Hubbell Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.18.13 | About: Hubbell Inc. (HUBB)

Hubbell (HUB.B) Q1 2013 Earnings Call April 18, 2013 10:00 AM ET

Executives

James Farrell

David G. Nord - Chief Executive Officer, President, Director, Member of Executive Committee and Member of Finance Committee

William R. Sperry - Chief Financial Officer and Senior Vice President

Analysts

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Nicole DeBlase - Morgan Stanley, Research Division

Mike Wood - Macquarie Research

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

Brent Thielman - D.A. Davidson & Co., Research Division

Operator

Good day, everyone, and welcome to the Hubbell Incorporated First Quarter 2013 Earnings Conference. Today's call is being recorded.

At this time, I would like to turn the conference over to Jim Farrell. Please go ahead.

James Farrell

Good morning, everyone, and thank you for joining us. I'm here today with our President and Chief Executive Officer, Dave Nord; and Chief Financial Officer, Bill Sperry. Hubbell announced its first quarter results for 2013 this morning. The press release and earnings slide materials have been posted to the Investors section of our website at www.hubbell.com.

Please note that our comments this morning may include statements related to the expected future results of our company and are therefore, forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Therefore, please note the discussion of forward-looking statements in our press release and consider it incorporated by reference into this call. In addition, comments made also could include non-GAAP financial measures. Those measures have been reconciled to the comparable GAAP measures and are included in the press release and the earnings slide materials.

And now with that, let me turn the call over to Dave.

David G. Nord

All right. Thanks, Jim. Good morning, everybody. Let me give you a few highlights for the quarter, a little bit of color, and then we'll let Bill Sperry take you through the details.

I think, as you see, we're reporting results of $1.10 per share on sales of $740 million, very much consistent with how we expected the year to start, although, obviously, the pieces are always moving around to get there. Our sales were up 2%, a big part of that coming from acquisitions, both the ones from last year, as well as the acquisition that we completed earlier this year, Continental Industries.

But the sales -- what I want to make sure we don't miss is the sales volume still holding up at a very high level when we look at -- compared to last year. You'd recall, last year had a very strong start, particularly on the Power Systems, so we're pleased. I'm particularly pleased that, that level of activity and volume has continued. But our expectations for the year has always been a bias toward the back half, where the growth would start to come in.

Our margins are below last year but -- for a couple of reasons, and we'll talk more in detail. We had a plant closing that we had talked about -- Bill Sperry talked about back when we met at the end of February, one of our Power Systems plant that we started the closing activity, and that's part of our normal ongoing continued focus on productivity and cost reduction. And as well, we were impacted by some mix issues, particularly in our industrial, where we've had lower industrial volume, and that's particularly a higher-margin volume, both high voltage and the Harsh & Hazardous. And as you'll also note that we had the benefit of the R&D tax credit that came through in the quarter. And because it wasn't approved until after the first of the year but applied retroactively to last year, we had -- the benefit of 2012 having to be reflected in the first quarter. So all in all, I'm pleased with the start to the year. I think it provides continued support for our expectations for the year.

Across our platforms, the Electrical Systems platform, as I said, had weaker industrial markets, but acquisitions continued to contribute. We were very active on the acquisition front last year and expect that to continue this year. On the lighting side of the business, we've seen growth -- continued growth in that business. New construction, there's pockets of activity, and we're seeing -- particularly on the non-residential commercial business, we're starting to see some signs of growth, but that's, again, very modest expectations and against a very difficult market over the last few years, but certainly, the residential market being very positive.

And on the Power side, as I said, last year was an exceptionally strong start to the year, so I'm pleased that we're continuing at that high level of activity from last year. And I think the margin in Power Systems really impacted mostly from the cost of the facility consolidation, but I think, in all of our businesses, the one thing that we are facing that's a little bit different than we expected coming into the year was a little bit more challenging pricing environment. And that's surprising in a slower growth environment but one that we have a lot of experience and we continue to navigate through.

So I mentioned the acquisition activity continues to be positive. We closed on the acquisition of Continental Industries back in January. That's integrating well, and our pipeline is -- continues to be active and expanding with a number of deals being evaluated and processed. And I expect this year to be a fairly active year.

