Greetings and welcome to Lincoln Electric’s 2017 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. And this call is being recorded. It is now my pleasure to introduce your host, Amanda Butler, Director of Investor Relations. Thank you. You may begin.

Thank you, Nicole, and good morning, everyone. Welcome to Lincoln Electric’s 2017 second quarter conference call. We released our financial results earlier today and you can find our release as an attachment to this call’s slide presentation as well as on the Lincoln Electric website at lincolnelectric.com in the Investor Relations section. Joining me on the call today is Chris Mapes, Lincoln’s Chairman, President and Chief Executive Officer as well as our Chief Financial Officer, Vince Petrella. Chris will begin the discussion with an overview of the quarter and Vince will cover the quarter’s performance in more detail. Following our prepared remarks, we are happy to take your questions. Before we start our discussion, please note that certain statements made during this call maybe forward-looking and actual results may differ materially from our expectations due to a number of risk factors. A discussion of some of the 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. In addition, we discussed financial measures that do not conform to U.S. GAAP. A reconciliation of non-GAAP measures to the most comparable GAAP measure is found in the financial tables in our earnings release, which again is available in the Investor Relations section of our website at lincolnelectric.com. And with that, I will turn the call over to Chris Mapes. Chris?

Thank you, Amanda. Good morning. I’m pleased to report that we achieved good momentum in the second quarter with sales growth across all three business segments in all primary product categories and in most end markets. Excluding Venezuela, we achieved approximately 7% sales growth in the quarter on 4.2% volume growth and 2.7% price contribution. Higher organic sales helped mitigate increasing raw material costs and higher operating expenses in the quarter. This resulted in a 28% adjusted incremental margin, a 12% increase in our adjusted operating income and an 80 basis point increase in our adjusted operating income margin to 14.7%. EPS increased to $0.92 in the quarter. On an adjusted basis, EPS rose 17% to $0.97, which excludes acquisition and integration related costs. Operating cash flow has remained strong in the quarter and we achieved good cash flow conversion at 92%. Moving onto Slide 4, we saw good momentum in all product categories with consumable demand surpassing equipment growth in the quarter in all of our welding segments. The Harris Products Group business saw strong demand for both retail channel equipment and consumable products. Geographically, most regions continued to improve. U.S. domestic sales rose 5% and international sales rose 7.3% excluding Venezuela with strongest growth in Asia-Pacific especially in China, Australia and India. End markets continue to improve and we estimate that approximately 90% of our revenue is now exposed to end sector applications that are trending positively. Two areas of notable strength in our welding businesses are automotive transportation and energy. This includes most oil and gas related applications and power generation. This reflects continued development of solutions and key customer expansions. Also our U.S.-based exports have continued to strengthen on rising demand for our solutions, including our automation systems. Looking ahead, we continue to expect modest year-over-year sales and margin growth, but against more challenging comparisons in the second half of the year. Our priority is to focus on our development pipeline, commercializing innovative products, identifying opportunities to achieve continuous improvement and driving improved performance through the cycle. We're also looking forward to the expected close of the Air Liquide Welding acquisition at the end of the month. The combination of our two organizations will advance our 2020 vision and strategy and better position Lincoln Electric long-term as a leader in key international markets. After several months of integration planning and assessment, we are confident in how complimentary the organizations are, the growth opportunities ahead, and the efficiencies we can realize to drive value. We look forward to updating you on our progress on our October conference call. And now, I will pass the call to Vince to discuss our second quarter results and uses of cash in more detail.

Thank you, Chris. Looking at our second quarter income statement highlights on Slide 5, our consolidated sales increased 5.8% compared with the prior year from solid organic sales performance. Volumes rose 3.2% percent, price increased 2.6% and acquisitions contributed 20 basis points to the top line. Excluding results from our Venezuelan operation in the prior year, second quarter 2017 sales increased 6.9% primarily from 4.2% higher volumes and 2.7% price. Our second quarter gross profit margin increased 40 basis points to 34.7% compared with 34.3% in the prior year. Higher volumes and price helped to offset rising raw material costs in the quarter. We did incur an approximate $2 million LIFO charge in our Americas Welding segment reflecting this raw material inflation. Our SG&A expense increased approximately 8% or $9.3 million primarily due to higher compensation expenses and acquisition transaction and integration costs related to the proposed acquisition of Air Liquide Welding. Excluding those acquisition related costs, SG&A expense increased 4% or $5 million and SG&A as a percentage of sales improved by 30 basis points to 20%. Operating income increased 82% to $87.6 million or 14% of sales. On an adjusted basis, operating income increased 12% to $92.1 million or 14.7% of sales, an 80 basis point improvement versus the prior year period. Higher volumes drove the improvement in operating profits. Our adjusted incremental margin was 28% in the quarter. Interest expense was $6.3 million in the quarter, compared with the prior year interest expense of $4.2 million. We continue to expect annual interest expense of approximately $24 million. Our second quarter effective tax rate was 27%, which was lower than the prior year rate of 31.6% reflecting geographical mix of earnings and tax benefits from stock option exercises. Tax deductions related to stock options exercised in the quarter…

