Lincoln Electric Holdings, Inc. (LECO) Q2 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the Lincoln Electric 2013 Second Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Vincent Petrella, SVP and Chief Financial Officer. Thank you. Sir, you may begin.

Thank you, Brenda, and good morning to everyone. Welcome to the Lincoln Electric 2013 Second Quarter Conference Call. We released our financial results for the quarter this morning prior to the market's open, and our release is available on the Lincoln Electric website at lincolnelectric.com or by contacting our Investor Relations office at (216) 383-2534. Joining me today on the call are John Stropki, Lincoln's Executive Chairman; and Chris Mapes, President and Chief Executive Officer. John will start the discussion this morning with an overview of the quarter, and Chris will highlight our top line performance and strategic initiatives. I will then cover the numbers and our uses of cash. We will then take questions following our prepared remarks. We are using a slide presentation as part of today's webcast, which can be accessed on our website under the Company and Investor Relations tabs. The presentation will also be posted along with the replay of the call later today. Before we start our discussion, please be reminded 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. Additionally, we will also discuss financial measures that do not conform to U.S. GAAP, and you may find important information on our use of these measures and their reconciliation to U.S. GAAP in the financial tables that we have included in our earnings release. With that, let me turn the call over to John Stropki.

Thank you, Vince, and good morning to everyone joining us on the call today. We'll begin by reviewing Slide 3. We are pleased to report that despite the combination of uneven end market conditions and challenging year-over-year comparison during the second quarter, we were able to increase our quarterly profit margin by 9%, achieving a record operating income margin of 14.8% in the quarter, up 150 basis points compared with the prior year. Additionally, we achieved double-digit earnings growth, up 10% to $0.87 on a reported basis and up 12% to $0.91 on an adjusted basis. We also increased our operating cash flow by 31%, with a cash conversion ratio of over 120%. Lastly, we increased our return on invested capital, or ROIC ratio, by 20 basis points to 18.9% compared with the December 31, 2012, ROIC of 18.7%. Looking at capital allocation, we continued to invest in our business to ensure that we are well-positioned to achieve our long-term growth goal, and we also accelerated the return of cash to shareholders, reflecting our confidence in delivering on our 2020 Vision objectives. In the second quarter, we returned $73 million to our shareholders through the combination of dividends and increased share repurchases. And just this past Friday, we announced that the board approved a new 15 million share repurchase program. This program now authorizes total shares for repurchase of approximately 20% of our diluted weighted-average shares outstanding. This program will give us the added flexibility to continue our balanced approach of investing for the long-term growth and accelerating the return of cash to shareholders. Now before I pass the call to Chris, and looking at the summary of the second quarter income statement on Slide 4, it is clear that the results demonstrate our ability to drive measurable improvements even in weaker market conditions and even as we are incurring additional overhead expenses to integrate our new acquisitions. We are focused on optimizing our product mix in targeted regions, continuing to invest in our strong product pipeline and generating improved profitability from our operational initiatives. We are clearly executing on what we feel is a disciplined approach that positions us to meet our long-term 2020 Vision goals and to continually increase shareholder returns. Chris will now walk us through the top line performance and comment on the key end markets, as well as update us on specific initiatives.