Some of the other items. We had our analyst meeting, since we last spoke in January, in New York, where I think many of you attended or certainly, if you couldn't, you listened to. Those who attended had the opportunity to see firsthand some of our product display and meet with some of our business leaders and to get more insights into those products. We've also had some leadership changes since we last spoke. You saw one announcement. Most recently, we have a new Corporate Controller, Joe Capozzoli. He's replacing Darrin Wegman. Darrin has been our Controller for about 5 years, came out of our operations, and he's now moving back into a general manager role, actually leading our wiring systems and our industrial products, so we're expecting some big things from him on our industrial products side.

And another area that many of you have commented in the past and inquired we're adding some resources to and that's on the tax side. We brought on a new Vice President of Taxes, Jim Van Hoof, to make sure that we are adding to our capabilities and focusing on what is a significant cost driver in our business. So a lot of good things going on and a lot more to come.

But let me now turn it over to Bill, and he could take you through the details of the quarter.

William R. Sperry

Thanks, Dave, and thanks, everybody, for joining us here. As I dive into the numbers, my kind of overriding comment would be that it's pretty clear we're operating in what we would characterize as a low growth environment that has some variability from week-to-week and month-to-month, not a lot of consistent trends going on, and I think our platform is operating financially very well through that kind of environment. And as Dave pointed out, the numbers I'm about to go through represents a first quarter that's consistent with how we planned the year.

So the sales growth of 2% really driven entirely by new acquisitions. Dave mentioned Continental. But this includes a portfolio of 5 different deals that we did, investing about $130 million in that group over the past year, and they're spread evenly throughout Electrical and the Power segment. And we'll talk a little bit more about those when we get to the segments. And again, that compares against an organic end market that was very, very flat essentially for us in the first quarter. The operating margin of 13.2% compares unfavorably to prior year, and Dave described for you a little bit how we've got some mix headwinds, and the biggest contributor is the fact of high voltage test equipment and Harsh & Hazardous businesses having -- which come with very high margins, coming with lower sales this quarter.

In addition, the acquisitions that are providing the growth in their first year, as is typical, operating a little bit below our corporate average. So you've got some mix headwinds there. And then, the facility consolidation process, as Dave described, coming in our Power business, the enclosure business within the Power segment, and we had the opportunity to consolidate a facility there in the first quarter for efficiency purposes. And we're actually going to have the opportunity within enclosures and related to be able to actually consolidate another facility. So we're going to continue some of that spending. So $2 million of spend in the first quarter on facility consolidation. So we'll be getting -- to Dave's target of 1 to 3, we'll get 2 done on our first half this year. At the EPS line, up 5% at $1.10 and really benefiting from -- when we get to the tax page, you'll see the size of the impact, but certainly, the R&D tax credit providing a boost there.

I'm using, by the way, the slides that Jim mentioned, and I'll refer to the page numbers, which, hopefully, you've found all those materials on our website. But on Page 4, let's go through a little bit some of that. We described the fact that the acquisitions had been driving the growth, so let's go through the end markets and look at the organic story. The non-res markets, through the first quarter, really quite flat. On the industrial side, you can see the fact that both the extractive industries, which is referring to oil and gas and some of the mining businesses, where our Harsh & Hazardous business lines up, along with high voltage test equipment getting a red arrow downward.

As we look at the data, one of the best indicators for our Harsh & Hazardous business, as we've described for you all, is rig count. And in the first quarter, global rig count was down mid-single digits, which is -- really helps drive some tough headwinds for us in that business. Second interesting indicator within industrial production numbers, if you look at the iron and steel component of that, you saw some weak numbers in the first quarter so that's really providing some industrial headwind, which, if you just keep a place mark on that because that'll end up -- besides driving volume here, it has an impact on margins, which we'll talk about subsequently.

Utility side, we see, again, flat organic markets. Dave's characterization here is very appropriate, that it's a high level of spending because it's compared to a very high first quarter last year that had some pull-forward of budgets and a very warm winter, and it compares very consistently sequentially from the fourth quarter to the first quarter to prior years. So spending level there feels healthy, just not a big growth rate in the first quarter.

And residential at the bottom is really the place where we're seeing some significant strength. So even though we're getting some mixed signals lately in terms of permits and things like that we're really getting strong contribution in the first quarter from single family, multifamily and renovation within resi segment, so we've experienced some nice growth there.

