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SPX Corporation (NYSE:SPW)

Investor Meeting Transcript

January 21, 2009 1:00 pm ET

Executives

Christopher Kearney – Chairman, President and CEO

Patrick O’Leary – EVP and CFO

Analysts

Jeff Sprague – Citigroup

Shannon O'Callahan – Barclays Capital

John Baliotti – FTN Midwest Securities Corporation

Nigel Coe – Deutsche Bank

Nicole Parent – Credit Suisse First Boston

Christopher Kearney

Before we get started, I just want to remind everybody to please turn off your cell phones. I know that’s a painful thing to do. Turn off your cell phones and blackberries so that we can avoid interference with the webcast. So I appreciate your cooperation and good afternoon. It’s great to be back here again. It’s great to see everybody. Happy New Year. And we’re pleased to have you with us today as we present an update on SPX and our 2009 full year and Q1 guidance.

With me today are some gentlemen you all know, Patrick O’Leary, who is our Chief Financial Officer; Jeremy Smeltser, who is our Vice President of Finance; and Ryan Taylor, who is our Manager of Investor Relations.

Here we go. Let me first draw your attention to the cautionary language regarding forward-looking statements. In particular, I’d like to point out that unless specifically noted otherwise, the 2008 estimates you’ll see this afternoon are the same estimates that we presented on October 29th. These are presented only for comparison purposes. They are not intended to update or confirm earlier estimates. We plan to present the actual results for 2008 in a subsequent earnings call on February 25th. This presentation includes supplemental schedules, which provide reconciliations for all non-GAAP financial measures referenced here today.

This afternoon, I will begin with an overview of our business. Then I’ll discuss the summary of global trends in our three core end markets. Patrick will then update you on our reporting segments and describe the main 2009 financial drivers for each business. He’ll also review our capital structure and provide further detail on our 2009 financial targets before I conclude. After that, we’ll be happy to take your questions, and guess who forgot to turn off his Blackberry.

For those of you who are less familiar with SPX, let me give you some background. I joined SPX in 1997. At that time SPX was a U.S. based supplier of automotive components with less than $1 billion in sales. From 1998 through 2004, the company grew significantly. We acquired over 100 companies and diversified away from automotive. This transition expanded SPX internationally and added critical mass in some key industries. However, our organization was moving in many different directions. We had nine platforms operating with little commonality or shared initiatives.

When I became CEO at the end of 2004, we defined a focus strategy for SPX. We repositioned our business around three global end markets, infrastructure with an emphasis on power and energy, diagnostic tools for the vehicle service industry and process equipment. This transition has delivered positive results. Today, we’re a leading provider of product solutions in these markets. Our technologies are critical to supporting the world’s increasing need for electricity, food and vehicle service.

For 2008, we estimate that 85% of our revenue was generated from serving these three core markets. Global trend such as world population growth and emerging middle class in developing countries and each infrastructure in the western world point towards positive growth over the long-term for each of these markets. And we are committed to developing innovative, environmentally sound products to support our customers’ evolving global needs.

Underlying this strategic transformation has been the consistent disposal of non-core assets. Since 2004 we have completed 16 disposals for gross proceeds totaling more than $3 billion. This includes the recently announced sale of the GSE Scales product line that was discontinued in Q3. We have two additional disposals in process. We expect to complete the sale of the Flow product line that was discontinued in Q3 during this quarter. In addition, during the fourth quarter, we discontinued a product line in our industrial segment. We expect to complete this sale during 2009.

We believe that continuous pruning is a best practice for successful multi-industry organization. On an ongoing basis, we strategically review all of our businesses to evaluate future growth potential and maximize our long-term performance. The disposal process has increased our focus on our three core markets. It’s also helped to improve our financial flexibility and our liquidity.

In 2005 we used to proceeds from asset sales to pay down $1.7 billion of debt, significantly delevering the company. In the second half of 2007, we refinanced the majority of our debt to give us increased financial flexibility and extend maturities. We also issued senior notes to finance the APV acquisition. This has positioned us well given the current credit markets. At the end of December we estimate that our debt – our debt to capital was under 40% and our gross debt to EBITDA was 1.6 times.

With our current debt structure, we have minimal repayment requirements in the near term. Over the next two years, we are only required to pay $75 million annually. We estimate our available liquidity in 2009 to be over $1 billion, giving us flexibility and making strategic capital allocation decisions.

Over the past four years we have been consistent in our approach to allocating capital. We have a target leverage range of one and a half to two times gross debt to EBITDA. We have one levered above two times, we reduced at; one levered below two times, we use available capital for strategic acquisitions and share repurchases.

Over the past four years we have spent about $1.9 billion on share repurchases. In total, we repurchased over 35 million shares of SPX stock or 45% of the ending 2004 share count. Although not required, we historically have bought shares primarily through 10b5-1 one trading plans that are executed by a third-party broker. This has given investor transparency into our near term capital allocation intention.

In Q4 we repurchased 3 million shares under a 10b5-1 plan. We subsequently announced an additional 3 million share repurchase plan that is currently trading. And the guidance we present today, we have assumed that this plan trades out completely during the year. Net of equity issuances the share count used to calculate our 2009 EPS guidance is approximately 50 million shares.

In addition to repurchasing our stock, we have taken a disciplined approached towards acquisitions. In 2005 – since 2005, we have spent about $800 million on six acquisitions in Europe or Asia. In total, these business increased by revenue by just over $1 billion. Our primary criterion for acquisitions is strategic fit. Additionally, we use EPS equation and return on invested capital as financial hurdles for all acquisition candidates. All six acquisitions met our criteria and have expanded our global presence.

Globalization has been a key part of our transformation. In 2004, 70% of our sales were in North America. Over the past four years, we have significantly expanded our geographical presence. We estimate that more than half of our sales served customers outside of North America last year. We have a significant presence in Europe. About 28% of our 2008 revenue was sold into that region. And we estimate our Asia-Pacific sales that more than doubled since 2004 to $825 million.

Our Thermal business expanded in the Middle East last year and is nearing completion of $100 million cooling system installation at Shell’s petrochemical plant in Qatar. We believe over time that South Africa, Russia, India and South America also provide growth opportunities for SPX.

The geographical mix of our backlog reflects the global nature of our business. Growth in South Africa is currently under way. At the end of 2008, about 21% of our backlog was for projects supporting the power generation expansion in South Africa. We also have meaningful backlogs for North America, Europe and Asia. Our total backlog is just over $3.4 billion, up 25% from the end of 2007 and more than two and a half times our 2005 backlog. We believe the overall growth of our backlog is to some degree a validation of the strategic transformation and globalization of SPX.

Today, we have better visibility to future revenues than we did four years ago. We estimated about two-thirds of our total backlog will be delivered in 2009. Visibility varies across segments. The thermal segment has a backlog of over $2 billion. About 60% of the thermal projects are on average 12 months to 18 months long. The remaining 40% of the thermal backlog is power generation projects that we will be working on in 2010 and beyond. The industrial backlog has six months to nine months of visibility and our Flow business has just over three months of visibility.

Patrick will provide you greater detail on the sequential order and backlog trend for each segment.

Internally, we implemented six operating initiatives at the outset of 2005 to drive growth and improvements throughout the organization. We focus on expanding and developing in emerging regions along with new product innovation to build our customer base.