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Nathan Jones of Stifel. Your line is now open.

Good morning, everyone.

Good morning, Nathan.

Good morning.

I'm just going to start unusually I guess in the Harris Group here. On the first quarter call you guys talked about having challenging comps there for the next couple of quarter and still put up 11.1% volume growth there. Can you talk about what you think drove such strong results in that segment given a tough compare in the second quarter and what your expectations are going forward?

Yeah, our Harris business performed very well from a growth perspective in the quarter. I believe it’s really the culmination of a couple of items. One is continued investment and the marketing strategy around the retail, which is very strong for us in the quarter. We also saw some continued improvement in wholesaling as well as the HVAC space that we have for those products. So our Harris business has been advancing the retail strategy with its partners in that space and we have several new products that are being developed in launching into the HVAC space and we're starting to see some of those benefits on the top line side for the Harris business.

So despite the challenging comp that you're going to have again in the third quarter, I guess, would you expect to see strong, I don't know, mid/high single-digit growth rate there in the third quarter or is that – is this kind of a sustainable level that we are looking at from the first half?

Well, we're certainly expecting the Harris business as we are our other segments to continue to show growth in the back half of the year and would expect Harris business to be in the mid to high single-digit growth profile for its business as we move into the third quarter. So, certainly don't believe their growth is an anomaly. Certainly, a very strong performance in the second quarter that we might not be able to replicate in that low double digits, but certainly expecting mid to high double-digit, and continuing to show growth in the Harris business as we move through 2017.

Okay. And I guess the other number that stuck out to me was the slowing of the volume growth in the Americas went from 4.1 to 1.7 [ph]. Can you talk about if there was any particular end markets that drove that, any anomaly there that maybe correct itself, whether oil price volatility impacted that or just what you think caused this slowdown in volume growth there?

I really can't identify any particular segment as we stated. Our segments across the enterprise are still in an expansion mode where most of the segments outside of offshore and outside of ship building continue to be in a level of expansion. I would expect part of that is a very, very strong first quarter as we were relative to that particular business, but still believe we are advancing our solutions. And as we stated, we had very strong growth in a couple of segments especially automotive where I think many participants are wondering whether that particular segment is flattening, but our Americas growth in that particular segment was very strong. So really can't call out any particular element, probably a very strong Q1, but continuing to see advancements of growth in the Americas business.

Okay, thanks very much.

Thank you. Our next question comes from the line of Steve Barger of KeyBanc. Your line is now open.

Hi, good morning, guys.

Good morning, Steve.

It’s [indiscernible] on for Steve.

Okay. Good morning.

Good morning. So, you’ve mentioned expectations for sales and margin growth in 2017, could you give us some color on how you are thinking about incremental margins ex-Air Liquide in the back half of the year?

So, ex-Air Liquide, we would stay by our previously disclosed view of somewhere between 25% and 30% incremental depending upon where we end up with top line organic sales performance. So the same kind range that we outlined for the second quarter.

Got it. And speaking of top line organic, do you think you can push another price increase into the second half or should we expect organic growth to come from volumes? Just trying to see – are you expecting organic volumes to be sustainable where we saw this quarter is going to be stronger in 2H?

So the pricing that we saw in the second quarter, I would anticipate that that would continue in line with those types of year-over-year comparisons from a pricing strategy perspective. I don't see any significant changes occurring in the second half of the year. Raw material inputs are moderating and flattening out, so our expectation is a relatively stable pricing environment as an outlook for the second half.

Thanks for the color.

You are welcome.

Thank you. Our next question comes from the line Mig Dobre of Baird. Your line is now open.