Going to Page 5 and getting into margins. You'll see gross margins of 31.9%, down 40 basis points. You can see the mix that we've referred to, really attributing about 40 basis points of that decline and a couple of million dollars in the Power segment of consolidation providing further headwind there. At the S&A line, you see essentially $6 million increase in dollars of spending. Acquisitions really drove about 2/3 of that and higher employee-related costs, just kind of the inflation that we feel, providing the balance. So keeps us very focused on that number, making sure we're efficient as we bring our acquisitions in and trying to keep that S&A over the longer run in line with our sales growth.

On Page 6, we describe our operating profit. Essentially, $98 million, 13.2% margin. You see a 90-basis-point decline year-over-year, and that's due to the factors that we've just described, namely the mix and consolidation cost at the gross line and some of that headwind at the S&A line.

On Page 7, the story is the tax rate. Here, you see a 600-basis-point decline to 26.8% effective tax rates. That's really driven by the implementation of that R&D tax credit as part of the American Taxpayer Relief Act of 2012. There's really 2 components to it that are worth separating for you. The first is the retroactive application of the 2012 component of that all condensed into the first quarter of '13. That was nearly 5 points. And then another 100 points -- or sorry, 1 point, 100 basis points coming from the application of the 2013 spread, which will be spread evenly throughout the year. But overall, that's giving us a big tailwind there in the lower tax rate.

Page 8, you'll see the result is net income growth of 4%, and we're able to grow our earnings per share, as you see, to $1.10 by 5%, a little bit larger than net income just because of a slightly smaller share count in 2013. So I'm going to move now into some segment discussions, drill down a little bit into what we've just described for the company.

Page 9, we'll start with the Electrical segment. And again, consistent with the story of our morning here is the fact that acquisitions drove the sales growth. There are really 4 different deals, as Dave described Electrical segment being active, 4 deals here in the past year. And what's exciting for me is how they are spread out into different segments. So Dave referred to Continental, which we've plugged into our Connectors, Grounding & Tool business. You all know BURNDY. We bought Vantage, which is a bolt-on for our Harsh & Hazardous business. We bought TayMac, which is a great add-on for our Commercial Construction business. And Cableform, a nice add-on to our industrial controls. So good example across the entire Electrical segment there of finding good ways to strengthen our strategic portfolio.

We described how the industrial mix has been weak. As I've said, given the rig count, Harsh & Hazardous has actually been slightly negative, and high voltage test equipment was strongly negative, down double digits. And I think we've been spending a lot of time with you describing those dynamics. We're expecting this to be another down year, but really by the back half of the year, we're expecting that high voltage will have bottomed and start to grow again against some easier compares, and again, we've got a high-margin business there so that will be welcome as those 2 businesses come back.

I think it's fair to point out as well on Harsh & Hazardous that while the rig counts look down in the first quarter, they're actually forecast to be up for the year. So again those 2 mix issues suggesting by second half, hopefully, will be straightening themselves out a little bit. As we described, non-res being relatively mixed and relatively flat, although good signs that hopefully, as the year progresses, we can see some improvement there, and resi being strong in the first quarter. For operating profit in the Electrical segment, you see 12% OP margins, a decline of 60 basis points, and that mix accounted for more than that decline.

Page 10, we'll talk here about our Power segment. And again, being with the theme, the acquisition of Trinetics attributing all of the growth for the quarter and based on very high spending last year, very flat organic spending at those high levels across the distribution and transmission spending levels. You see a decline of 120 basis points at the OP margin level, down to 16.1%, and those facility consolidation costs and a little bit of price cost headwind, what Dave described, some of the price dynamics up creating the downward pressure there.

Page 11 lay out our cash flow for you. You can see the increase in net income and a slight step-up in D&A, reflective of our acquisition efforts. But I think the story here is the working capital. You see the increased investment, order of magnitude of about $9 million there, really coming from the fact that our trade working capital, we did a very nice job, I think, of having inventory and payables finance receivables, essentially keeping those neutral. But some of the timing of our tax payments created other current liability use of cash, which shows that difference. And you see a little bit of pick-up in CapEx, which we like because that's reflective of efficiency that comes out of those CapEx payments. We get very good returns on all those projects requiring that capital. So you see a seasonally low quarter here of cash flow, but I think still fundamentally sound, and our year, on track with how we're planning our cash flow getting to our annual target of 1x net income.