Thank you, John, and good morning, everyone. Moving to Slide 5. Our second quarter sales declined 2% to approximately $727 million. Looking at the key components of our reported sales performance for the second quarter, we realized a 3% increase from acquisitions we completed last year, 2 of which have yet to fully anniversary: Kaliburn, Burny, which is part of our plasma and shape-cutting strategy; and Tennessee Rand, which is part of our global automation strategy. Price was relatively steady on a consolidated basis, led by a 16% gain in South America, reflecting pricing actions taken to address the devaluation of the Venezuelan currency. These gains were offset by lower pricing in our Harris Products Group from lower pricing on declining raw material costs, most notably in silver and copper. Volume was lower by 5% despite 8% higher volumes in South America on rising demand for our solutions in the region and 2% higher volumes in Harris Products Group on international expansion. These gains were offset by lower volumes in North America, with approximately half of the decline driven by our strategy to reshape part of our business mix towards differentiated and specialty-oriented products. Moving to Slide 6, which highlights specific end sectors. The transportation sector continues to expand in several key geographies, specifically automotive. This growth is most pronounced in the U.S., China and Mexico, where we've been able to expand our presence in this sector on the strength of our footprint and our differentiated solutions. The heavy fabrication sector, where we have a strong presence globally and particularly in North America, is experiencing ongoing slow demand for earth moving, mining and agricultural equipment, due largely to excess industry supply and inventory buildup in the last few quarters, as well as from weak commodity pricing in a sluggish demand environment. While there is no expectation for this sector to materially improve in 2013, we have been able to expand our presence in target areas, with our recent introduction of the Power Wave S700, which adds to our already impressive offering for this sector, and which has helped to offset the double-digit percent industry decline in countries like Australia and China. Construction appears to be in its early stages of recovery, led by commercial low-rise buildings in the U.S. and in China, with new high-rise commercial projects still relatively soft. Residential construction, which is an end sector that our Harris Products Group serves, has also shown recovery in the U.S., off of a historically low run rate. Shipbuilding continues to be a challenging sector due to lack in investment in Asia Pacific. Brazil remains a highlight due to ongoing reinvestments in its shipbuilding and infrastructure sectors, and we are seeing increased activity in LNG and other specialty vessels. And finally, energy-related markets, which include offshore, pipe mill and pipe line, Power Generation and processing, are showing continued growth globally. We are active in this market and are capturing opportunities leveraging our footprint, specialty alloy solutions and our automation solutions. New solutions, such as our Lincolnweld 842-N [ph] submerged arc flux position, have also allowed us to accelerate growth in this important sector. Moving to Slide 7. We remain focused on investing in our business through this portion of the cycle by aligning our operations and commercial efforts to capitalize on long-term profitable growth opportunities and improve shareholder return. In the quarter, we began our investment in an automation facility outside of São Paulo, Brazil. This facility will allow Lincoln Electric to offer an unparalleled automation service offering in the region and enhance our ability to serve our multinational and regional automotive and OEM manufacturing customers more effectively. We expect this site to be running in late 2013. Other areas of focus have been our continued investment in a global ERP system to drive improved productivity and profitability. Year-to-date, we have completed 4 installations and will complete an additional 3 by year end, which exceeds our efforts in 2012. On the commercial front, we continue to expand our market presence, launching over 65 new solutions or product enhancements in the quarter and added sector specialists in key regions to support our growth strategy. Finally, we are also rolling out a new mobile CRM tool to our North American sales force, which should enhance our ability to serve and support our customers. Looking to the second half of the year, we expect that top line comparisons will continue to be challenging. While July sales data is still preliminary, trending suggests that demand remains stable on a sequential basis, which reinforces our cautious view. As such, we do not expect any meaningful organic sales improvement in the back half of the year due to customer uncertainty and market trends and global industrial production rates. Switching to expectations on profitability and earnings performance, we do expect to see continued improvement in year-over-year margin and earnings performance, as we anticipate that the benefits of favorable mix, our internal initiatives and cost control measures will offset top line headwinds and investments in our global initiative. Now I'll pass the call to Vince to cover our segments' financial performance, balance sheet items and uses of cash in more detail.

Thank you, Chris. Walking through the income statement highlights on Slide 8. Our consolidated sales were down by 2.2% compared with the prior year's second quarter. Volume decreased reported sales by 4.9% and pricing was relatively flat. Foreign exchange had a slight negative impact on sales, and acquisitions contributed an increase of 3.1%. Second quarter gross profit margin increased 280 basis points to 33% compared with 30.2% in the comparable prior year period. LIFO charges in the quarter totaled $1.4 million. The prior year had LIFO credits of $1.4 million. The quarter also included a $2.5 million charge related to the Venezuelan currency devaluation. The improved gross margins were primarily attributable to a better sales mix, an improved price cost relationship and operational improvements. SG&A expense for the second quarter increased 140 basis points. The increase is primarily related to incremental SG&A from acquisitions and general increases in SG&A spending. Operating income for the quarter increased 140 basis points. The quarter included rationalization charges of $850,000, primarily related to factory consolidation in North America and Asia Pacific. Adjusted operating income before rationalization charges and charges related to the Venezuelan currency devaluation was $107.7 million or 14.8% of sales, a 150 basis point year-over-year improvement, as well as an all-time quarterly record. Diluted earnings per share increased 10% for the second quarter compared with the prior year. Excluding special items, adjusted diluted earnings per share increased 12.4% over 2012 second quarter. On a reportable segment basis and excluding special items, North America welding improved adjusted EBIT margins by 140 basis points in the second quarter. Improved mix and pricing improvements drove the increase despite the decline in year-over-year volumes. Europe welding's adjusted EBIT margin declined 80 basis points in the quarter. The decline was attributable to the 4.9% reduction in year-over-year volumes. We experienced better top line results in Spain, Poland and the Netherlands; and weaker sales in Russia, Germany, the U.K. and Italy. Rationalization actions helped to offset this macroeconomic weakness. The Asia Pacific segment recorded an adjusted EBIT margin of 90 basis points in the quarter. Sales in Asia Pacific were down 17.8% due to volume, and pricing declined 1.2%. The volume decreases were primarily caused by the continuing softness in the construction and related machinery markets in China. In addition, Australian volumes declined as a result of lower mining and large-scale project activity, as well as a general industrial slowdown in that market. South America welding adjusted EBIT margin increased to 24.8% because of significant improvements in our Venezuelan, Colombian and Brazilian operations. The price increases were primarily caused by the higher inflationary environment in Venezuela. The Harris Products Group second quarter EBIT margins declined by 140 basis points. Volumes improved across the portfolio. However, declines in metal prices, primarily silver, compressed margin realization in the consumables business. We generated $107 million of operating cash flows in the quarter after contributing an additional $26 million to our pension plans. Our average operating working capital to sales improved to 19.5% at June 30 from 20.9% in the prior year's same period end. During the quarter, we spent an additional $57 million repurchasing about 1,015,000 shares for treasury. In addition, we paid a dividend of $17 million, representing 17% year-over-year increase in our payout. We ended the quarter with no net debt and over $256 million of cash on our balance sheet. We will continue to invest in the business for the longer term and prudently return cash to our shareholders. And with that, I would like to open up the call for questions. Brenda?

