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Hubbell Inc. (NYSE:HUB.A)

Q1 2013 Earnings Conference Call

April 18, 2013 10:00 am ET

Executives

David G. Nord - President and Chief Executive Officer

William R. Sperry - SVP and Chief Financial Officer

James M. Farrell - Director, IR

Analysts

Christopher Glynn - Oppenheimer

Richard Kwas - Wells Fargo Securities

Stephen Tusa - JPMorgan

Nicole DeBlase - Morgan Stanley

Mike Woods - Macquarie Capital

Noelle Dilts - Stifel Nicolaus

Brent Thielman - D.A. Davidson

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 M. Farrell

Good morning everyone and thank you for joining us. I am 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 investor 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.

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

David G. Nord

Alright, thanks Jim. Good morning everybody. Let me give you a few highlights for the quarter, a little bit of color, and then let Bill Sperry take you through the details. As you see, we are 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. 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 it, compare it to last year. If you 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 your has always been biased towards 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 and hazardous. And as you 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 1st of the year, but applied retroactively to the last year, we had the benefit of 22,000 in '12, had 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 continue 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 continued growth in that business, new construction where there's pockets of activity and we're seeing, particularly on the non-residential commercial business, starting to see some signs of growth, but that's against very modest expectations, and it gets a very difficult market over the last few years and 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 are continuing at that high level of activity from last year. 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, not 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 continues to be active and expanding with a number of deals being evaluated, in process, 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 five years, came out of our operations and he is 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.

Another area that many of you have commented in the past and inquired, we are 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 represent a first quarter that's consistent with how we plan the year.

So, the sales growth of 2% really driven entirely by new acquisitions. Dave mentioned Continental but this includes the portfolio of five different deals that we did investing about $130 million in that group over the past year, and they are 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. The biggest contributor is the fact of high voltage test equipment and harsh and hazardous businesses 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, are operating a little bit below our corporate average. So you had 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, we'll 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 million to $3 million, we'll get $2 million done in our first half this year.

At the EPS line, up 5% at $1.10, and really benefiting from, when we get to the tax pages, you 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 defer to the page numbers, which hopefully you found all those materials on our website. But on Page 4 of, let's go through a little bit of some of that. We've described the fact that the acquisitions have 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 or our harsh and hazardous business lines, 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 and 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 really helps drive some tough headwinds for as 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 will end up besides driving volume here 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 year. So, spending level there feels healthy, just not a big growth rate in the first quarter.

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

By 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 referred to really attributing about 40 basis points of that decline and another 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 two-thirds 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 just described, mainly the mix and consolidation costs 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 rate. 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 two 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, and that was nearly 5 points, and then another one point, 100 basis points, coming from the application of the 2013 which will be spread evenly throughout the year. But overall, that has given 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 earnings per share as you see to $1.10 by 5%, a little bit larger than net income just because of 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. Really four different deals as Dave described, Electrical segment being active, four 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 and tool business, you all know as Burndy; we bought Vantage which is a bolt-on for our harsh and hazardous business; we bought TayMac which is a great add-on for our commercial construction business; and Cableform, nice add-on to our industrial control. 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 said, given the rig count, harsh and 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 your 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 higher-margin business there. So that will be welcome as those two businesses come back. I think it's fair to point out as well on harsh and hazardous that while the rig counts look down in the first quarter, they are actually forecasted to be up for the year. So again those two mix issues suggesting by the 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 could see some improvement there, and resi being strong in the first quarter. For operating profit in 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 of 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 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 an 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 liabilities, use of cash which shows that difference, and you see a little bit of pickup in CapEx which we like because that's reflective of efficiency that comes out of those CapEx payments and 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 are here on track with how we're planning our cash flow getting to our annual target of one times 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 relative to that being slightly positive actually, and a very supportive liquid balance sheet to be able to implement the investment plans that we've got, Dave describing an acquisition pipeline that we're eager to invest in.

So 14, let's start to look ahead a little bit, and Dave is going to conclude our outlook, but I'll give you a little bit of color on some of the markets and how that spreads to our 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 that they're at a 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 for that change, it 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 starting to put some real positive trend together as a leading indicator, to put in place numbers for the second half of the years, 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 are 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 two 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, what you 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 are still expecting that our top line sales growth will be 3% to 5% compared to the last year with about 2 points of that coming from 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 upside to that for acquisitions that we closed this year but we don't contemplate that in our guidance. I think three months ago, we would've said that that – felt that that 3% to 5% was a lot more conservative, but I think the results of the first quarter and the level of activity suggests that the year didn't start any better than we had thought, so it might still have some conservatism we hope but not necessarily at the level that we had three months ago.