Page 12 illustrates the rolling trade working capital as a percentage of sales. You see the number being up slightly compared to the first quarter of '12, a sign of continued emphasis, on our management's part, particularly on inventory and payables more so than receivables. Page 13, our capital structure continues to show you a very liquid balance sheet, plenty of cash, especially debt relative to that being slightly positive actually, and a very supportive liquid balance sheet to be able to implement the investments plans that we've got. Dave describing an acquisition pipeline that we're eager to invest.

So 14, let's start to look ahead a little bit, and Dave's going to conclude our outlook, but I'll give you a little bit of color on some of the markets and how that spreads towards different segments. Starting really in the northeast side of the pie, you see utility at low- to mid-single digits. That's not a change since we provided our outlook in January. And again, you saw kind of flat first quarter spending. But for us, the sequentials feel at a rather strong level of overall spending, and we're anticipating easier compares in the second half that will provide us those kind of growth rates.

You see residential at 15%. We had that at 10%, and so adding 5 points based on the experience that we've had particularly in our Progress Lighting brand. I think it just so happens that, that slice of our pie is small enough that, that change just creates some rounding. It doesn't change the overall outlook. As Dave mentioned in his comments, non-res still remaining at an outlook of 1% to 3%. Some of the drivers there feeling better. ABI is starting to put some real positive trend together as a leading indicator that put in place numbers for the second half of the year maybe start to improve a little bit. Vacancy rates look down, and certainly, our historical relationship where resi growth helps drive non-res growth with a lag would suggest and gives us some belief that we'll start to see more improvement there over time. And you see quite a flat low growth industrial outlook. Again, we're focused not just on those levels but on the mix and hopefully, getting some of those industrial businesses and the margin that comes along with them back into line there.

So overall, those markets give us a low-single digit expected organic growth rate. And as I turn to Page 15, you see how that spreads to our 2 segments, where now instead of organic, we're talking about sales growth of 4% to 6% at Power, inclusive of the acquisitions; 3% to 5% at Electrical; and the net for us, obviously, 3% to 5%.

So I'm going to turn it back to Dave to give you the full color of our outlook.

David G. Nord

Okay. Thanks, Bill. So I'm on Page 16. So I think what you've heard is a lot of things going on in the first quarter but all contemplated in our expectations for the year. I think starting on the top line, we're still expecting that our top line sales growth will be 3% to 5% compared to last year, with about 2 points of that coming from trends -- the acquisitions that we've done during the course of 2012 and then what we've done so far this year. I'll say there's an upside to that for acquisitions that we closed this year, but we don't contemplate that in our guidance.

I think 3 months ago, I would have said that, that felt that 3% to 5% was a lot more conservative, but I think the results of the first quarter and the level of activity suggest that the year didn't start any better than we have thought. So I think it might still have some conservatism, we hope, but not necessarily at the level that we had 3 months ago. And certainly, it's a more challenging period to try and forecast that, as we saw in the first quarter with tremendous volatility in our order patterns in January, when we talked about very strong orders and then flowing back off on February and coming back, but I think all driving to supporting our low-single digit organic growth.

I think the other dynamic that we're faced in our forecasting besides the market volatility is a bit of a shift in our business from what was more heavily weighted toward project-related business over the last couple of years on the Power side, particularly on transmission, on the high voltage side and even some of the harsh and hazardous, to more short-cycle, short-term book-and-build business that we're looking at other metrics to make sure that we're having a basis to forecast. We're very comfortable with what we're doing but of course, those markets can always change. I think that flip side of that is, and I think Bill mentioned on our high voltage side, we've started to see that business start to book the orders that start to give us confidence on that side of the house for later this year and certainly, into 2014. And that provides some support.

On the margin side, we're still expecting to improve margins by 40 basis points. Certainly, that's what we're targeting, although, as I mentioned earlier, the pricing environment is turning out to be a lot more challenging so that puts some additional pressure on that. But we do -- what we normally do is focus on the pricing, but also look at our productivity opportunities, and I think to some extent, that's why you're seeing some of the acceleration of the plant closings that we had contemplated. We usually try to do them on a more ratable basis during the year, but we work with Bill Foley and his team to try and accelerate some -- to try and develop those productivity cost savings earlier, certainly toward the end of this year and setting up for 2014. But it's also -- that margin is also based on what is clearly a second half bias volume pickup, that volume will be a big contributor to the incrementals. That can lead to that improvement, but still expecting and targeting that 40 basis points.