[Operator Instructions] Our first question comes from the line of Tom Hayes with Thompson Research Group.

Chris, I guess, one question for you. As you're going through the slides, you had indicated that about half of the decline in North America was related to a program or a strategy. You kind of went over that kind of cost. Could you maybe elaborate on what that is?

Yes, absolutely. We really had 2 anomalies when I think about the business on a year-over-year basis. The first one is in 2012, there was an opportunity that was created in the aluminum marketplace. There was a casting operation, competitive casting operation that had a problem at a facility, and we've got an aluminum caster up in Canada. Because of the compression of capacity in the marketplace, we participated in the rod market pretty extensively in the second quarter of 2012 that we normally don't participate in just to serve that market. That was the first anomaly. Really, the second anomaly was that we've continued to work on our acquisitions. Our large consumable acquisition in the nickel space, we've continued to make improvements in that business. Part of that has been focusing on products and segments, and we actually moved away from a couple of those products and markets in Q2 and -- versus prior year. As you've seen the expansion of the profitability, our North American business, we're very excited about where that acquisition is, as well as the other acquisitions we brought in. But we expected there to be that dynamic in the business for Q2.

Okay. How much of the North American volume decline then was attributable to export? Or was export up for the quarter?

Export was actually flat-ish for the quarter year-over-year.

Okay. And then, Vince, you kind of alluded to the majority of the SG&A increases related to acquisitions. Can you just give a little bit of clarity on that?

I'm sorry, a little what?

A little -- I mean, could you kind of maybe ballpark the dollar figure that's kind of driven by acquisition-related SG&A increase?

I think it's between $5 million and $6 million.

Our next question comes from the line of Schon Williams with BB&T Capital Markets. Christopher Schon Williams - BB&T Capital Markets, Research Division: Could you talk a little bit about the pricing environment? I actually thought the pricing in North America was somewhat tepid kind of given some of the normal increases that would be going through this time of year. Can you just speak -- just talk a little bit about kind of price cost environment?

Well, certainly, the pricing environment is relatively stable. We have experienced some improvements in our price cost relationship during the course of the quarter and the year-to-date. Having said that, I would say that North America is one of our stronger pricing environments on the welding side of our business. Christopher Schon Williams - BB&T Capital Markets, Research Division: Would you expect that -- I mean, you put up 30 basis points of pricing in North America in Q2, would you expect that to accelerate? Or this is the type of level we should expect kind of through the year end? There wouldn't be any additional prices going through either on equipment or consumables in North America?

Yes. At this point, based on the volume experience that we've had on a segment by segment basis and the level of raw input cost trends, I would expect more of the same for the last half of the year. And at this point, there aren't any broad-based anticipated pricing actions in our marketplace. Christopher Schon Williams - BB&T Capital Markets, Research Division: Okay. And then as a follow-up, if I may, obviously, the pricing environment in South America is quite robust because of the situation in Venezuela. I mean, just help us understand here because, I mean, it feels like you've been over-earning to an extent maybe there for the last couple of quarters, certainly putting up very good margins this quarter. I'm just trying to get a sense of how sustainable is that over the long term? Is there anything changing in the inflationary environment that would cause that margin to start to come back to historical levels in the near term?