And certainly, it's a more challenging period to try and forecast that. As we saw in the first quarter, we have tremendous volatility in our order patterns in January, when we talk about very strong orders and then falling back off on February 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 towards project related business over the last couple of years on the Power side, particularly on transmission and the high voltage side, even some of the harsh and hazardous, to more short-cycle short-term book and bill business that we're looking at other metrics to make sure that we're having a basis to forecast. We are very comfortable with what we're doing but of course those markets can always change, I hate that.

The flipside 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 are 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 starting 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 closing that we had contemplated, we usually try to do them on a more rateable basis during the year, but we worked with Bill Tolley and his team to try and accelerate some, to try and develop those productivity cost savings earlier, certainly for the end of this year and setting up for 2014. But it's also that that margin is also based on what is clearly a second-half biased volume pickup, that 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 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 this 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

Just on the facility consolidations, 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 businesses within Power segment. So it's kind of a couple of plant shifts and consolidation opportunity from 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 will probably cover I think some of the chunkier activity that we expect for the year and I think you should expect that the returns that we get on this spending is pretty attractive for us.

Christopher Glynn - Oppenheimer

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 keep in mind that that's growth off of really low levels but we're looking for any signs, I think an overuse turns as 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

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 Kwas - Wells Fargo Securities

Dave, could you just touch on the order trends of the quarter one? 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 weak end and then you saw the rally a bit in January, and so just wanted to get some more color, because it seems like there is some mixed signals out there and just some update there would be helpful.

David G. Nord

Okay, sure. 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 that 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 got a drop 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, 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 charts, and hopefully we can continue to build on them.

William R. Sperry

And Rich, I think just building on some of that to give you a little more color, book to bill in the first quarter was above 1 and that's typical for us for the first quarter. So, even though as Dave is describing kind of inconsistent between the months, when you aggregate it up, it kind of behaves 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're planning our year. So, the pieces are a little variable but they are sort of adding up to kind of where we were planning to be.

Richard Kwas - Wells Fargo Securities

Okay, that's helpful. And then, as it relates to harsh and hazardous and the high-voltage business, for high-volt you have some easing comparisons as we move through the rest of this year, imagine the harsh and hazardous business is a lot stiffer in terms of the comp, so with the kind of the weakness you saw in the first quarter, it seems like high-volt seemingly gets less worse here in the near term, potentially sees some growth at the end of the year, but then how you think about growth in harsh and hazardous, or I should say performance in harsh and hazardous top line as the year moves forward?

Operator

Anything further, Mr. Kwas?

Richard Kwas - Wells Fargo Securities

Yes, can you hear me?

Operator

Yes please, go ahead.

Richard Kwas - Wells Fargo Securities

Okay. I was just asking about high-voltage and harsh and hazardous, the high-voltage piece of the business faces easing comparisons as you move through the rest of the year, but harsh and hazardous I imagine facing tougher comparisons. So, any color on – I imagine high-volt gets less worse, that's the expectation as the year goes on, maybe there's some growth at the end of the year, harsh and hazardous goes tougher comparison given what happened in the first quarter, how you're thinking about the performance in both those businesses as we move through '13? Can you hear me?

Operator

Yes, Mr. Kwas, we're hearing you, yes.

Richard Kwas - Wells Fargo Securities

Okay. Were you able to get my question?

Operator

Mr. Farrell, we're not hearing you.

Richard Kwas - Wells Fargo Securities

Anybody there?

Operator

I apologize, Mr. Kwas, we are hearing you, just one moment.

Richard Kwas - Wells Fargo Securities

Okay.

Operator

I apologize for the silence. I am currently trying to reach your moderator. Please stand by. Please continue to stay on the line. You will hear silence. We are trying to reach out to your speaker at this time. Once again, please continue to stay on the line. Do not disconnect. Thank you for your patience. Once again, we ask that you please continue standing by. We are trying to reach back out to your moderator and get them disconnected. Thank you for your patience. And Jim Farrell and speakers have rejoined the conference.

David G. Nord

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

Richard Kwas - Wells Fargo Securities

But Bill gave a very eloquent answer.

David G. Nord

I'm glad I couldn't hear it.

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 and hazardous was a little bit harder because they had strength, and that's true, but again based on third-party data of rig count as well as our operating folks' insight 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 and hazardous business.