Free cash flow. Still on track to deliver free cash flow equal to net income. And the tax rate in the -- for the year, still targeting at the 31.5%, which has contemplated in it the R&D tax credit for 2013, as well as the catch-up from 2012. So all of these continuing to provide the basis for our plans to continue to deliver strong results in 2013, following our strong results last year.

So with that, I'll open it up -- turn it back to Jim and our moderator and open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Christopher Glynn from Oppenheimer.

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

Just on the facility consolidation, just was checking which segment the second quarter charge pertains to and if we should expect some more activity in the back half and then also from the first half activity, what kind of savings that should generate.

David G. Nord

Yes, Chris. The second facility is also in Power, it's the same enclosures business within Power segment. So it's kind of a couple of plant shifts and consolidation opportunity from a relatively recent acquisition that gave us the opportunity to move some of that volume into our existing footprint. And I think you should expect that, that would probably cover, I think, some of the chunkier activity that we expect for the year. And I think you should expect that returns that we get on this spending is pretty attractive for us.

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

Okay. And on the non-res side, was -- the comment for new non-res improving, did that cover total non-res or are you isolating out part of the market? If we could just kind of tease out a little more into non-res.

David G. Nord

It certainly is built around the commercial side. And I think that's -- keep in mind that, that's growth off of really low levels, but we're looking for any signs. I think an overused term is the green shoots, but I think we view the growth in orders turning at least positive to be supportive of what we've said is going to be a low-single digit growth year, but starting on that path.

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

And Dave, are you seeing that with larger high-quality projects? Is that an inflection there?

David G. Nord

Not really any particular bias in the market for us. It's really more broad-based.

Operator

Moving on, we'll hear from Rich Kwas from Wells Fargo Securities.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Dave, could you just touch on the order trends as the quarter went on? You provided some color -- some updated color, but just wanted to see how March ended for you and what you're seeing in early part of April. Back in January, you talked about the fourth quarter had weakened and then you saw that rally a bit in January. And so just wanted to get some more color, it seems -- because it seems like there's some mixed signals out there and just some update there would be helpful.

David G. Nord

Okay, sure. Yes, certainly, we saw, as we mentioned back on the fourth quarter call, a lot of volatility between December and January. And as I've been out with our distributor partners and other customers, I guess, I get some level of comfort. I'm amazed at how many people saw the same dynamic, almost exactly the same, the numbers are slightly different. And then they've sort of seen things the same way that we have where February kind of dropped back off to virtually flat and then starting to get back to in March. More consistent with what we expected overall, which is kind of the low-single digit. And I think that's -- as we've exited March into April, I think that's continued so -- which is certainly from our standpoint, much better to manage through a consistent, albeit low-single digit growth, but much more consistency. But again, as I've always said, I'm always cautious even in the month of April when you're less than halfway through the month to draw an absolute conclusion. But we're feeling better that there's a lot of green numbers along the way, if not big green numbers on our order chart, and hopefully, we can continue to build on that.

William R. Sperry

And Rich, I think, just building on some of that to give you a little more color. Our book-to-bill in the first quarter was above 1, and that's typical for us in the first quarter. So even as Dave's describing kind of inconsistent between the months, when you aggregate it up, it kind of behaved like the first quarter does. And as well, I think the first few weeks of April were showing an order pattern that's very consistent with how we are planning our year. So the pieces are a little variable, but they're sort of adding up to kind of where we were planning to be.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Okay, I hear you. That's helpful. And then as it relates to Harsh & Hazardous and the high voltage business, for high volt, you have some easing comparisons as you move through the rest of this year. I imagine the Harsh & Hazardous business is a lot stiffer in terms of the comps. So with the kind of the weakness you saw in the first quarter, it seems like high volt seem at least to get less worse here near term, potentially see some growth at the end of the year. But then how are you thinking about growth in Harsh & Hazardous -- or I should say performance in Harsh & Hazardous top line as the year moves forward?