To improve profit margins, we are driving consistent operating practices across SPX including, the implementation of lean principals, efficient supply-chain management and improved IT systems. We have increased our talent in the organization to improve recruiting efforts and we are developing business leaders using internal training and development programs.

The steady improvement in our financial results underscores the benefits of our strategic transformation, capital allocation decisions and operating initiative. Over the last four years, we have averaged 8% organic growth and excluding the dilution from APV in 2008, have increased our operating margins by more than 300 points.

We have estimated that our 2008 financial results will represent the best earnings performance in the 97-year history of SPX.

In October, we targeted 2008 EPS at about $6.45 per share; this is 1.5 times our 2005 EPS. Today SPX is a leading supplier of products and services supporting the growing global need for electricity, food and transportation. Our employees are driving a culture of continuous improvement. We are in solid financial position with good liquidity and a $3.4 billion back log. We are pleased with the progress we have made and we believe the company is well positioned for the significant challenges that we are currently facing.

We begin 2009 amidst what many believe is the most challenging economic environment of our lifetime. The banking failures that have created an unprecedented credit crisis, as a result the availability of credit and the high cost of long-term capital are impacting capital spending decisions for many businesses. We are experiencing changes in customer activity as a result of this and expect 2009 to be significantly impacted. It is obviously not possible for us to currently predict when or if these trends will improve as 2009 progresses.

Our current backlog gives us decent visibility to revenues through the first half of the year for many of our businesses. However, with 60% of our business being short-cycle, the second half of 2009 is much more uncertain on this environment. The volatility in exchange rate is also expected to impact our 2009 results. We translate roughly 45% of our annual revenue from foreign currencies. During the second half of 2008 declines in the value of the Euro, British Pound and South African Rand versus the U.S. dollar have had a significant negative impact on our outlook for 2009.

At current rates we expect reported revenue to be reduced between $250 million and $300 million due to foreign currency fluctuation. This represents approximately $0.30 to $0.40 of earnings per share. From an organic perspective we’re targeting consolidated revenues to be flat to down 5%.

Looking at our major end markets in power and energy which has driven double-digit growth in our business over the last three years, we expect to have either modest growth or a 3% decline. We continue to have strong order activity in out thermal business, as highlighted by the recent contract wins in China. However, this growth has expected to be offset by significant declines in our power transformer business.

Based on the current order trends in this business, we are expecting – excuse me, we are expecting the North American market for vehicle repair tools to weaken further this year, driving a decline of approximately 20% in our tools and diagnostics business. Food and beverage spending is historically not impacted as significantly as other markets by weak economic conditions.

In 2009, we’re expecting our revenue into this market to be flat to up to 4%. In aggregate, we believe our other infrastructure and general industrial businesses will be down on average as much as 5%. Although we are expecting an organic decline in 2009 on a consolidated basis, we are coming up four consecutive years of organic growth at between 6 and 10%.

We believe the fundamental long-term drivers for demand in the market we serve are positive and over the long-term we forecast the organic revenue growth of our collective businesses to be between 4% and 6%. In response of the current state of the global economy, many of our businesses have planned restructuring actions for 2009.

In our Flow segment, we are in the midst of closing and consolidating several facilities as part of the ATV Integration. We have targeted a total headcount reduction of 500 employees. Additionally, we have plans in place to reduce costs given the slowing organic growth particularly in our industrial based end markets.

Restructuring actions in our Thermal segment are aimed at rationalizing our global footprint. We expect to concentrate our resources at centers of excellence in Germany, the U.S., Belgium and Hungary. In China, we are rationalizing our package cooling business in Guangzhou and focusing sales of our global products on strategic accounts.

In our Test and Measurement segment, we expect to continue reducing our U.S. cost structure consistent with our market expectations. Additionally, we planned to rationalize the European and Asian facilities we have acquired in recent years. Restructuring in our industrial segment will occur business by business in response to expected revenue decline this year.

In total, we expect to incur about $65 million in restructuring expense in 2009. Combined with the APB integration actions previously announced, we expect cash restructuring to be about $60 million to $80 million. We use the detailed thorough process to determine restructuring actions that we expect will mitigate to a degree the economic slowdown in the near term, well at the same time simplifying our business model and creating flexibility for the future.

In total, we expect restructuring actions taken last year combined with our plan for 2009 to reduce our global workforce by about 10%. We will communicate more details as the year progresses and as we complete employee communications and regulatory requirements.

These restructuring actions as well as the organic revenue expectations I described for our major end markets are assumed in our 2009 guidance. We are using January exchange rates for the year and our guidance assumes that raw material cost remain relatively stable.

Based on these assumptions, our 2009 earnings guidance range is $5.40 to $5.80 per share, a decrease of about 13% from our 2008 estimated EPS mid-point. We’re targeting free cash flow between $230 million and $270 million. This includes the $60 million to $80 million of cash restructuring, and Patrick again will give you the details of our 2009 financial targets.

Although the near term outlook is uncertain, we believe our strategy to position SPX for long-term growth in our three core markets. The needs of the world today look very much like they did four years ago when we chose these three markets as the focus for SPX. The global population is at about 6.5 billion and is expected to grow about 1% per year.

A Goldman Sachs study predicts that the world’s middle class which they define, as people earning between $6,000 and $30,000 per year will expand by a billon people by 2020 and 2 billion by 2030.

According to the Mackenzie Global Institute, China’s middle class will grow to become 76% of its population by 2025. The increasing world population, coupled with the advancement of developing countries is driving demand for electricity, food consumption and vehicle service. These trends are expected to drive a significant investment in power and energy infrastructure over the next two decades. We have multiple opportunities across the power and energy spectrum to participate in the expected global investment.

For 2008, we estimate our global power and energy revenue was more than $2 billion. Our technologies support critical processes including power generation, the transmission and distribution of electricity and mining of natural resources. We offered customers a number of solutions with high return on investment.

Our technologies are being used in new power plant construction and are also being installed in older plants to increase deficiency or improve environmental outcome. We have leading cooling technologies, many of which are protected by patents. Our Balcke, Marley and Hamon brands each carry 100 years of history, and we believe combined to have the largest global installed base of cooling system.

Other thermal power offerings include heat exchangers, moisture separators, flue gas systems and industrial filters. We’re designing specialty valves and providing technical support in training for nuclear power plants that Westinghouse is providing in China and in the U.S. and we’re a leading provider of medium power transformers in the U.S. and – in the U.S. transmission and distribution market.

In its 2008 World Energy Outlook published last November, the International Energy Association estimates that $26 trillion will be spent globally on power and energy infrastructure from 2007 through 2030. More than half of this investment is expected to be spent on power infrastructure.

Developing countries are expected to account for about 60% of the total investment. Economic advancement of developing areas such as China, India, South Africa and the Middle East is expected to keep energy demand growing strongly.

In developed regions such as North America and Europe, aged infrastructure, tightened regulations and environmental concerns have driven a significant need for replacement. On the heels of this replacement cycle is the need for new capacity.

Population growth in the evolution of digital equipment is increasing the demand for electricity in developed economies. Although the global recession may reduce demand for electricity in the near term, it is expected that demand will continue to build for power and energy infrastructure.

The IEA estimates that North America, China and Western Europe, will spend a combined $14 trillion on power and energy infrastructure technologies that can add value by reducing heat exchange loss, modernizing cooling systems and optimizing flu gas systems. Many of our technologies have a payback period of one to three years.