Well, Schon, South America is a combination of positive influences in the quarter and, certainly, the half year. Venezuela's margins have expanded as their inflationary environment has accelerated. However, almost equally as important is how robust our turnaround and operational improvements have been in Brazil and Colombia. We're experiencing very strong environment in Brazil and have had very good results in Colombia. And all of those factors combined have led to a very high operating margin in that segment. Certainly, a fair amount of the improvement is caused by an accelerating inflationary environment in Venezuela, that the future of the Venezuelan economy and the inflation trends, as well as, ultimately, the devaluations in that currency are at best unpredictable. So at this point, it's difficult for us to be able to say what might happen in the last half of the year and when the next devaluation might occur in that economy.

And our next question comes from the line of Mark Douglass with Longbow Research.

So on the heels of that, Vince, is the devaluation a net benefit then this year in South America?

No, the devaluation on its own is not a net benefit, but it's a consequence of a highly inflationary economy. In other words, the more rapidly unofficial rate rises and the higher the inflation in that economy, the more profits we book and then ultimately, the more severe the adjustment is after the devaluation occurs. So it's -- a highly inflationary economy leads to pretty volatile operating results, and so we will be recording higher and higher profits up until the time where we have the devaluation impact that we had in the first half of this year.

So even though the devaluation was already announced, it really hasn't impacted the markets yet? So we haven't seen that ratchet down?

Well, it is impacting the markets in terms of the economic growth in the marketplace. But the flip side of the devaluation point is that prices will rise more rapidly, and you're seeing that in our 16.2% price increase in the quarter year-over-year.

Okay. I'd assume that it was going to come sooner, I think some of it were [ph] as well negative effects.

We've been able to offset those negative effects by raising our prices in line with the inflationary environment in Venezuela.

Right. And then I assume then similar to what you've explained before that people are willing to accept those higher prices because they want hard goods?

Yes, that certainly is an element of the economic dynamics in a country like Venezuela. But I will point out, Mark, that our volumes in the region were the strongest of any of our welding operating segments. We're up over 8%, and that's across most of our major operations in South America. So we do have a strong underlying business environment that has accelerated in the second quarter of 2013.

Right. Vince, can you quantify the price cost impact, rough numbers of maybe just basis points, whether it's North America segment or business as a whole?

Yes, that isn't something that we've tried to discuss heretofore, and I wouldn't want try to make an estimate at this time on that price cost.

Okay. The gross margin improvement then could you say was mostly price cost? Or was it pretty evenly distributed across mix, price cost and your operational improvements?

Yes, I would say it's was more heavily weighted towards mix and price costs and then third, operational improvement.

Okay. And then just a clarification, Chris, you were talking about the second half. Did I hear you right that sequentially, you think that demand is going to be relatively stable, but that's -- and including the -- are you talking there absolute dollar figures? Or are you talking about the year-over-year growth in volume trends? Because just there's no meaningful organic growth, I believe, in the second half or improvement?

Yes. Mark, my comments were really driven towards looking at the business on a full year basis versus what we have been seeing through the first half of 2013. So we're excited about where we're positioned in the marketplace and some of the new products that we've got coming in, but we just see that globally organic growth is going to be very challenging for us as we move through the rest of 2013.

Okay. So you're talking relatively flat-ish. Of course, the comps are a little easier, too, in the back half, right?

Yes, they would be.

Our next question comes from the line of Steve Barger with KeyBanc Capital Markets.

Chris, just to follow up on that last question, you said you don't expect much organic growth in the back half. But just to make sure we're thinking correctly about the top line, what do you expect the acquisition contribution is in the back half to revenue?

Right now, we're sitting at 3%. So yes, I wouldn't think it's going to differ a whole lot from that in the last half of the year.

Okay. And looking at the expected increase in margins, do you expect more from mix or from the cost reductions? And I'm just trying to get a sense for your confidence level by comparing the things that you can control versus what you expect from the market.

Mix has had a more important impact on our margin expansion than the cost initiatives. We've talked in the previous call and I'll reaffirm in this call that our cost savings initiatives in terms of the rationalization actions are running right around $2.5 million a quarter, and the mix impact is greater than that.