Hi, it’s Mig Dobre. Good morning, everyone.

Good morning, Mig.

Good morning, Mig.

So, if we can go back to a previous point on volume in the Americas, maybe we can unpack this a little more. If we exclude Venezuela, you are looking at 3.3% volume growth and I'm just wondering here, can we maybe look at equipment versus consumables, you say consumables has grown across the board, I presume that includes America?

That's correct. Although it was a more modest growth rate in the Americas in equipment, we had a stronger growth profile in consumables in the quarter than equipment, Mig.

Okay. And I'm trying to kind of square over this with your comment on the export business up 21% to $42 million that's what I recall you said. I guess this contributed something like 2.2% to organic growth. I presume not all of that was volume, but it seems like the export business was a good chunk of what we have seen here in a quarter. I'm trying to understand in terms of real call it North American demand whether its equipment or consumables, how things are progressing versus what you've seen in the first quarter and what your expectations for this end market are for the second half the year?

Yeah, so Mig, the domestic demand was still strong in the quarter with those sales being up in the mid-single-digits, certainly export business was stronger with a 21% increase, but we're still seeing steady and strong demand in the quarter both domestically and from an export perspective.

All right. Vince before I get back in the queue, I guess my point is this, every data point that I've looked at through the quarter whether it's what's happening in the machinery sector, whether it's fabricated metal, you name it, was suggesting that things are really accelerating and picking up in the second quarter versus the first. And I'm just wondering if that's really what you're seeing as well if there is a lag in your business versus some of these other data points, is that normal and at what point in your view we're going to have some kind of a catch up?

You know I think that our second quarter is largely in line with what we saw in the first quarter from demand trends. We view this as a strong environment. We have noted a broadening out of our end market improvements across more than 90% of those markets. I would say, Mig, that the second quarter on a year-over-year basis did have one last billing day, which inevitably has some impact on the view of the current quarter versus the prior year's quarter. But we don't see it in our view a significant difference in our year-over-year performance in the second versus the first quarter.

Okay. I appreciate it. I will get back in the queue.

You're welcome.

Thank you. Our next question comes from the line of Walter Liptak of Seaport Global. Your line is now open.

Hi, thanks. Good morning, guys.

Good morning, guys.

Good morning, Walt.

I wondering [indiscernible] about the pricing at 2.6%, that looks pretty good, but the gross margin was still down sequentially and I guess there is a LIFO charge in there. Is there anything else in there that depressed it or is it gross margin being impacted by the equipment consumables mix that you talked about?

We had some higher costs that we were fully expecting coming through our segments in the second quarter we talked about the full restoration of some of our cost cutting initiatives that we had implemented over the past couple of years. We did have the maturing of the raw material cost increases across our segments. You can see that in the Harris Products Group and International, we gave up a little bit of price cost there, but maintained our position, I would say, rather well in the Americas. So this is fully in line with what our expectations were for the second quarter seeing these costs come in that we have been predicting at the end of last year and through the first quarter of this year.

Okay. What are you thinking about the third quarter for some of those costs as well as for the LIFO charge?

Well, the LIFO charge is in line with what we took in the second quarter. We can expect a similar type of situation in the third quarter in the second half of the year. Our view on the cost position is that it's relatively mature that we don't expect any material changes one way or another as we move into the third quarter, so we would expect more of the same. And with the expectations on volumes that we saw in the second quarter and replicating something along those lines in the third quarter, we ought to see some incremental improvement in our overall margin profile in the third quarter.

Okay, great. If I could do a follow-on on the energy sector, could you refreshes now, like, how are you thinking of energy, how much of that is the mix of your sales both direct and indirect and was it across the board up, mid, downstream that you're seeing the improvement, any cadence just I guess looking for a little bit more info on your energy sector exposure?

So we had a continual improvement on a year-over-year basis in our oil and gas end markets. We increased in the second quarter mid-teens in total sales year-over-year. The strongest part of those mid-teens improvement were in upstream and downstream and the strongest of single end market was upstream activities. So we had a strong quarter from the oil and gas perspective. That oil and gas business is also about mid-teens exposure for the total corporation – total energy including oil and gas is in the high teens.

Yeah, it was pretty broad based. Outside of the offshore segment of the space that's what I like about, the breadth that we're seeing is that we're seeing some broad improvements not only across upstream/downstream, but also regionally. That gives us some confidence affirming end growth in that space as we move forward.