Richard Kwas - Wells Fargo Securities

Okay, that's helpful. 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, it still continues to be a really good kind of revolutionizing technology that we think still has lot of legs to keep growing.

Richard Kwas - Wells Fargo Securities

Any pricing pressure on that front? One of your key competitors talked a little bit about pricing pressure a couple of weeks ago and anything that you saw that was 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 faced it as much as anybody to the extent that they get big bid kind of business.

David G. Nord

Yes, I mean Rich, pricing in most of our businesses is more challenging, I think particularly in those businesses in the Power side where it's historically been tied around the commodity-based, but I think what we're seeing is commodities have certainly moderated and most recently have even come down more. There is certainly other material cost headwinds that we've got to deal with, particularly for as an 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 was 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.

Richard Kwas - Wells Fargo Securities

Okay, that's helpful. I'm passing on, thanks so much.

Operator

We'll hear next from Steve Tusa from JPMorgan.

Stephen Tusa - JPMorgan

Could you just maybe help us baseline 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 was okay from a growth perspective, but maybe if you could just give us any kind of high-level commentary around maybe just saying the splits for your first-half second-half, just so we make sure that we're all baseline for how that's going to progress?

David G. Nord

I'll tell you broadly that 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.

William R. Sperry

Yes, Steve, I would say a couple of things. First, you saw the charges that we signalled 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 than 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.

Stephen Tusa - JPMorgan

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

William R. Sperry

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 2 in the first quarter, 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.

Stephen Tusa - JPMorgan

Okay, and then I guess just lastly on the Power side, you talked about kind of a tough comp and some of these 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 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?

David G. Nord

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, we should be able to grow that business. In addition, some of that housing cycle here as we get more home construction last mile hook up 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, I agree we do, it is hard to keep growing that. But that said, the visibility we have for now suggests that it can into '14, it can continue to grow.

Stephen Tusa - JPMorgan

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?

David G. Nord

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

Stephen Tusa - JPMorgan

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 on another call early on. How do you see that playing out in the second half of the year and do you got any releases commodity cost pullback here?

David G. Nord

We're not expecting that. As I mentioned, pricing has been more challenging with the 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 would like to get some of that back. So, we're fighting to – obviously price cost was favorable, 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.

Stephen Tusa - JPMorgan

Do you think there's balanced risks around price being down at some point over the next year and a half, two 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 costs, 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 and some of our purchase materials and with price increases on the other side, so that plays out.

Stephen Tusa - JPMorgan

Okay, thanks.

Operator

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

Nicole DeBlase - Morgan Stanley

So, we talked a little bit about order trends within March and April but I'm curious specifically on how that looked within harsh and 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

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

David G. Nord

The retrofit continues to be a good market for us. 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 rateable business. So, if you've got it with 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 were 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

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.

Nicole DeBlase - Morgan Stanley

Okay, got it. I'll stop there, thank you.

Operator

We'll hear next from Mike Woods from Macquarie Capital.

Mike Woods - Macquarie Capital

Could you give us 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

I mean the growth rate, the implied growth rate is just better than zero, 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 three, six, nine months, depends really on the project.

Mike Woods - Macquarie Capital

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

You know, 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 have 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 are seeing.

Operator

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

Noelle Dilts - Stifel Nicolaus

I just 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

Noelle, nothing's 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 Dilts - Stifel Nicolaus

Okay, perfect, thanks. That's helpful. 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 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 is referring to, the cost side for them, there was are in a very benign environment but some of the component tree that the Power Systems group utilizes, I think for some of the reasons Dave was highlighting on the personnel side, et cetera, gets some upward cost pressures. So that creates an interesting dynamic. I think if it's a big large transmission project, you can get a reasonably competitive bid going and you are describing some of the international business parse outs, they too are involved in bids and projects. So, it's a competitive segment for sure.

Noelle Dilts - Stifel Nicolaus

Okay, thank you.

Operator

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

Brent Thielman - D.A. Davidson

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

William R. Sperry

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 ex that. I don't know Jim if there is – it has been up slightly, Brent, really nothing.

Brent Thielman - D.A. Davidson

That's helpful, just looking for rough numbers there. And then in 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 regarding deliveries there that might be potentially 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, we never want to say it's out of the question but those schedules are usually pretty fixed. I mean 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, I appreciate that.

James M. Farrell

Yes, 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

That does conclude our conference today. Thank you all for your participation.

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