Okay. Switching gears to the prior acquisitions. When you look at the cutting and automation deals that you've done, is that portfolio pretty much complete? Or are there other specific pieces that you need to add?

No. I'll take it from a strategic perspective, we think that not only are there other pieces that we can place into that portfolio, but we view both of those initiatives to be global initiatives. And as we've mentioned, the expansion of the automation capabilities in -- for Latin America outside São Paulo in Brazil, we still see opportunities for us to expand that model more significantly than the capabilities we have today, both in Europe, as well as Asia Pacific.

Are there a lot of targets out there? Or is this the kind of thing where you just have to get your guys on the ground and go figure out the properties?

Well, there are a multitude of targets, but finding the right target that we're trying to mold into the strategy becomes more challenging. So that's very much an engineering-driven business. It's a very customer-centric business. So we've been excited about the businesses we acquired here in the U.S., especially in automation over the last 12, 15 months. And we want to make sure that we find the same kinds of opportunities as we're looking at building into that portfolio globally.

Steve, and as you might imagine, I mean, this is a very much a regional business. We don't move product from the U.S. to Europe or to Asia. You have to be able to support those regionally. So the build-out in places like Brazil, and Mexico and Canada, which have been very successful for us, we think that we can translate those into the other important markets around the world. And the opportunities are regional because they're generally smaller regional businesses.

Right. And I know you don't break this out specifically, but is the growth rate for the automation products accelerating? And is your sales force fully up to speed in terms of getting in front of customers with those products? Or is that kind of still an ongoing evolution?

Our automation growth is robust. It's growing at a double-digit pace, and it's one of the stronger product lines in our portfolio presently.

And as I recall, it's still -- it's less than 10% of revenue, right?

That's correct.

And when your guys are out in the field talking to customers about the value proposition here, what is the pushback or kind of what are the limitations that they're seeing in terms of being able to sell the product set?

I wouldn't probably talk about limitation as much as I would share with you that we're very early in the process in building these capabilities out to our global sales force. So I mentioned in the call that we're developing a CRM tool here. It's -- we'll be rolling it out in the back half of this year. It's yet another tool to facilitate our people around the world to be able to drive value and provide the value to those customers. So you started the comment with 2 questions: one about growth and one about at what point we were with our sales teams and our commercial organization to be able to drive this value. I would tell you that we're in a very early innings of that game, but very excited about engaging that group to provide those services and products to the global customer base.

That's good detail. Two more, and I'll get back in line. First, have you set a buyback target? Or is the increase in the authorization just giving you the flexible -- the flexibility to be opportunistic in a more sizable way? How are you thinking about that?

We haven't set a buyback target, and we are using this authorization to increase our flexibility over the next few years to return more cash to shareholders. I think if there is a message, the $57 million in the quarter, I believe, sends a pretty strong message and the $70 million that we spent for the half year also sends a pretty strong message. Last year's 2012 total was $81 million of cash spent on share buybacks, which was double the average of the 3 or 4 years before that. So I think that's strong enough messaging, as far as I'm concerned.

And last one. Vince, interest rates have been increasing. You made contributions to the pension in the quarter. Are you going to continue to put cash in there? Or will you wait until you see how the rate environment shakes out? Or what's the logic in terms of putting more money in as interest rates increase?

I think our posture might be changing slightly. As the quarter ended, the change in interest rates, the ramp-up, as well as the strong returns on our pension fund has resulted in the U.S. plan being approximately fully funded. And so the gap has been largely closed through June 30. And based on that current environment of a fully funded plan, I wouldn't anticipate future funding at the levels that we've had in the half year, as well as the prior year.

Our next question comes from the line of Walt Liptak with Global Hunter Securities.

I wanted to ask about commodities pricing, and maybe if you could break up pricing on consumable versus equipment. And I think in the comment that you mentioned before that you're not planning on doing any pricing action in the back half of the year, but I'd say go for both -- or the consumables, as well as the equipment?

That's correct. No foreseeable pricing action on both sides of the business.

Okay. And wanted to ask about the profit initiatives and the $8 million to $10 million, $2.5 million per quarter. Can you provide some more detail about some of the -- where the costs are coming out and where you're finding more manufacturing efficiencies?

Well, most of that, Walt, is in line with the plant rationalization actions that we previously announced. So there are actions in Europe in consolidating an Italian plant, there's actions in Asia Pacific where we shut the remaining manufacturing activities in Australia. We have a combination of factories, the plants that are occurring in North America. And the savings are largely. [Audio Gap] overhead, manufacturing and SG&A cost base to bring down our capacities and shift them into more cost competitive environment.

