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Hubbell Incorporated (NYSE:HUB.B)

Q2 2013 Earnings Call

July 18, 2013 10:00 am ET

Executives

James Farrell - Vice President of Strategic Planning and Investor Relations

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

Ryan Edelman - Vertical Research Partners, LLC

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

Mike Wood - Macquarie Research

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

Operator

Good day, and welcome to the Hubbell Incorporated Second Quarter 2013 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jim Farrell. Please go ahead, sir.

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 our Chief Financial Officer, Bill Sperry. Hubbell announced its second 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 are reconciled to the comparable GAAP measures and are included in the press release and the earnings slide materials.

Now let me turn the call over to Dave.

David G. Nord

Thanks, Jim. Good morning, everybody. Let me just take a few minutes to talk a bit about the second quarter, and then I'll give it to Bill to go through some of the details. We're certainly pleased with our performance, overall, in the second quarter, particularly when we think about the end markets that we're facing. As expected, very mixed, very difficult to predict. So our team is very focused on performance regardless of what the markets throw at us. But overall, our sales you see are up 3%, largely due to the acquisitions in total, but even within our markets, particularly on the lighting side, good growth on that side of the business, the Electrical segment, x acquisitions are flat and then the Power business and we'll talk a bit more later. And I think from an end market standpoint, as I said, we've got some mixed markets that we're dealing with, the non-residential market, a little bit better, mainly because of the strength in the renovation market, we're not seeing any meaningful improvement in new construction. The residential market continues to be solid, although as you see from the monthly reports on housing starts and permits, it's a bit lumpy. Utility side was a little weaker on both transmission and distribution, but also against some pretty tough comps, you remember last year, we had a very strong start to the year from weather and releases on transmission projects.

And then the Industrial side is mixed. The core is bit sluggish, our high voltage down sharply, although I think we feel pretty confident that that's the last time we'll be saying that. We got some good activity that we expect to start to come through in the third and fourth quarter. And the Harsh & Hazardous side, as we talked about, continued to be weak, although, we're seeing some signs of improvement early this quarter. So despite some choppy markets, particularly pleased with being able to continue to expand our margins, up 50 basis points, attributable to a combination of -- still holding a little bit of favorable price, even in light of the favorable material costs really being big contributors to that. And that was helpful because we still had some of the facility consolidation costs in the quarter.

More importantly, I'm very pleased to talk about a couple of acquisitions that we've closed, one in June and the second one we just closed earlier this week, and I'll talk about that in a minute. I've been spending a lot of time on the road with our customers, our suppliers and with our operations. In fact I was just out last week, visited 5 of our locations and I'm always hesitant to highlight any one because the others feel slighted. But there was one that was actually a new acquisition, so it is a little bit different. The business that we acquired last year in our utility business, Trinetics, and I was particularly pleased to visit, meet with the team, look at the products and evaluate the integration. And I think on all fronts, very positive results and I think it's a strong indicator of the type of acquisitions that we're doing and the method that we have employed to integrate them.

And on the new products side, we're still focused on innovation. At the recent LIGHTFAIR, the lighting business, where a lot of the innovation is focused, won 2 awards: one in our Kurt Versen business, on a MultiSource LED that actually is designed to allow a lot of plug-and-play for field conversion, fall from below the ceiling; and then our building automation, a low bay sensor dimming device. Now this is -- and if you've seen reports on LIGHTFAIR, some refer to it as LED Fair, but it's industry-wide, very well attended, so getting recognition from that group, I think, is indicative of our focus on our innovation.

When we talk about facility consolidation, we continue to work our footprint. We completed the closure of the Mexican operation in Power Systems and we're near completion on a related domestic facility. Most of the costs are behind us, what happens in the third quarter is probably not meaningful. The pricing environment is still competitive. I mean, we continue to try and push price, particularly to cover some of the other cost inflations that you deal with, despite more favorable material costs. And depending on the market, some markets are more competitive than others.

I think if we go through the platforms, just at a high level, the Electrical segment, as I said, a little weak markets in Harsh & Hazardous and High Voltage, but we think both of those will be turning positive and those are key to some of our outlooks for the second half. The acquisitions, certainly, a lot of acquisitions were in the Electrical segment and those are contributing to growth and some of the positive favorable price costs.

On the Lighting side, the new construction -- there's some pockets of activity but generally, a choppy pattern. More of it is based on the energy efficiency on renovation, the residential markets remains solid and the LED component continues to increase.

The Power side probably has a little more challenge, the distribution side down slightly, if you exclude Trinetic's impact. Transmission and the Substation business down low-double digits. We've got some challenging comps, I mentioned a couple of months ago that we're seeing project deferrals, although some of those might get pulled back in, in the second half of this year. It's a lot more volatility but I think, overall, that part of the business continues to soften, the quoting activity is down dramatically. And it's probably not surprising when the industry and FERC in particular is looking at reducing the rates of return, so I think people are much more cautious about what they're going to invest in. We continue to maintain our price discipline in that business so that could contribute to some share shift in a competitive environment, but we think it's important to continue to focus on that. There's also, interestingly, some continued inventory destocking, particularly in the Northeast region, a lot of Sandy inventory build still being worked off by a few customers in the area, which does have some impact, but I would expect that, as we get towards the second half to the later part of the third quarter, they're certainly going to want to make sure that they're prepared this year's storm season. And then the good news is, despite the shift from transmission to distribution, that does help on the margin side because the distribution business is a better margin business there than transmission, so I think that has contributed to the Power Systems margin.