Okay. And the price of oil has been kind of volatile the last month or two. Were you just seeing improvement throughout the quarter into July and the recovery have you seen the demand for welding products related to oil and gas move around with the price of oil?

We didn’t see necessarily any material change in the quarter. We saw some of the volatility for the oil price within the quarter, but that type of quick movement usually we don't see that level of impact immediately. So we really didn't see anything within our data within the quarter relative to our demand model.

Okay, great. All right. Thank you.

You are welcome.

Thank you. And our next question comes from the line of Liam Burke of FBR Capital. Your line is now open.

Thank you. Good morning, Chris. Good morning, Vince.

Good morning.

Good morning, Liam.

Chris, can you give us some color on Europe, volume was up, was it primarily automation or was it systems or how was that market checking out from both product and a competitive basis?

Well, I think a couple comments on Europe. I believe that when we're seeing broad discussions in the marketplace around improvement in the European economies, I believe we're seeing some of that benefit, it wasn't that long ago, three or four quarters where there were some real interpretation relative to Europe, but we've seen over the last couple of quarters firming and slight improvements in those markets. And I would tell you that it's relatively broad based as it relates to the solutions. There’s not any one particular application or category which is driving that. And again that gives me more confidence in that region long term and expecting opportunistically that this will also provide us with a catalyst as we're bringing in the Air Liquide business at the end of the month where they have a lot of density and capabilities within that region.

Great. Thank you, Chris.

You are welcome.

Thank you. Our next question comes from the line of Tom Hayes of Northcoast Research. Your line is now open.

Good morning, gentlemen.

Good morning.

Good morning, Tom.

Maybe kind of shifting around the globe to the Asia-Pacific business, you said there is over – picking up. I’m just wondering maybe give us kind of an update on where you stand on the probability levels. I know before you consolidated or change your reporting segment’s profitability, [indiscernible] bit of a challenge, just maybe kind of an update on where that stands?

So, Tom, we are seeing improvements most notably and organic growth in the Asia-Pacific region and China and Australia. China, first, we continued to gain attraction in developing our business model there and we've also been aided by an upturn in the end markets in our China marketplace are profitable there and have been consistently profitable for the last several quarters. The business is improving. I would say it's still a bit uneven and volatile, but we’re satisfied with the progress that we see there over the past four to six quarters. Australia is showing some rebound in underlying market, but perhaps more importantly we're winning some important discreet business opportunities there that have driven our revenue and margin levels to levels that we haven't seen for the better part of a couple years there. So, the Asia-Pacific region is certainly has a good trend line going forward.

Yeah, Tom, I would add also that I don't think it's accidental, matter of fact it’s part of the strategy to drive more solutions into that marketplace. The expansion of our technical centers that were developed in Australia and Singapore over the last 18 months to 24 months, we’ve had a multitude of customers both channel partners as well as OEMs that have visited us to look at our solutions in those regions and we're beginning to see some of the benefits of that investment in those markets.

Great. I appreciate the color. I will get back in the queue.

Thanks, Tom.

Thank you. Our next question comes from the line of Matthew Trusz of Gabelli & Company. Your line is now open.

Good morning, thank you.

Good morning, Matt.

Can you provide a little more color on what drove margins down in the international segment despite taking I guess even more price than the Americas, is it something of a function of business mix there having more lower engineered consumables?

It's really related to my previous comments on cost coming into the model and not fully being offset by pricing improvements. So we had a little bit of a deterioration in our margins from that perspective.

Okay. And then just going back to the export strength and automation specifically what end market are you selling that into that’s driving the growth there? Are there any specific commercial initiatives that you call out?

The export markets that have been attractive have been some in the Middle East. We've had strong exports into China. And then our neighbors in Canada and particularly Mexico are up very strongly in exports. So, those handful of regions and countries are predominantly the drivers for export improvement.

Great, thank you.

You're welcome.

Thank you. Our next question comes from the line of Seth Weber of RBC Capital Markets. Your line is now open.

Hi, good morning, everybody.

Good morning, Seth.

Good morning.

I think this is probably a follow-on to that previous question, but I'm trying to understand if you could parse out some of the strength in the auto markets that you're saying, is it possible to parse out how much of that is coming from automation and maybe some of that is this export business you're talking about and how much of it is just the traditional welding business is continuing to do well because obviously this is kind of a hot topic around the space right now, if there is any additional color on the auto strength that you're calling out? Thank you.