Okay, good. And kind of along those lines, you mentioned the São Paulo, Brazil, facility, can we get some details on square footage, how much revenue you expect to be going through there in 2014, 2015?

Square footage isn't something that I have on the -- off the top of my head, but it's a -- Brazil is an important part of our South American segment. Brazil and Venezuela represent the preponderance of our business in that region.

Okay. And the new plant, I mean is it going to be large enough that we're going to see revenue increases in 2014?

Yes. It's a separate facility that is -- that we're populating with equipment and people outside of our base business there, and we do expect to see the contribution of that business really starting in 2014.

And Walt, just as a clarification, I mean, you've been to our automation center here in Cleveland. I mean, that facility in Brazil is modeled around that. Obviously, it will be smaller than that because it's just a startup operation, but that's the type of activity that we'll be doing there. So we'll be basically importing high-tech equipment and doing the integration of that work to service local customers in the Brazilian market. So some of that activity will be captured in North America and some will be captured in Latin America.

Our next question comes from the line of Liam Burke with Janney Montgomery Scott.

You talked about the China general conditions being weaker, but how much of -- was there any amount of the revenue decline related to product rationalization or the elimination of product that was marginally or less profitable?

Yes. That certainly did continue to occur in the quarter, Liam, as we've now pretty much fully anniversary-ed our pairing of the business in that marketplace that started about a year ago. So there's still a contribution towards the contraction in volumes in China in particular, as we've tried to reposition our business towards a more attractive product and customer portfolio.

Okay, great. And the automation, you pointed out, Vince, that it's one of your fastest-growing businesses -- or your fastest-growing business. How are the margins related to the traditional Lincoln product lines? How do they stack up?

Actually, in the quarter, the margins in our acquired businesses contributed positively to our consolidated EBIT margin profile.

Our next question comes from the line of Joe Mondillo with Sidoti & Company. Joseph Mondillo - Sidoti & Company, LLC: Just to follow up on that last question and sort of the whole product mix issue, is the dynamic between the benefit that you're seeing in the product mix related mostly to automation? Or is there something else going on with your traditional product base?

The automation acquisitions actually contributed positively to that mix. The exposure to declining and re-shifting volumes on our consumable business in Asia Pacific also contributed. So they're both contributing to the improved margin profile but for obviously different reasons. Joseph Mondillo - Sidoti & Company, LLC: Okay. So is that sort of equally weighted between those?

I'd say a little bit more emphasis on the repositioning of the business towards a more profitable mix profile. Joseph Mondillo - Sidoti & Company, LLC: Okay, great. And then my second question, just related to the European business, the margin came down a little bit from the first quarter. Just wondering sort of what your expectations on that market? It seems like you got a little pricing in the quarter. It seems like maybe things are stabilizing somewhat. Going forward, what are your sort of expectations on the profitability there?

We continue to be cautious on Europe. We have seen some of those economies that were hit the hardest, the earliest, perhaps if you're optimistic, are bottoming out a little bit and improving. But on the other side of that coin, some of the economies or our business at least in those geographies that were a little bit stronger before are entering a weakening phase. So on balance, the European segment is on the softer side, and we don't see in the second half of the year that changing significantly. Joseph Mondillo - Sidoti & Company, LLC: Okay. And just to follow up with that, is there any seasonal product mix issue throughout the year in the European segment? Just noticing that the margin declined throughout the year last year. Is that something we should expect this year as well? Or was that just sort of an anomaly just with the dynamics that were going on last year with the European markets?

No. It isn't necessarily, Joe, a mix issue as much as the third quarter tends to be a softer quarter in Europe because August is a holiday month. And so I would expect our European margins to soften a little bit in that quarter simply because volumes will be down from the shutdowns that inevitably occur every August.

Our next question comes from the line of Stanley Elliott with Stifel. Stanley S. Elliott - Stifel, Nicolaus & Co., Inc., Research Division: Most of the questions have been answered. But real quickly on the North American volumes in the quarter, did the fire at the Baltimore facility have any impact in your ability to ship and fill orders which would show up in these results?