To give you a pictorial example of our product offerings, this chart shows the key components of a typical coal fired plant. It indicates where SPX products are installed. You can see that we offer a wide variety of solutions throughout the power generation process.

For a typical coal plant, we could provide a cooling system, condenser, heat exchangers, environmental filters, pumps and valves. If we were selected to provide the full scope of our equipment for a new 800 megawatt coal fired plant, we could receive between $80 million and $150 million in revenue. The range is really determined by the type of cooling system desired. A dry cooling system can cost up to five times a wet system.

For a 1,000 megawatt nuclear plant, we have the potential to supply about $100 million of new equipment. On a nuclear plant, a wet cooling system is required due to the amount of heat generated. We also have some technologies specifically designed for nuclear power including moisture separator reheaters and split valves. Obviously the total cost on these examples can fluctuate based on the customer specifications, degree of engineering, raw material fluctuations and competitive dynamics. But at least this gives you a framework for our new power plant opportunities.

In China, the vast majority of new capacity additions are coal plants. The power generation market continues to grow and we’re seeing a steady demand for our dry cooling systems. This technology helps to reduce water consumption by approximately 90% as compared to other types of cooling systems. Chinese authorities have mandated this technology in certain regions of the country to conserve water resources.

Since 2002 we’ve been concentrated in China to design – excuse me – we’ve been contracted in China to design and manufacture 47 dry cooling systems. We’ve completed 32 of these installations, seven are under construction and eight projects are in the engineering and design phase. Our customers in this market are primarily government-owned utilities. Although we have local manufacturing and an established brand in China domestic suppliers are now competing.

Despite the increased competition our order flow has remained steady. In 2008, our win rate for dry cooling projects was consistent with prior year. During the past six weeks alone we have signed four contracts totaling over $90 million in China. Coal is also fueling the new power additions in South Africa which has plans to add 40 – up to 40 gigawatts of power capacity. The government-owned utility, ESCOM has two projects currently underway.

The Medupi and Kusile power stations are expected to add about 4.8 gigawatts of additional capacity each, roughly 25% of South Africa’s total planned expansion. Hitachi and Alson [ph] have been selected to build the boiler and turbine islands respectively for each of these plants. We have been contracted by both OEMs to provide critical thermal equipment on these mega power plants.

In total, we had about $725 million of South African orders in our ending 2008 backlog. We expect to deliver on these orders over the next three to four years. In 2009, we estimate about 50 to $60 million of recorded revenue will be attributable to these two projects. We have demonstrated experience providing power infrastructure in South Africa over several decades.

The Kendall station which was completed in 1993 was the last major power plant built in South Africa. The plant is cooled by six SPX cooling powers. At the time this plant was constructed, it was the world’s largest dry cooled power station. This technology was critical for ESCOM because of lack of water in the region. Our manufacturing presence in South Africa was established in 1970 in Nigel not far from Johannesburg. We expanded our existing facility in 2008 and now have over 300,000 square feet of manufacturing capacity.

We are committed to using local labor for manufacturing support. Our manufacturing presence in Nigel allows us to meet the domestic content requirements to these projects. Additionally the shareholder structure of our South African entity complies with local governments requiring requirements for bidding on these projects.

We also provide equipment for our geothermal power plants. For geothermal facilities, we have the capability to design complete cold end solutions. Our equipment is installed on the world’s largest geothermal plant named the Geyser, located in California. We have also supplied equipment for geothermal plants in Indonesia and Iceland.

In Iceland, geothermal plants currently produce about 25% of the country’s electricity. Iceland’s largest utility is planning to build five geothermal plants that will add 225 megawatts of total generating capacity. It shows SPX to supply the complete cold end solutions for these plants at a value of about $100 million.

The economic situation in South Africa and Iceland and the political unrest in South Africa have raised concerns. While we do recognize that there is risk to the completion of these projects we currently believe that risk is low. The demand for new power generating capacity is significant in both regions and is particularly dire in South Africa.

In both countries, government-owned utilities are committed to power infrastructure expansion and have recently been loaned sizable amount of capital to assist in power related projects. We don’t have complete transparency to the specific funding status of each project. We have collected cash deposits of at least 10% of the value for each contract and we expect to collect progress payments as we complete various stages of production. We believe that the South African and Iceland projects in our backlog will continue. However, we prudently monitor our net cash position on each project to mitigate our risk.

The solar market represents a niche opportunity for SPX to apply our technologies. Research analysts estimate that the total – excuse me, the solar market will double to 10 gigawatts in 2010 and exceed 20 gigawatts by 2012. Solar panel fields require heat exchangers and cooling systems. This provides opportunity for our thermal technologies. As an example, we supplied the cooling system for the world’s third largest solar plant, Nevada Solar One, helping generate power for15,000 homes near Las Vegas.

In our Industrial segment, we manufacture crystal growing equipment. Since 2007, we have received three large contracts to provide this state-of-the-art equipment to solar power providers. Recently, however, we have experienced cautiousness from some of our solar customers, who have indicated they intend to delay 2009 projects into 2010 given the economic environment.

In the U.S. transmission and distribution market, we’re a leading provider of medium sized power transformers. Our medium sized transformers are typically in the 10 to 60 MVA range and are used in substations. We also participate in transformer sales in the 60 to 150 MVA range. These larger sized transformers are located at the point of transmission. Our customers include public and privately held utilities as well as independent power producers. Some of our biggest customers include Southern Company, National Grid, and Georgia Transmission.

Investment to replace aging Transformers has driven significant revenue growth for our business over the last three years. For 2008, our transformer sales grew nearly 20% to $500 million. We had expected this market to remain robust for a number of years. However, transformer orders have declined primarily due to the uncertainty regarding the availability of capital and the high cost of long-term funds.

In our Q3 earnings call, we noted that third quarter orders declined 15% from Q2. This trend continued in Q4, with orders down 27% sequentially. The decline in orders significantly impacts our expectations for 2009. We’re estimating transformer sales to decline 20 to 25% this year. The declines in Q3 and Q4 are expected to be significant.

Commentary from our customers indicates that the slowdown in orders is tied primarily to the current credit crisis. This is a difficult time for utilities as they’re facing the challenge of meeting significant infrastructure investment when the cost of capital has risen substantially. Last week FERC Chairman, Joseph Kelliher voiced his concern about the implications of the current financial crisis, stating we are at a point where there is a need for tremendous investment in electricity generation, transmission and distribution to assure security of electricity supply at a reasonable cost.

From our experience, the three most significant factors driving the need for investment are increased electricity demand, tightened regulatory standards and an aging infrastructure. These fundamental long-term drivers haven’t changed. At this time however we can’t predict how long our customers will defer needed investment into the power grid.

We do believe that the government plays a key role in their investment decisions. Increased regulation from the Federal Regulatory Commission, Federal Energy Regulatory Commission should keep utility’s CapEx spending at higher levels. The energy policy act of 2005 increased fines and penalties for service interruption, and in 2007, the North American Electric Reliability Corporation approved over 70 standards that are now being enforced. Non-compliance with these standards can result in fines of up to $1 million per day.

In addition to regulatory influences, it’s expected that any new stimulus plan by the Obama administration will support the investments needed in the U.S. for power and energy infrastructure. The early commentary from the Obama administration coupled with the global needs for power generation give us continued confidence in the long-term growth prospects for power and energy, our largest end market.

