments he mentioned that steel and commodity costs have risen significantly this year, but we are seeing a moderating in that priding and so that would tell me at this point 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, but where we stand today, it doesn’t look like at this point that we see on the horizon significant input cost increases in our largest commodity buys. From a volume standpoint, I think we think – I commented on a earlier question that we have seen some sequential slowing in Europe, John pointed out 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.

John Stropki

Walt, if you went around the world geographies and went back to where we were, the peak of the 2006, 2007 cycle depending on what part of the world you are talking about, clearly Europe has moved the least in recovering their overall strength, economic strength. And you still have very, very high unemployment rate in Spain and Portugal, obviously Greece is newer disaster. So, the predictability is much more challenging. Again, our focus is in winning in whatever market we got in. It’s going to be a tough market, but we think we are going to win it.

Walt Liptak – Barrington Research

Okay, great. Thank you for the color. I wonder if I could just ask one more about the tax rate, can we expect the tax rate to be a little bit lower this quarter?

Vincent Petrella

Yes, it should be running right around 30%, Walt and as I’ve cautioned before though, that is highly dependent upon our mix of earnings around the world in the last half of the year, 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.

Walt Liptak – Barrington Research

Okay, great. Okay, thanks, guys.

Operator

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

Jason Rogers – Great Lakes Review

Good morning.

Vincent Petrella

Good morning, Jason.

Jason Rogers – Great Lakes Review

If you could talk a little bit about Japan, if you are seeing any early benefits from the infrastructure rebuilding that’s going to be needed there?

John Stropki

Jason, we are still a pretty small player in Japan. I mean, I’m pleased with the performance that we are getting, but it is off of such a small base. We would not be a huge recipient of major economic growth within the Japanese market. Now that being said, as the infrastructure ought 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 the domestic equipment that is part of the rebuilding effort. So, it does represent an opportunity, but I don’t view it as being a huge opportunity for us in the short term.

Jason Rogers – Great Lakes Review

Okay. That’s helpful. Looking at the US, are you seeing opportunities – you hear a lot about the infrastructure need in this country with bridges and so forth being structurally deficient, I am wondering if you are seeing any kind of benefits with that area?

John Stropki

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 until our government figures out how they are going to pay the social security checks, they are probably not going to be investing the kind of money that they should in infrastructure, but it is going to happen – it needs to happen, it must happen and 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’ve talked as an example, the energy sector, the two nuclear power plants that are under construction in the US, we’ve established a major platform there and we are doing exceptionally well in the early stages of that and 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.

Jason Rogers – Great Lakes Review

Right. And then looking at the acquisition environment, just wonder if I could get your latest thoughts on that area and regions you may be focused on currently?

Vincent Petrella

Well, we are constantly, Jason, looking at the right opportunities at the right price and 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, it lines up with our strategy, and our strategy is that we want to identify properties that give us strength in emerging markets and 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 automation 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’s what we’ve been saying for a long time and 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 important at the right prices as well to improve our returns and shareholder value.

Jason Rogers – Great Lakes Review

Okay. And finally, Vince, do you have the shares that were purchased in the quarter, either the number, the average price paid?

Vincent Petrella

We spent $12.4 million and the average price was right around 36, give a moment, I’ll get the exact number here. Yeah, we purchased in the quarter 365,000 shares for $12.4 million.

Jason Rogers – Great Lakes Review

Okay. Thanks a lot.

Vincent Petrella

Actually $34 a share. I’m sorry. $34 a share.

Operator

(Operator instructions) Our next question comes from Steve Walter [ph] with KeyBanc. Please proceed with your question.

Steve Walter – KeyBanc

Hi, good morning, guys.

Vincent Petrella

Hi, Steve.

John Stropki

Hi, Steve.

Steve Walter – KeyBanc

Just want 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. It sounds like you are being a bit more cautious on 3Q, should we think about mid-to-high teen incremental margins as being right in the back half?

Vincent Petrella

That’s probably correct. The second quarter, our incremental were hurt by the Russian acquisitions that I talked about in the call and afterwards on some of the questions as well as the negatives, if you will, in 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 business, including North America showed some nice improvement in Europe in Harris and South America, but Asia Pacific and the European acquisitions hurt us.

Steve Walter – KeyBanc

Right. I had to hop off. I think we are talking about Asia-Pac really. I had to hop off for a second, but was the issue there more competitive in nature or more end market or – ? If you already talked about that, I can check the transcript.

Vincent Petrella

Yes, it’s a little bit of both. John talked about it in his comments and as well as I and it was a little bit of both. The price/cost issue – we had our lowest price increases of any segment or a business unit in the Asia-Pacific region and that region is having the greatest challenges on the price/cost issues.

Steve Walter – KeyBanc

And John, I did hear you say there is more challenging market conditions there right now. Last night, one of the Chinese PMI indices slipped sub – 50. If Chinese growth would come in lower than people expect, would your strategy be to get more aggressive on price to take some share and kind of jumpstart that or would you on remaining profitable for however long that lasts?

John Stropki

I think the part that you missed was we talked about the fact that our focus in China is really on the long-term, not on the short-term. So when I look at our 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 allow us to be profitable over the long term, not focus on short-term incremental kind of gains.

Steve Walter – KeyBanc

Okay, got it. Thanks very much.

Operator

There are no further questions in queue at this time. I would like to turn the call back over to Mr. Petrella for closing comments.

Vincent Petrella

Well, thank you Latania and thanks for joining us on the second quarter call. We think we made significant progress towards meeting our strategic and operations 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.

Operator

This concludes today teleconference. You disconnect your lines at this time and thank you for your participation.

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