[Technical Difficulty]

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

I was just asking about high voltage and Harsh & Hazardous. The high voltage piece of the business faces easing comparisons as you move through the rest of the year, but Harsh & Hazardous I imagine is facing tougher comparisons. So any color on -- I imagine high volt get less worse. That's the expectation as the year goes on, maybe there's some growth at the end of the year. Harsh & Hazardous, those tougher comparison, given what happened in the first quarter, how are you thinking about the performance in both those businesses as we move through '13?

[Technical Difficulty]

William R. Sperry

So Rich, I'm sorry you were in the middle of a question. I don't know if everybody's still on and somehow it went dead on our end, and we couldn't hear anything. We tried another phone, it didn't work.

David G. Nord

But Bill gave a very eloquent answer.

William R. Sperry

You guys could all hear us, but somehow we couldn't hear, so we just kept talking. But you asked about high voltage, and you're right that we really don't rely terribly much on market indicators or forecasts. We just use our order book. And as you pointed out, that order book is supporting some growth against some easy compares in the second half. And your question highlighted the fact that Harsh & Hazardous is a little bit harder because they had strengths, and that's true. But again, based on third-party data of rig count, as well as our operating folks' insights into the business, they actually still believe they can grow despite a soft first quarter, grow for the whole year. So that feels more like an anomaly in the quarter rather than some kind of secular shift in the Harsh & Hazardous business.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful. And then just a quick one on lighting. What was lighting in the quarter and then LED as a percentage of the total?

William R. Sperry

Yes, so we grew lighting at about 4%. Resi was obviously leading that growth. And LED for us continues to be kind of in the 20% range so that still continues to be a really good kind of revolutionizing technology that we think still has a lot of legs to keep growing.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Any pricing pressure on that front? One of your key competitors talked a little bit about pricing pressure a couple of weeks ago. Anything that you saw that is noticeable in the quarter on the LED front?

William R. Sperry

Yes, I think Dave gave a macro comment on pricing, and certainly, the lighting guys face it as much as anybody to the extent that they get bid kind of business.

David G. Nord

Yes, I mean, Rich, that -- I mean, pricing in most of our businesses is more challenging, I think, particularly in those businesses on the Power side where it's historically been tied around the commodity-based. But I think what we're seeing is while commodities have certainly moderated and most recently, have even come down more, there are certainly other material cost headwinds that we've got to deal with, particularly, for example, product coming out of China, where they're dealing with other cost inflation issues. On the lighting side, it's a little bit more difficult to try and sort through what is pure pricing on a comparable basis and what is pricing that's attributable to LED and the lower cost associated with that. So overall pricing levels can be down, but not necessarily in the case of LED, with a margin detriment. So that one's a little bit more of a challenge to even separate that. But clearly, there's pricing dynamics that aren't really positive on the lighting side.

Operator

We'll hear next from Steve Tusa from JP Morgan.

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Could you just maybe help us base-line kind of 2Q expectations? I mean, you talked about a lot of the volume and margin expansion being second half weighted. I guess, you gain a selling day in the second quarter. March is okay from a growth perspective. But maybe if you could just give us any kind of high-level commentary around maybe just saying the split for the year, first half, second half, just so we make sure that we're all base-lined for how that's going to progress.

David G. Nord

Right. I mean, I'll tell you broadly that our -- the strength in last year was really in the first half. So you still have some tough compares in the second quarter. But maybe Jim can take you through some of the more specific.

James Farrell

Yes, Steve, I would say a couple of things. First, you saw the charges that we signaled that will be in the Power segment in the second quarter, so you have those. And secondly, I think the industrial mix comment that we made on Q1 continues, maybe a little less pronounced in Q1, but we'll have a little bit more of that into the second quarter. So I would expect the first half to be down, and then I would expect the second half to be strong to get you to that 40.

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Okay. Are the revenue dynamics, first to second quarter, kind of normal seasonality, like similar with what we saw in the last couple of years?

James Farrell

Yes. So I would say, again, that would be low-single digits first half, and then it strengthens in the second. The order pattern that the guys described in April is sort of increasing a little bit we reported to in the first quarter, that as that build to 4-ish in the second, somewhere in that range. We're starting to see visibility to that, which would suggest the second half is a lot higher.