Shifting gears now to Tools and Diagnostics, this is primarily our service solutions business that is a global supplier of diagnostic products, tools and equipment, technical information and services to vehicle manufacturers and service centers. For most of the 1900s, this was a North American business. For the past decade, we’ve been expanding our business model internationally. We offer a broad spectrum of tools and services to OEMs, their dealership networks and to the aftermarket. We do this for many vehicles including cars, motorcycles, farm and construction equipment, off-road vehicles and boats.

We make two kinds of tools for both OEMs and the aftermarket, electronic diagnostic tools that are used to troubleshoot vehicles and essential tools that are primarily used for repair. We also provide technical information that helps diagnose and repair vehicles and DES is helping dealers build, expand and modernize their facilities. This includes designing service space, providing needed equipment and performing field surveys, investigations and training programs. We believe we’re the only global provider with a full line of products and services for the vehicle industry.

Nearly 70% of our annual revenue for this business is generated from sales to OEMs and their dealership networks. And we have about 30% annual aftermarket sales. The primary drivers for our business are new vehicle or platform introductions, increasing electronic content on vehicles, and regulatory requirements. Globally, we have seen a continued increase in vehicle complexity in order to improve safety, comfort, emission, performance and fuel economy. The result for our business has been a significant product shift over the last decade towards electronic diagnostic equipment information and service.

For 2008, we estimate that two thirds of our revenue in this market was for diagnostic equipment or information and services. Our strategy in this market is to expand our presence as a global tools and diagnostics provider. We’ve made significant progress towards this goal over the past four years. In 2005, our business was predominantly US-based with a small European presence.

For 2008, we estimate that 46% of our tools and diagnostic revenue was generated outside of North America. And for the first time, we expect that more than 50% of our profit came from our international operation. As the U.S. automotive industry continues to struggle and dealership networks are rationalized our growth is concentrated in Europe and in Asia.

European and Asian based OEMs are in a growth cycle that is expected to continue for sometime with significant opportunities in China and Russia. Part of our globalization strategy has been acquiring companies that have strong relationships with global OEMs. We’ve increased our European relationship with BMW, Renault, Peugeot and Volkswagen. We’ve been working with these OEMs for years, servicing their U.S. based dealers. We’re now focused on partnering with these customers as they expand globally.

In 2008, we completed our first Asian acquisition in the diagnostics market. We acquired AUTOBOSS a leading supplier of vehicle diagnostic equipment to the Chinese markets. The impact of these acquisitions and our globalization initiative is noticeable when you look at the change in our customer mix. In 2005, almost 30% of service solutions revenue was generated from sales to the big three U.S. OEMs. For 2008, we estimated that these sales comprised only 23% of our total service solutions revenue. And this 23% was much more global as the U.S. big three have expanded around the world. Conversely, our sales to BMW, Volkswagen and Renault-Nissan have increased to 16% of revenue and we expect these trends to continue.

The increase in global presence has driven significant changes to the infrastructure of our service solutions business. In 2003 we had eight U.S. plants, two in Europe and nine in Asia. Today, we have just one plant in the U.S. and have also consolidated into one distribution centre. In 2009, we expect to continue to rationalize the U.S. operation.

Additionally, we’re planning to integrate our European and Asian acquisition. IEA estimates that new car sales in China are expected to increase significantly over the next two decades. In 10 years new car sales in China are expected to exceed both the U.S. and Japan. Mackenzie Global Institute projects that from 2003 to 2010, the number of vehicles in China will rise from 26 million to 120 million. And then there’s India, the Middle East and Russia. We’re strategically positioning our tools and diagnostics business to participate in the expected build-out of dealership networks to support these new car sales.

In 2008, we estimate that our total tools and diagnostic sales into Asia-Pacific were $65 million. This is up 10% from 2007 and 35% from 2005. Our OEM customer base in this region has also expanded. We now serve 30 global OEMs and 29 local OEMs in Asia-Pacific. Honda is one of our key customers. In 2008, Honda selected us to design its third generation diagnostic system. This program will be fully managed from our team in Asia. This award provides further validation of our capabilities to provide global diagnostic tools.

In Q3 last year, we completed the AUTOBOSS acquisition and it gives us access to the code systems used in the electronics of most Chinese manufactured vehicles. This significantly increases our ability to serve the Asia-Pacific market and also provides distribution opportunities to local customers. The acquisition also increased our R&D capability. We now have 85 engineers in China, dedicated to the development of diagnostic tools for the Asia-Pacific markets.

New product development is critical to this business. Over 35% of our annual tools and diagnostic sales are from new product introductions. In Q4 2008, we introduced our next generation diagnostic tool branded Pegasus. This new tool has a wireless connection to the vehicle and is equipped with speed scroll control and touch screen selection for ease of use. It has vehicle coverage dating back to 1980. Initial customer feedback has been very positive.

To summarize, despite significant near term headwinds, we believe there are solid long-term growth prospects for our tools and diagnostics products. And we expect to continue globalizing our business.

Now we’ll move on to the global food and beverage market, which makes up about 13% of our consolidated 2008 estimated revenue. The APV acquisition significantly increased our global presence in food and beverage. Key sales drivers include enhanced hygienic standards, increases in regulatory requirements, particularly in developing countries, customer demand for process optimization, energy efficiency and waste reduction, and production of higher quality products. We view the food and beverage market as an attractive market for growth over the long term.

Global Industry Analysts Incorporated estimated that the global investment for food processing equipment this year would be nearly $41 billion. They predicted this market would expand 6% annually from 2008 to 2011. This would increase the global market size to $45 billion. In addition to the near term growth potential, we also like this market because it is stable, and typically regulated by government authorities. And we believe the heightened standards in developing markets will be a driver in the future.

The highest growth region is expected to be Asia-Pacific at 7%. Europe and the U.S. are predicted to grow at about 3.5%. You can see that in 2007 more than half of the total spend on food processing machinery was in developing parts of the world. Asia-Pacific accounted for 35% and Latin America 10%.

We serve a large global customer base. Our typical customers include U.S. based Pepsi, ConAgra and Miller Brewing. APV broadened our international customer base to include for example, Nestle, Arla and Danone.

The products we sell into these customers are specifically engineered to meet their manufacturing requirements. We provide a variety of process equipment using Flow control and tempered – used to control flow and temperature during manufacturing.

Our core strengths include strong brand identity and the ability to create custom engineered solutions for diverse flow processes.

About 70% of our sales are for components, the other 30% are for systems. Increasingly, customers are looking for turnkey solutions to their manufacturing processes. To address this, we offer both skidded sub-systems and turnkey solutions. A skidded system assembles 10 components to 20 components into one sub-system for a manufacturing line.

On a turnkey project, we’re delivering a full manufacturing system that may contain anywhere from 50 components to 100 components. This provides ease of installation for our customers. It also gives us a competitive advantage over single component competitors and expands our installed base and aftermarket opportunities.

Our largest installed base of systems is in Europe. However, over the past few years it has come from demand in developing countries. Over 20% of our 2008 systems revenue was from sales into China, Russia and Brazil.

Prior to the acquisition of APV, globalization of our Flow business was under way. We had a strong presence in developed parts of the world such as North America and Western Europe. The APV acquisition has provided us with significantly greater access to developing country markets, and the integration of APV is well under way.

From a manufacturing perspective we’re initially focused on rationalizing operations in higher cost regions including Europe and the United States. We’re in the process of executing several previously announced facility closures and consolidations that are expected to reduce headcount by approximately 500 employees. We expect the total cost of the entire integration to be between $60 million and $80 million, and to be completed sometime in 2010.