So, when we looked at the automotive segment on a global basis and looked at the increase year-over-year, about half of that increase was relative to customer expansion, us doing more business with the current customers or some customer acquisition activity. The other half of that growth was relative to some new products and solutions that we have in space and then just quite frankly growth with the customers that we are participating with. So, again, about half new customer acquisition and about half new technologies and growth in the space that we’re participating.

Okay. But it’s fair to characterize that the core welding business is up as well as the automation into auto.

Absolutely.

Yeah.

Okay. And is there any color that you could help with as far as regional auto mix, does it just kind of mirror the overall company or is there some subtleties with the regional auto exposure specifically?

Well, our automotive exposure is certainly greater in the Americas segment than it is in the international segment relative to a density perspective. So we are slightly heavily more focused in our ability to service that market in the Americas versus International, but we don't break out the amount of density within those two segments from an industry perspective, partially because quite frankly it isn't always as relative as one might think at the end of the day, we're continuing to try to drive those solutions broadly across the world, but certainly just to have a higher density in that particular segment in our Americas space.

Makes sense.

We could – Seth, the growth rates were robust in both Americas and International. We had strong growth rates in automotive and transportation globally and the growth rates in International were certainly higher than what the builds that you might be following in the International arena. So we had good strong growth across all of our segments in automotive and transportation.

That’s helpfulness, Vince. Thank you. And then I guess just a quick follow-up, I mean, the mix at the company is currently running at consumables equipment, is that kind of the right – you feel like that normalized at this point or you still think that there is some – I know in the first quarter you talked about mix was favorable, this quarter you talked about a little bit more of a headwind. So is this sort of a normalized level here? Do you think it continues to become more of a headwind going forward?

I wouldn’t say that the mix is – we expect it be a headwind going forward. In large part, our consumables and the equipment portfolios globally have similar margin profiles and I would tell you that we expect more out of equipment if this recovery continues to strength and that mix might improve a little bit. But our expectations are that we should now have significant headwinds from mix going forward.

Okay. Thanks very much everybody. I appreciate it.

You are welcome.

Thank you. [Operator Instructions] Our next question is from the line of Mig Dobre of Baird. Your line is now open.

Yes, thank you for taking my follow-up. Just wanted to clarify something and I had missed this I apologize. But I want to make sure that I understand how you are positioning volume growth as in what’s kind of behind your comments for the second half of the year for the Americas Welding and International Welding, I understand Harris, you commented on that, but I want to make sure we are clear in Americas and International, do you expect volume growth there in spite of comparisons getting progressively more difficult or should we be mindful of that comparison as we think about the back half?

We expect there to be, Mig, a continual improvement in year-over-year performance in our global business which would include both the Americas and International. We’ve talked about from a consolidated perspective seeing a low to mid-single digit organic sales improvement year-over-year. We do as normally is the case expect the third quarter to have some seasonality that would result in a sequential decline from the second quarter, but we do expect on year-over-year comparisons to improve across our portfolio by a low to mid single-digit organic amount.

In the fourth quarter you are saying here?

No, we are talking third.

You are talking third? And obviously your comparisons get tougher in the fourth quarter in both Americans and International, but I don't know you have visibility to comment at all on what that could look like?

Not at this point.

Not at this point, okay.

We are just [indiscernible] October.

And then – sure, sure. And then I guess the other question I had, if we're looking at automotive versus heavy industries, I'm wondering if say for instance down the line the automotive component of the business is slowing down, but we continue to see a pickup in heavy industries. To my knowledge automotive and heavy industries are pretty similar in terms of overall size. Does that do anything for your overall mix in terms of profitability?

No, I wouldn't say so. I think you're right. Those are our two largest end market segments automotive and transportation and heavy fabrication, heavy industries is really not that far behind, but they're clearly the two largest. And any rebalancing of those two industries would not have a material impact on our margin or profitability profile.

Okay. Thank you so much.

You are welcome, Mig.

Thank you. This concludes our question-and-answer session. I’d like to turn the call back over to Vince Petrella for closing remarks.

Thank you, Nicole, and thank you everyone for joining us on the call today and your continued interest in Lincoln Electric. Look forward to talking to you again towards the end of October about our trends in the third quarter and for the full year. Thank you, again.

This concludes today’s teleconference. You may now disconnect your lines at the time. Thank you for your participation.