Yes, this is Chris. First of all, I will say I am very proud of the work that our employees did to mitigate the impact that could have happened to the marketplace and our customers during this fire at our Baltimore facility. That's a leased facility for us. We had teams of people that left our Cleveland operations to go and try to support them and get that business up and operating. And as much as I'm very excited about those actions, it probably did have an impact for us in the quarter where we probably went to some customers and asked them if we could delay some shipments or find ways to mitigate the impact upon them. Very difficult for us to put a measurable amount upon that. But back up and operating and servicing the market and those customers today, but there probably was an impact within the quarter, although slight. Stanley S. Elliott - Stifel, Nicolaus & Co., Inc., Research Division: Okay, great. And then kind of switching gears to the global ERP system. You guys has 4 installs, 3 by the end of the year. How much more should we expect or how many more platforms or systems, whatever you want to call it, would trickle in into 2014?

Well, we have -- what we have as part of our 2020 strategy to continue to deploy our global ERP system, and we're in the middle of that implementation in our European operations today. So we have a few sites from Europe that will be implemented in 2014. We also will be implementing the product into those sites that we acquire as we continue to look for and identify acquisition opportunities for us as we move forward. So I see that we're going to have several installations in '14. And then we have a handful of other installations around the world in very small locations that we'll be evaluating, determine how we would move forward. But certainly, once we complete the European operations, which are expected to complete in '14, we would have the significant portion of our overall revenue with utilizing the tool. Stanley S. Elliott - Stifel, Nicolaus & Co., Inc., Research Division: So sales like on a year-over-year basis, maybe things slow a little bit on the expenditure side in '14 and really slow down significantly in '15. Is that a fair way to think about that?

I would say that our spending will be fairly consistent and heavy for '14 and '15. And Stanley, just to summarize that the ERP journey that we've been on, North America is largely on SAP. Asia Pacific is largely on SAP. South America's most important operations are on SAP. The Harris Products Group is completely on SAP. And so the last rollout is really Europe. And so you can get a sense for -- we have Europe to go. And then, of course, if we do any acquisitions, we'll put them on SAP and continue our journey of improving our leverage from that ERP platform. But I would say the bulk of our implementations will be largely in place by the end of 2015. And the last segment to be put on will be Europe. We already have a handful of companies in Europe that are on SAP, and we'll finish it off in the next couple of years.

Our next question comes from the line of Greg Halter with Great Lakes Review.

I just wanted to clarify something. In the press release, you talk about $25 million on the pension for the first -- for the 3 months and $75 million year-to-date. And then on the slides on 14, it's $26 million and $81 million, is that just a cash timing difference?

No. The $25 million and $75 million is the U.S. plan, and $26 million and $81 million is simply worldwide. So the bulk of our funding is in the U.S. plan, and we tend to highlight that. But the $81 million is really the consolidated number.

Okay. And relative to the new products, the 65 new solutions or products in the quarter, is that something you envisioned continuing and at that pace? Or will there be any sort of slow down?

I don't think there'll be any slowdown. I mean, with our broad portfolio across the global welding and cutting world, we continuing are looking at enhancements, as well as new product introductions. I'm very excited about the upcoming Essen show that we have in Germany where we'll be showcasing some of those technologies to the customer base globally. So I don't expect that, that will slow down. Obviously, there may be some quarters where it's slightly more significant than others, but continuing to enhance the product line and create new products is a critical element of our business model.

And one last one. Any comments you can make on the relationship or partnership or whatever you want to call it with IPG Photonics?

You know what, they're one of the leaders, if not the leader in laser technologies in the marketplace. So we have a relationship with them. And certainly, the implementation and expansion of our automation systems here in North America and globally just enhances that relationship. So you know what, some of our customers are looking for that particular solution, and we, in working with them and through our partnership, provide them that solution.

Just as a -- follow up with that, and Greg, Chris touched on it, but the Wayne Trail and the Tennessee Rand acquisitions gave us a much stronger platform in the laser side of things, particularly in cutting, which was really never part of our focus as it related to lasers. We were more interested in the welding side of it. But Wayne Trail, in particular, has been very active in cutting solutions in the automotive side of things and had a very strong relationship with IPG as a result of their expertise in that. So as Chris said, that enhances, it grows, it broadens, and you should be able to also take that into our global platform that Chris talked about in terms of European and Brazilian opportunities for us.

All right. And one last one for you, Vince, any thoughts on what your capital spending will be for this year?

I think we've said that we'll spend around $60 million in CapEx for the course of the year.

All right. And I think you're at about half of that right now, so...

Yes.

And our final question comes from the line of Colin O'Connor [ph] with JWest.