We have increased our projected annualized savings to be between $60 million and $80 million after the integration is finalized. We now expect the APV integration to benefit earnings per share in 2009 by about $0.50 to $0.60. We continue to be excited about the prospects of the APV business and our overall growing exposure to the global food and beverage market.

And with that, I’ll turn the call over to Patrick.

Patrick O’Leary

Thanks, Chris. Good afternoon, everyone. I’m going to begin with an update on our financial reporting segments. We report the financial results of our business in four segments, Flow technology, Thermal equipment and services, Test and Measurement, and Industrial products and services, and each of these four segments has significant presence in at least one of our three core markets.

Flow technology is now our largest segment with over a third of our annual revenue or approximately $2 billion. Thermal is about 30% of our consolidated revenue. Test and Measurement and Industrial are just under 20% each. And I’m going to begin the day with an update on Flow.

Our Flow segment offers customers branded engineered process solutions into many regulated markets. We offer a diverse product mix that includes pumps, valves, heat exchangers, mixers, thermutators and air dehydration equipment. For the entire Flow segment, 85% of sales are for components.

As Chris mentioned, we also design skidded sub-systems and turnkey systems. Historically, component and sub-system sales have been more profitable than turnkey. Flow is also our most global segment. We have a strong presence in Europe, North America and Asia and we are focused on increasing our presence in developing economies. In 2008, the Middle East, South America and Africa made up an estimated 17% of Flow’s revenue. The food and beverage market is Flow’s largest end market at 36% of revenue.

Power and energy markets including power generation, oil and gas refinement and mining comprised 27% of the segments revenue, and these markets grew significantly in 2008. Flow ended the year with a backlog of $646 million. This level of backlog gives us good line of sight to sales for Q1. However, our visibility to the remainder of the year is limited. The Q4 backlog declined sequentially about 15%.

During the quarter, order trends in our general Industrial chemical and dehydration market slowed. Foreign exchange fluctuations reduced the value of Flow’s backlog by 9% from Q3, leaving organic shrink in the backlog of about 6%. Offsetting these declines and based on current order trends, we expect food and beverage and oil and gas orders to remain steady in 2009. All in, we are targeting modest organic growth in 2009 following three years of approximately double-digit organic growth. We expect this to be offset by currency translation headwinds of about 7%.

We’re targeting total Flow revenue of just under $2 billion, as I mentioned. We are expecting 2009 segment margins to be up about 200 points. This is obviously being driven predominantly by the APV integration. We are in the process of reducing headcount by 500 employees and we expect this to be completed during the first quarter.

Additionally, we have detailed cost reductions planned if orders slow as the year progresses.

2009 segment margins for the Flow segment are targeted to be between 13.7% and 14.7%. Long-term, we expect 3% to 5% top line growth in the segment with operating margins between 14% and 16%. From a strategic perspective, completing the APV operational integration is our number one priority. We are also integrating APV into our financial systems and our internal control environment. Once we have the cost structure in line, we believe we will be able to be even more competitive in the marketplace.

Another initiative Flow is focusing on this year is further globalizing its sales channels and we continue to focus on developing innovative new technologies to support our customers, particularly in our two largest end markets. Additional acquisitions are also possible.

Our Thermal segment is our second largest segment with estimated 2008 sales of about $1.7 billion. About 60% of the revenue is generated in sales of our cooling technologies and nearly half of our cooling sales were for the dry cooling technology, one of our more profitable product lines. We also sell a variety of other Thermal equipment including heat exchangers and critical boiler components.

Nearly 60% of the revenue generated in this market comes from the global power market. We also participate in HVAC and petrochemical. We have significant presence in North America, Europe and Asia and are expecting growth in South Africa over the next few years, as you saw in Chris’s presentation.

For 2008, we estimate the petrochemical sales made up 10% of Thermal’s total revenue. This was driven by the progress made on the installation in cutter. This project increased Thermal’s percentage of revenue in the Middle East to approximately 7% last year. We have good visibility to the forward revenue stream with the backlog at over $2 billion at the end of 2008.

The Q4 backlog was up 4% from Q3 on the strength of another large order in South Africa and the two December dry cooling contracts awarded in China. Order growth in the fourth quarter more than offset a 6% decline in the backlog due to currency fluctuations.

For 2009, we are expecting currency fluctuations to decrease reported revenue about 4%. Organically, we are targeting mid single-digit revenue growth, driven by steady trends in the global power generation market. The project nature and the large size of orders in this segment tend to cause uneven quarterly fluctuations in organic revenue and in the development of the backlog. We expect quarterly comparisons in this segment to vary in 2009.

The management team at Thermal has done a nice job over the past two years, improving the operating margins. Improved project execution and benefits from lean initiatives have contributed to significant margin expansion.

For 2008, we had targeted margins to approach 12%. It’s actually at the middle of our long-term range. Profitability in this segment is very sensitive to project mix, which was favorable in 2008. In 2009, we currently expect operating margins in the range of 10.4% to 11.4%. Our long-term targets for Thermal remain 5% or greater revenue growth and margins between 11% and 13%.

As you saw in the power and energy analysis, we believe there will be significant opportunities for our Thermal business to participate in global power capacity expansion and the replacement of aged infrastructure in developed countries. Developing technologies to address our customers’ environmental and energy efficiency challenges is obviously a key focus for this business. Margin expansion and improvements in working capital also remain high priorities for the Thermal team.

Moving on to Test and Measurement, this segment is a global market leader in providing specialty tools, diagnostic equipment and services for vehicle OEMs and their dealerships. We also report two smaller niche product lines in this segment including underground cable and pipe detection equipment and faboc [ph] systems for public transportation.

The Tools and Diagnostics business that Chris described generates more than 85% of test and measurements annual revenue. In 2008, more than half of the revenue came from sales into North America. We expect to see that percentage decline as we continue to focus on globalizing this business and the U.S. market remains challenging.

As Chris described, we’re investing in Europe and Asia to develop future growth opportunities. The U.S. market for vehicle repair tools and services continues to decline. The financial difficulties of GM, Ford and Chrysler along with the broader U.S. recession, continues to depress the market. We are expecting to see significant dealership rationalization in the coming years. And we don’t expect to see a significant amount of new model launches this year.

To a large degree, this is a daily tool business and it’s obviously our shortest cycle business. Driven by the challenges in the U.S. market, we’re expecting organic revenue to decline about 10%. In response to the end market declines, we are planning significant U.S. cost reductions. In 2009, we are targeting a reduction in headcount in the U.S. of approximately 400 employees. Overseas we are focused on integrating our European and Asian acquisitions.

For the year we are targeting revenue to be between $920 and $980 million with high single-digit margins. On a global basis, we believe the long-term revenue growth profile for the business is still 3% to 5%. However, due to the fundamental changes in the U.S. automotive market, we have reduced our long-term margin expectations to be between 11 and 13%.

Our fourth segment is Industrial Products and Services. This segment comprises niche businesses that are leaders in their respective markets. Our U.S. based power transformer business makes up more than 40% of the revenue for the segment. The segment is 82% North American based. Its largest end market is the power market at about 50% of annual revenue.

The credit crisis is significantly impacting the capital spending behavior of our Industrial customers. Q4 backlog declined 14% from Q3 to $550 million. This was primarily driven by a 27% reduction in orders for power transformers. As we described in the Q3 call, the sentiment underlying this behavior is being driven by the uncertain availability and high cost of capital, rather than a change in customer need.