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Okay. And then, I guess, just lastly on the Power side. You talked about kind of a tough comp and some of the projects still going nicely. I mean, do you think at this stage of the game you have enough visibility to talk about whether you can actually grow in that business in '14? And is there a risk of it being down in this economy? I'm just curious as to kind of maybe how you felt this year about the next year versus how you felt last year about the next year in that business on the T&B side?

William R. Sperry

The underlying dynamic, Steve, for us in Power, the predominating revenue stream continues to be distribution, which tends to have an MRO component to it and the economic viability of the networks depend on utilities really doing a good job of maintaining those networks. So with this, that simple kind of tailwind should be able to grow that business. In addition, some of that housing cycle here, as we get more home construction, that last mile hookup should help create some distribution more on the construction as opposed to the maintenance side. But I think you're starting to get at an interesting question, maybe more around some of those transmission projects. And as that activity, which is a smaller percentage of our whole, but from a very high level, it is -- I agree with you, it is hard to keep growing that. That said, the visibility we have for now suggest that it can -- into '14, it can continue to grow.

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

And on the distribution front, is there -- I know you guys are a little bit different than kind of the bigger-ticket items like transformers, I mean, what do you think that would -- is there any kind of differences there? Or is it all kind of moving together?

William R. Sperry

No, I think there are very different drivers, right? I think the maintenance side of distribution, which you're right, is -- can be a very small piece parts that go onto those poles, that should be sort of a GDP kind of driver to it, as opposed to transmission, which should have more of a construction and project driver. I think that they are drivers, yes.

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Okay. And then one last question, just price cost in the second half. I mean, I don't know if you guys talked about this, I was on another call early on. How do you see that playing out in the second half of the year? Are you getting any relief as commodity costs pull back here?

David G. Nord

We're not expecting that, and as I mentioned, pricing has been more challenging with a slow growth. And while the good news is that you've got some more commodity -- continued commodity moderation, customers are quick to recognize that. They'd like to get some of that back. So we're fighting to -- obviously, price cost was favorable. We had a lot of tailwind last year, following some challenges in the prior year, and that's the volatility we're looking for this year to be relatively neutral on the price cost side.

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Do you think there's balanced risks around price being down at some point over the next 1.5 years, 2 years?

David G. Nord

I guess price could be down, but we're not -- I think as I mentioned, I think there's other inflationary pressures that we need to deal with, particularly as I've talked about in the past, employee-related costs, specifically health care costs that aren't going to go away. You've had spikes from time to time in energy cost, and all those things have to be dealt with. We continue to try and offset them with productivity. But some of those are coming our way in some of our purchased materials and with price increases on the other side. So I think that's how it plays out.

Operator

And we'll go next to Nicole DeBlase from Morgan Stanley.

Nicole DeBlase - Morgan Stanley, Research Division

So we talked a little bit about order trends within March and April, but I'm curious specifically on how that looked within Harsh & Hazardous. Have you seen any evidence that, that business is starting to improve?

William R. Sperry

Not yet, Nicole. We would expect that to be, again, second half.

Nicole DeBlase - Morgan Stanley, Research Division

Okay, got it. And then can you talk a little bit within non-resi, how is the retrofit versus new construction growth?

David G. Nord

The retrofit is -- continues to be a good market for us. We -- there's growth in that business. I think our business tends to be, and others may as well, but certainly ours is very project-oriented, national-account-oriented, so it can be more volatile. It's not a ratable business. So if you've got -- we have a national account that had a major retrofit effort last year, and they're tailing back on that, so you're going to have periods from time to time that are up and down. So ours was not up in a big way this quarter, but we still think that's a good market and we're very well positioned in that market.

Nicole DeBlase - Morgan Stanley, Research Division

Okay, that's fair. And then on pricing, was pricing actually down this quarter in either of your businesses or is it just looking more flattish?

David G. Nord

I'd say generally flattish.

Operator

And we'll hear next from Mike Wood from Macquarie Capital.

Mike Wood - Macquarie Research

Could you give a sense of the lead times on the new non-res construction-related orders? And you hadn't yet quantified the actual growth rate that you're seeing in the first quarter, that would be very helpful.