Can you just talk a little bit about North America and maybe what you're seeing relative to ESOP? They said on their conference call that they thought they were gaining market share. I'm curious if you guys are seeing that -- if you're seeing any pricing competition because of that?

Well, this is Chris. Well, I'll -- I won't comment on anything they might have said or alluded to in their particular call. I can share with you, though, with great confidence that I believe not only are we performing very well, but I think there's a multitude of segments and areas we're actually gaining share in the marketplace. Excited about some of the segments. Certainly, as we mentioned, heavy fabrication is down pretty significantly here in the North American marketplace, and we think will be challenged for a couple more quarters. Although I believe that there's been a significant amount of inventory that's been pulled out of that particular supply chain, so we still are optimistic that we'll see improvements of that as we move into 2014. Though, when we look at our business here in North America, we think we're executing very well. We love the expansion into automation and feel very comfortable that we're probably actually gaining pieces of share throughout the various segments in this particular market.

Great. And then just -- that's a great segue into my next question. You did a phenomenal job in Q2. Your sales in North America were basically flat with Q1, but your margins improved 110 basis points sequentially. Is that the mix shift that you're talking about in automation? Or is that consumables? Could you help us understand that better?

Well, it's a little bit of all of those. Our mix did help us in terms of our margins. We continue to drive costs out of our manufacturing operations. We are looking at all avenues to improve our profitability throughout our operations, not only North America. So it's a little bit of all the above.

Great. So could you give us a sense of just -- if we assume that you kind of stayed flat in North America into perpetuity, which obviously, you won't, because you'll be gaining share and growing. How much more incremental margin can you gain in North America because of that mix shift or whatever? I mean, can you go another 100, another 200 basis points?

I think we can. I think we've demonstrated a pretty clear track record that we have the ability to execute operationally to improve our business models in North America, as well as other parts of our world. So we expect our businesses to improve their margins on a year-on-year basis. We put together our operating plans on that concept of continuous improvement, and there's no reason why we can't continue to improve as we move forward on our 2020 Vision.

Great. And the last question I have for you is you did a phenomenal job in Latin America. You alluded to the price increases. You -- basically, sequentially from Q1 to Q2, your incremental margin was 73% on a drop-through basis. I mean, you went from 14% to 24.8%. Is that something that's sustainable? I mean, can you keep Latin America at these high 20s margin or mid-20 margins?

Certainly, we've made great progress in all of our operations in South America during the quarter. I will caution you that South America is -- continues to be a relatively volatile environment, particularly in a place like Venezuela. But it is gratifying to look at the improvements that we've made in our Brazilian and Colombian operations during the course of the half year, and we certainly believe that we can build upon those improvements for future sustained earnings growth. But again, Venezuela is an important part of the region, and we will continue to exhibit volatile operations because of that operating environment.

And the last question I have, just relative to that in Latin America, is can you give us a sense for how big Brazil is? And do you think you've benefited a lot from the World Cup and the build down there for the Olympics? And do you think that business slows down afterwards? Or do you continue to see great visibility in that business as you go into '14?

Well, first of all, we're excited about our team operating down in that region, the expansion with the automation business that we'll have up and operating as we've discussed. But I believe that, quite frankly, this is a long-term growing economy in Brazil. You got energy, you got offshore implementations. You do have the catalyst of the World Cup and the Olympics. But we see that as a catalyst, but certainly not a unique catalyst. And we think our investments in Brazil will be very good for the long term, and quite frankly, see it as one of those areas of the world where we see very long-term favorable demand dynamic.

And are you willing to share with us what Brazil is of Latin America for you, or no?

Well, Brazil and -- it's not -- doesn't rise to the level of being a separate reportable segment, but I will reiterate that Brazil and Venezuela are the preponderance of our business on the continent.

It seems we have no further questions at this time. I'd like to turn the floor back over for any closing comments.

Thank you, Brenda, and thank, everyone, for joining the call today and for your continued interest in Lincoln Electric. Again, our second quarter results demonstrate the company's solid execution in aligning operations for a more profitable growth. Longer-term, we remain well-positioned for ongoing profitable growth, with contributions coming not only from our core business, but also from our acquisitions, which have expanded our presence in higher-growth areas, such as energy, transportation and automation solutions. We will continue to leverage our world-class R&D efforts, our leading application engineering capabilities and our extensive, technical sales force. These competitive advantages will drive ongoing earnings and cash flow growth through the cycle and continue to enhance shareholder return. Thank you, again, for your time today, and we look forward to talking to you at the end of the third quarter. Brenda?

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