We also experienced order deferrals from a few of our large solar customers who have delayed projects into 2010. These were for orders we had anticipated receiving later this year. We cannot predict how long this behavior will last. However, as Chris mentioned, we believe regulation influences are… and potentially a new stimulus plan will help maintain a decent level of spending.

We are also expecting softness during the year in our shorter cycle Industrial businesses. The slowdown in order activity is expected to modestly impact the reported results for the first half of 2009 as we work through the backlog. However, we are forecasting significant revenue declines in Q3 and Q4.

For the year, we’re targeting total revenue to be between $790 and $850 million. This reflects an organic decline of over 20%. We expect margins to decline primarily in the second half as the revenue declines more dramatically. Restructuring responses are being assessed business by business and will be made in a timely manner. For the year we are expecting operating margins between 18.5% and 19.5%. We view the current trends in this segment as temporary and linked primarily to the credit markets.

Our long-term expectations of 3% to 5% annual revenue growth and margins around 20% are unchanged. We also have a 44.5% interest in a joint venture with Emerson Electric. Emerson controls and operates this joint venture. It’s been an excellent relationship for over 11 years. EGS is a global manufacturer of high quality, branded industrial electrical products. Nearly 50% of EGS’s revenues are from sales supporting infrastructure growth and they have annual revenues of more than $500 million.

The business achieves operating margins of about 20% and has no debt. We expect our equity earnings to be about $43 million this year. That’s actually about 10% of our pre-tax income and we also receive a quarterly cash dividend which typically approximates our equity earnings and we expect that to continue.

Now, for a more detailed look at our consolidated financial targets for 2009, for the full year, we are targeting between $5.3 billion and $5.6 billion of revenue. We are expecting organic growth to be flat to down 5%. Currency fluctuations are projected to reduce reported revenue above 5%.

We are using exchange rates from mid-January in our guidance model. 2009 segment margins are targeted to be about 13%. We are guiding earnings per share to be down 10 to 16% in the range of $5.40 to $5.80 per share. Our pre-cash flow guidance is 230 to $270 million. This includes the 60 to $80 million of cash restructuring Chris reviewed, and capital spending of about $100 million.

This chart details the midpoint of our full income statement model for 2009 and gives transparency to our non-operating assumptions. Consistent with previous years, we intend to update this model and describe any changes to investors on a quarterly basis. This year we are targeting a $12 million reduction in cooperate expense related primarily to non-recurring charges taken in 2008 and overall cost controls.

Pension expense is expected to be flat for last year. As our asset performance was better than the average U.S corporate plan in 2008. Stock compensation expense is expected to about $16 million less than last year reflecting the lower stock price today versus a year ago. Our anticipated restructuring actions are reported on a special charge line in the income statement. You can see the increase to $65 million.

Interest expense is expected to be about $12 million less than last year are reflecting the reduced debt level and the lower average interest rate on our total dept. And the EPS count for 2009 is $50 million shares. This reflects the share repurchases in 2008 and assumes the current repurchase plan of $3 million shares is completed during the year. And we are modeling the tax rate at 34% consistent with last year.

Looking at the EPS bridge for 2009 compared to our guidance range for last year, excluding foreign currency changes, total segment income is expected to decline 12% at the midpoint from our 2008 guidance range. This is driven primarily by the changes in our Industrial and Test and Measurement segment that I described.

Foreign currency translation is a headwind of $0.30 to $0.40 as compared to last year. The increased spending on restructuring is expected to be basically offset by the reduced share count and stock comp expense. And the reduction in corporate expense and interest expense provide a tailwind of $0.30 as I mentioned.

Certain events could occur in 2009 that may impact our earnings and cash flow guidance. These events include continued disruption in the credit markets, stronger than expected organic growth or additional end market slowdowns, foreign currency fluctuations, additional share repurchases, acquisitions or disposals, the speed of integration and restructuring of APV, changes in raw material prices and any change in our effective tax rate.

Now for our current expectation for the first quarter we expect consolidated revenue to decline between 5% and 8%. The majority of this decline is due to currency fluctuations.

Segment income is targeted at $130 million to $135 million that’s down about 18% from Q1 last year, driven primarily by currency and the declines in our shorter cycle Industrial and Tools markets. We expect margins between 10.3% and 10.7%. Our Q1 EPS range is $0.75 per share to $0.85 per share. That’s down about 30% from last year. The primary drivers of this decline are currency and expected restructuring charges. Of the expected $65 million in restructuring charges this year, we expect about a third of them or nearly $0.30 a share to be incurred in Q1. Obviously, the actual results for Q1 will be very sensitive to the actual timing of restructuring actions and the volatility of exchange rates.

Now I’d like to give you an update on our overall financial health and our thoughts on 2009 available liquidity. In Q4 of last year, our financial position continued to improve our year end cash balance was slightly up since third quarter to just under $500 million. This was despite share repurchases of over a $100 million and a negative impact from currency translation. In addition, our gross debt position improved over $200 million in the quarter to just over $1.3 billion. Our estimated gross and net leverage ratios improved to approximately 1.6 and 1.1 times respectively at year end.

Our acquired debt payments in 2009 and 2010 are minimal at $75 million per year. We’re pleased with this result and have exceeded the leverage projection we made when we announced the APV acquisition just over a year ago. From a liquidity perspective, we expect just over $1 billion to be available in 2009. This includes proceeds from closed asset sales but excludes any proceeds from the businesses currently in discontinued operations.

From this available liquidity as Chris mentioned we are currently expecting to pay for the plan we put in place in December to repurchase an additional 3 million shares. After this share repurchase is completed we intend to evaluate prevailing economic credit and equity market conditions along with our expectations for the near term. At that time we will communicate our thoughts on capital allocation for the remainder of the year.

Obviously, liquidity is vital in uncertain economic and credit market conditions. We currently pay an annual dividend of $1 per share, a yield of approximately 2.5%. Our financial position and flexibility remains strong despite the current global economic environment. And we intend to maintain this position of strength.

With that, I’ll turn the presentation back to Chris.

Christopher Kearney

Thanks, Patrick. In 2005, we communicated a plan to investors, focused on repositioning SPX for the long term. Over the past four years, we successfully recapitalized our balance sheet and strategically reshaped SPX around three global end markets. We defined a disciplined approach to capital allocation and have shown consistency and balance with our investment decisions. And we focused growth and improvement around core operating initiatives that have been embraced by our employees and are driving a culture of continuous improvement. We believe these actions have SPX well-positioned to manage through this challenging economic environment. Our financial position is strong and we believe we have ample liquidity to remain flexible in our investment decisions for acquisitions and share repurchases.

As Patrick discussed, we intend to maintain this strong financial position, given the uncertainty in a global economy. The integration of APV is progressing and we expect the cost reduction actions we’re taking, will benefit earnings in 2009.

We have identified restructuring opportunities in each of our segments that will help mitigate the effect of the current economic recession. However, we remain confident in our long-term strategy and committed to executing it.

We thank you again for joining us at this time and we’re now ready to take your questions. And just as a reminder, for those listening on the webcast, please wait till the microphone comes so they can hear the question on the webcast. Jeff?