David G. Nord

Well, I mean, the growth rate, the implied growth rate is just better than 0. It's in very low-single digits, so it really is the early indications of turning to positive from negative. So I don't want to overstate how excited we are other than we like it being positive. And the lead times of some of the project-oriented are consistent with how they've been in the past, I mean, some of those can be 3, 6, 9 months, depends really on the project.

Mike Wood - Macquarie Research

Okay. And also can you talk about some of the main hurdles that you're facing in closing some of the deals that you currently have in your M&A pipeline, whether or not the current low growth environment is actually helping or hurting you getting some of these deals closed?

William R. Sperry

It's hard for me to attribute, Mike, any of the dynamics in our pipeline to the markets. But as Dave pointed out, we have been investing some people in this effort. We've been putting more time into it. And if you were to gauge our pipeline right now, we'd say it's a little bit stronger than it's been for a year or so. So I don't know if I can correlate that to any situation in the market or to the fact that we're putting some resources into it. But all that really matters to us is that we're finding some really compelling strategic fits out there at good valuations that we think will be able to allow us to strengthen the strategic position of our portfolio of brands, become more important to our customers and be able to add value to those things that we buy and create shareholder value out of it. So we are feeling good about that level of activity that we're seeing.

Operator

Moving on, we'll hear from Noelle Dilts from Stifel.

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

I just had a -- first, had a clarification question. You continue to expect 40 basis points of operating margin expansion for the year, and I'm just wondering if -- when you initially gave that guidance -- you're now expecting this headwind from the plant consolidation. Were you kind of anticipating that when you initially gave the guidance or is something now incrementally better to help offset that headwind?

William R. Sperry

Yes, Noelle, nothing has changed from our original January guidance. The consolidation costs were contemplated in our full year guidance. We just were unsure of the exact timing of when those would come through.

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

Okay, perfect. That's helpful. And then you've discussed this a bit, but is there -- could you give us more detail on some of the price cost pressures in Power? Can you kind of parse that out between what you're seeing in distribution versus transmission and then the international business?

William R. Sperry

Yes. It's difficult to parse it between those segments. I think that we had been -- had a pretty aggressive year last year in pulling price. As you remember, we were sort of making up for some headwind we had in '11. And I think we were efficient at getting price back in '12. And I think we're finding ourselves to be at an interesting resistance point and elasticity point there, which is what Dave's referring to. And the cost side for them, their raws are in a very benign environment, but some of the componentry that the Power Systems group utilizes, I think for some of the reasons Dave was highlighting on the personnel side, et cetera, get some upward cost pressure. So that creates an interesting dynamic I think on if it's a big, large transmission project, you can get a reasonably competitive bid going, and you're describing some of the international business parse outs. They, too, are involved in bids and projects, so it's a competitive segment for sure.

Operator

And our final question will come from Brent Thielman from D.A. Davidson.

Brent Thielman - D.A. Davidson & Co., Research Division

Bill, would you happen to be able to provide organic growth for Electrical without the high volt -- more volatile high voltage business?

William R. Sperry

Well, so they had -- you saw that they had the contribution from deals in the 3% kind of range. And high volt was down double digits. So you can figure out, I guess, what it was x that. I don't know, Jim, if there's...

James Farrell

It would have been up slightly, Brent. I mean, nothing...

Brent Thielman - D.A. Davidson & Co., Research Division

That's helpful, just looking for rough numbers there. And your second half expectations, you mentioned high voltage business will see lower demand, but you're seeing some uptick in orders this quarter. Do you think you're taking a conservative stance in regard to deliveries there, such that there might be potential -- we could see some of that show up in second half? Or is that out of the question just sort of based on typical lead times there?

David G. Nord

For the most part, I never want to say it's out of the question, but those schedules are usually pretty fixed. I mean, there's -- the amount of movement would not be material to our level of activity certainly for this year.

Operator

And that does conclude our Q&A session today. Gentlemen, I'll turn the conference back over to you for any additional or closing remarks.

William R. Sperry

First of all, thanks, everybody, for putting up with our technical difficulty and hanging on the call. Appreciate that.

James Farrell

Yes, as Bill said, thanks for hanging in there and joining us today. Certainly, I'm available if anyone has any follow-up questions that you'd like to follow up on. And we'll talk to you soon. Thanks very much.

Operator

And that does conclude our conference today. Thank you, all, for your participation.

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