Question-and-Answer Session

Jeff Sprague – Citigroup

Thank you. I was wondering, first, on transformers, if you could give us a little color, given the order weakness, what’s happening on the price standpoint and is there any cancellation activity going on in the backlog or does the backlog decline just reflect the absence in new orders?

Christopher Kearney

The backlog decline, Jeff, really reflects the slowdown in orders. We’re not seeing cancellations. And pricing is frankly remaining steady and that’s something that clearly we have developed a pretty good discipline around over the last several years. We’ve, as you know, restructured our contracts in a different way. As raw material costs fluctuate overtime, that’s a big factor in ultimately determining revenue. But the culture that we’ve developed at the company focusing on the operational improvement initiatives have really helped us develop the kind of discipline that we need that I think will – has been good to us in good times and I think will help us through tough times as well. So we’re seeing that pretty steady.

Jeff Sprague – Citigroup

And then on the wall maps, I think the way, the words you chose were, your guidance assumes raw materials aren’t – don’t play out differently than what you said here today. But does your guidance reflect benefits from raw material costs relative to ‘08 and any noise in the way contracts or lags with hedges play out in your numbers?

Patrick O’Leary

It basically reflects raw material pricing prevailing at the point we produced this model. And so, this varies business-by-business. Clearly in this environment, you could reasonably expect the customers would be looking for price concessions. Historically, there is a correlation. We have done a good job constructing pass-through arrangements in most markets. Despite our prevailing view of significant deflation, for high-end materials like stainless steel and others, there has not been the significant deflation that you might expect, but business-by-business we’ve used our current view of material.

Jeff Sprague – Citigroup

And just finally, what is the rough range of margin we should expect at APV if we thought about that on a standalone basis in ‘09?

Patrick O’Leary

The reality is, as APV becomes integrated with the Flow segment, it basically makes more sense to talk about Flow as a whole. As you saw from my remarks, we’ve not changed our view of the post-APV guided margins of 14% to 16%. The core business has been running very strong in the 15% to 17% range, and you can tell from today that our expectations for APV are accelerated with much greater savings and earnings per share impact than the original guidance that we gave.

Shannon O'Callahan – Barclays Capital

Just to follow-up a little on transformers. You mentioned the credit environment really impacting thing more than the demand side. It doesn’t look like you’ve modeled in any normalization in credit markets into your current guidance, but can you give a sense of any downside scenario you view or an upside scenario if credit markets get a little better or if you do get stimulative impact?

Patrick O’Leary

I mean, basically it’s not possible for us to predict the business other than we’ve done at this point. There are in the last four weeks or five weeks significant public market commentary from large domestic utilities including some of the customers that we listed today that clearly address this as credit related. If you look at the run rate of this business, obviously we’re going to work up the backlog in the first half, but the run rate of the business or the current order level is $350 million or so. And we will update that as we go through the year and really see how the credit markets develop and whether or not there is a changed behavior in spending by our domestic utility customers.

Shannon O'Callahan – Barclays Capital

And then just on Thermal, you mentioned $50 million to $60 million from South Africa in 2009. I mean, how does that flow in the out-years and may be just also give a comment by geography, how you’re seeing Thermal play out right now?

Christopher Kearney

Specifically with respect to South Africa or Thermal in general.

Shannon O'Callahan – Barclays Capital

South Africa, you said $50 million, $60 million in ‘09. How does it flow after that? And then just maybe a general geographic view of the world in terms of what you’re seeing in that business.

Christopher Kearney

It picks up again – it picks up significantly in 2010, 2011 where you start to see more revenue flowing from South Africa. But the thing that’s similar to the South African revenue, similar to the rest of the business is that the project nature of it makes it fairly lumpy, Shannon, and so we can project it in advance where we think it naturally should flow and because of the nature of the construction project and where we come on those projects, as we’ve seen quarter-to-quarter in our Thermal business, it can be impacted by the timing of other parts of that construction project. We basically come at the tail end of construction. So, if you charted out over the next three years to four years, you’ll see some contribution to revenues in 2009. You’ll see it pick up in 2010, more so in 2011 and then there are – there is the potential for obviously other projects beyond that. But it would fall similar to the project related revenue that we see in that segment quarter-to-quarter. John?

John Baliotti – FTN Midwest Securities Corporation

Chris, if you think – it seems like if you summarized your long-term business, long-term demand businesses that nothing really long-term has changed in terms of that. If you think about when credit eases, whatever point that is and the demand for transformers comes back, do you have any sense of how that – what that looks like? Does it look like the beginning of this ramp-up again or it just like a continuation of what was there before.

Christopher Kearney

It’s certainly not – first of all for us make impossible for us to predict the timing of that but if you look at the underlying drivers of those businesses, whether it’s transformers, cooling towers, just the broad energy infrastructure business and the food and beverage related process businesses. We are fundamentally committed to those businesses because the underlying fact that we talked about today, which are no different than the fact that we talked about on a regular basis, are there. And there is a dire need for new capacity in developing parts of the world like China and South Africa. That’s not going to change. And in the United States where we’ve seen a greater impact as a result of the pending credit situation, that gets to be more serious as time goes on because that infrastructure just – it’s not getting any younger. And what’s different this time around than the last down cycle we’ve seen in the business is that now we’ve got the reliability standards imposed which make – create a significant risk for utilities for failure of that equipment.

John Baliotti – FTN Midwest Securities Corporation

Patrick, on APV, the original – when you guys did the deal initially, I think the first look was for ‘09 was – the count was at least $0.25. Obviously that’s been raised. Is it because you’ve had more time with the business or is it because of the slower environment, does that make it easier to integrate it?

Patrick O’Leary

This was a very complex integration project at the time we acquired the business. It was quite fragmented and profit between 2% and 3% return on sales. And so we’ve been very careful in the way we constructed the plan, really took the first year, 2008, where we sort of had breakeven EPS impact based on the additional debt that we took on but significant savings nonetheless. And so this really reflects speed of integration. The actual plan that they’re integrating is very close to the original plan. As I mentioned phase one will be competed here as we finish the quarter. They’ll then be moving into additional actions. Clearly, we jump from (inaudible) acquisition. We subsequently experienced significant revenue synergy from leveraging the channels and actually rationalizing the products and swapping products. That should also start to take place in APV as 2009 progresses.

John Baliotti – FTN Midwest Securities Corporation

Also add that shares are down about 10% in 2009 and that has an impact on that calculation.

Christopher Kearney

I mean generally, their product mix when you bought it from a margin standpoint seem more attractive I think because they are more focused on sanitary.

Patrick O’Leary

It was substantially more focused on sanitary, around 70%, and so food and beverage, particularly dairy, very important. And we are taking – continuing to take nice sized orders in the global dairy market. This is for things like cheese and yogurt. A lot of this construction is outside of the U.S., the names that you saw on the customer chart that Chris presented. So we are taking decent systems orders and we are integrating the management structure and the SG&A. At a prescriptive level, the primary problem with the business was less than 50% utilization of manufacturing capacity and much too high global SG&A level.

Christopher Kearney

John?

John Baliotti – FTN Midwest Securities Corporation

Have you seen any cancellations other than Waukesha within the businesses with respect to orders and are you baking in any kind of cancellation expectation as part of your guidance for 2009.

Christopher Kearney

We typically – we haven’t calculated that into our calculation and getting back to the response to Jeff’s question, is more based on what we’ve seen in terms of the sequential decline in the order backlog but are we seeing or have we seen cancellations as a result of this current situation, no, but what we have seen is a slowing in the order process.

John Baliotti – FTN Midwest Securities Corporation

Okay and then the restructuring charges. It sounds like a lot of that most of its going to be cash. What kind of a – I mean what kind of a payback should we be thinking about, like will there be some back into ‘09 and what kind of a run rate does that give you for 2010?

Patrick O’Leary

About a 12 month to 18 month payback based on the nature of the restructuring and as you say, primarily cash and obviously quite a bit of it related to headcount reduction which has an immediate payback. So this is an attractive return on investment project and we’ll report quarterly as we complete the employee and government requirement.

John Baliotti – FTN Midwest Securities Corporation

And Patrick, does any of the guidance assume cost saves or is it kind of a wash in ‘09?

Christopher Kearney

It’s a net benefit, John. There will be net tail wind in 2010 as well, depending timing but, though its front end loaded, I think we won’t realize anywhere close to the full run rate of savings in 2009.

John Baliotti – FTN Midwest Securities Corporation

Okay. Well, if we take what you say respectively you’re talking about over $1 of earnings accretion at some point maybe not fully in ‘010 but at some point. Is that –

Patrick O’Leary

It’s fair to say in a normalized revenue environment this would be accretive to our annual run rate earnings model.

John Baliotti – FTN Midwest Securities Corporation

And just lastly why is the tax rate not coming down? Other companies that are taking U.S. charges are able to deduct I think to the tax rate lower. Is that part of the cushion that you’re looking at or why is the tax not coming down?

Patrick O’Leary

I mean obviously, with APV, we’re going through a significant reorganization. This was a billion dollar company, owned by a U.K. parent with a very different tax structure. It is going to take a while for us to assimilate that structure, particularly the legal entity structure into the SPX structure. Over the long-term, I do expect to see our tax rate come down. It will be very much a function of international revenue, profitability of the international operations and then the overall structure that we arrive at. But for now, we’re modeling this year with the same rate that we used to model last year of 34%.

Nigel Coe – Deutsche Bank

Chris, could you maybe take a stab at what you think, how you think thermal bookings are going to develop over the next 12 months. I think Alson said $0.03 down for 2009, but you tend to lag (inaudible) so what do you think those will go in 2009?

Christopher Kearney

What we’ve seen, Nigel, is that we’ve seen some pretty steady progress in really in all regions, but particularly in China with four contracts in the last six weeks that we’ve announced, which is encouraging to us because we’ve talked for a couple of years now about the changing competitive dynamic in China and yet we still seem to be holding our own there pretty well. And in South Africa, in adjacent market applications outside of power and energy, we continue to see decent quoting activity which is a bit of a paradox in terms of how we see all of our markets combined. You know, we’re seeing slowing as we said, in some of the general industrial applications, but continuing to see a pretty steady order process in thermal and in the food process applications. So, I think there continue to be a good replacement opportunities in Europe and the United States in the thermal business. We saw some of that come up last year. It’s good business. And when you look at the whole portfolio, it’s, I would describe it as holding its own and being pretty steady.

Nigel Coe – Deutsche Bank

On the free cash conversion, is that a function of the free cash conversion of 100%, is that a function of the non-cash restructuring charges in between ‘09 or is that a little leakage with the customer deposits?

Patrick OLeary

I mean it’s really a combination of a number of factors. Obviously, CapEx, even at 100 is still somewhat elevated over depreciation. Depreciation running about $85 million and off the $100 million that we have in this model about $20 million of it relates to systems investment that we are making to control and rationalize the business and so at the bottom end of the range it’s a decent cash conversion. We do try to target a 100%. Obviously, the non-cash equity incentive comp is lower in this model based on the stock price.

Christopher Kearney

I’m sorry. Nicole? We’ll get around to you. There you go.

Nicole Parent – Credit Suisse First Boston

Thanks. Chris, you talked a little bit about the structural changes that you’ve made in the portfolio. Could you maybe give us a sense within some of the broader segments where you have profitability or margin differences? I think back a couple years ago we talked in Thermal about the differences between dry and wet, cooling and maybe just give us a sense of how we should think about the revenue split and what that does to profitability?

Christopher Kearney

You are talking specifically about Thermal?

Nicole Parent – Credit Suisse First Boston

I think Thermal, but if there’s any other specific broader differences...

Christopher Kearney

Sure in Thermal, you know, the dry cooling business has historically been more profitable although what I will tell you Nicole is that one of the things that we’re quite proud of is that the focus on lean and supply chain and just general operational improvements have really yielded good results for us in the Thermal business so that even in the – even in some of the lower margin businesses, we’ve seen sequential year-over-year improvement as a result of better operating discipline and better selection, frankly, in terms of some of the business that they’ve pursued. But if you look across the entire portfolio – you’ve seen pretty consistent improvement segment-to-segment. Certainly that’s true in industrial, Flow has always been a strong performer but we’re seeing the steady expected improvement in APV so that it is approaching a point where it becomes consistent with the rest of the process business there. So I think across the business we’ve seen good improvement. Transformers, it’s where it is today obviously is a good, profitable business for us. But even some of the other Industrial businesses that are smaller, as a result of the structural changes we’ve made, some of those businesses have improved their profitability pretty dramatically. So broadly across the business, I think without exception, I’m struggling to think of a place where we haven’t actually made progress, but –

Patrick O’Leary

On a relative basis in Thermal, dry and components – replacement components are most profitable in flow. Historically the food and beverage market has been our – has been relatively more profitable than the segment average, the more Industrial oriented markets are particularly in dehydration, have been somewhat lower. Oil and gas has been good. And I think Chris really covered Industrial. We have pretty much exited the Industrial businesses that were lagers in terms of margin. And now where – as Chris mentioned, we’re at the point where 85% of our revenue is in the defined three core markets.

Nicole Parent – Credit Suisse First Boston

And just one follow-up, you referenced the stimulus plan. You guys are clear beneficiaries. Could you just talk about what you baked into your numbers and the timing that you think that could flow through?

Christopher Kearney

Nothing has really been baked in terms of that. It’s just too early for us to tell. I think it’s appropriate to identify it as potential upside, Nicole, but no, it wasn’t baked into our assumptions. I guess we’ve got one behind you there.

Nicole Parent – Credit Suisse First Boston

Thank you. Any update on 4Q, especially trends in some of the shorter cycle Industrial businesses. We saw the first quarter outlook. But any thoughts on how that trended sequentially from a stronger position in 3Q?

Christopher Kearney

We’ll talk about that in a few weeks when we come and report on Q4 and the full year.

Nicole Parent – Credit Suisse First Boston

Okay. And then just so we got a bit of an order picture. Were there any restructurings in 4Q or is that we should be aware of or is really the bulk of the restructuring program starting in the first quarter?

Christopher Kearney

We talked about it when we reported Q3. We talked about restructuring as it affects APV with 500 people announced to be coming out of that business. Some of that occurred in Q4. We also talked throughout 2008 about continuing restructuring in the Test and Measurement segment, particularly focused on the North American tools business. So some of that restructuring did occur in 2008 and particularly at the end of 2008, but obviously will continue into 2009.

Nicole Parent – Credit Suisse First Boston

Okay. Thank you.

Christopher Kearney

So if that’s it, we thank you again very much. Any follow-up questions or things that we didn’t get to address in this meeting, be sure to reach out to Ryan and he’ll be happy to help you. So thanks everybody for coming and happy New Year again.

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