So all in all, some good balance. We like our portfolio. We'd love it if every market and every business was hitting on all cylinders, that doesn't happen often, and so we're used to the challenge of navigating through some challenging markets.

On the acquisition side, we closed on the Continental deal back in January, but this quarter, we closed on Connector Manufacturing Company in the Electrical segment, $44 million acquisition, excellent fit, extension of our offering in the Grounding business. And just earlier this week, we closed on a smaller lighting deal, a company called Nordlux, small but very important deal, extends our knowledge in the LED design and manufacturing, really helping us be first to market solutions with the specialty markets. So as I know the question's come up in the past about where our focus is on acquisitions, and we said it's in all of our businesses and I think this is indicative of that and we're very pleased that. So with that, let me turn it over to Bill to take you through some of the more -- some of the details on the numbers.

William R. Sperry

Thanks, Dave, and good morning, everybody. I'm using materials that, hopefully, you found on our website and I'm starting on Page 4. Our second quarter sales were $801 million, up 3%. As Dave mentioned, driven essentially by acquisitions. I think to give you a little bit of flavor of that, we had 5 different acquisitions contributing to the quarter. Dave was just referring to the breadth of that, those investments spread across both the Electrical and Power segments. I think that it gives you reasonably interesting snapshot of the state of our business development activities and, to the extent you're interested, we certainly can talk more about that in the Q&A.

The second part of sales is obviously the organic end markets here where we had flat performance. On the non-residential side, which is our largest market, we continue to wait for a rebound in the new construction building market. It's not here yet. We continue to see a bifurcation between the private construction markets, which are growing a little bit, and the public markets which are not. And I think one favorable place we've got so far is the fact that the balance between those 2 markets is a lot closer to 60-40 now, with private being the largest contributor. And that compares to maybe 50-50 when government stimulus was at its peak and we think the 60-40 balance is a lot healthier. But we're still waiting for that new construction to catch.

The renovation and relight continues to be the favorable side of non-res. It mostly impacts our lighting business, but it also helps us on some of our wiring device and other electrical product areas. So that's really the bright spot of non-res. The industrial story is very mixed in terms of both industrial production and some of the extractive industries. I think metals and mining are down. I think the oil and gas side a little bit more favorable. But the real drag for us in industrial comes from our high voltage test equipment, and this is now ends, I think, the string of negative compares for us on high volt, and when we switch over to outlook later, we'll talk about the outlook for that, but it's basically inflecting right now.

I think Dave commented on the utility business, when we get to the Power segment, we can talk more about that. But we're seeing a decline, transmission providing the most volatility there.

And the bright spot of the 4 markets is residential. I know the latest news had some derogatory insights into multifamily and everybody's trying figure out what impact weather had. I think we tend to step back from specific the month-to-month, and the trend for us certainly in the second quarter, continued to be double-digit positive, again, we can talk about our outlook at the end. But that's really our sales picture, which is flat end markets and the 3% coming from acquisitions.

On Page 5, you'll see an impressive 50 basis point pick up in gross margin. That's really being driven by 2 sources: one is the better sales from higher margin products, as Dave was describing, in the Power business. Sometimes those large transmission projects can get reasonably price competitive and as those have declined and their contribution to us, we get a pickup, as a result, in margin; second driver was a little bit of pulling of price, which, combined with favorability and tailwind from our material cost side and productivity was essentially balanced with inflation. So the net of that was a 50 basis point pick up in gross to 33.9%.

On the S&A side, you see an increase to $140 million, a 3% increase, which is largely in line with our sales. And as we watch it, the dollar increase comes from acquisitions, and keeps us mindful, as we view our acquisitions, that we've got to continue to integrate well and keep that S&A efficiency where we need it to be.

On Page 6, we show our operating profit, increasing 6% to $132 million, a 50 basis point pickup to 16.5%. And as we've discussed, that's really all -- that driver is really all coming at the gross line.

On Page 7, we've got our other expenses increasing a little bit less than $1 million, being driven by FX. And the tax rate is favorable by 40 basis points down to 32.4%, driven, in large part, with R&D tax credit being included in '13 and not in '12.

On Page 8, the results of all those is a net income of $82 million, an increase of $6 million. Obviously, higher OP and lower tax is driving that. At the EPS line, a 6% increase to $1.37. Our share count was reasonably comparable across the periods. We had only very modest share acquisition activity in the second quarter.

Let's transition now to talk about the 2 segments and, on Page 9, we've got Electrical. You see sales up 5% at $565 million, with acquisitions adding 3% to that, volume adding 2%. On the acquisition side, as Dave mentioned, a good amount of activity on the Electrical segment there. We have 4 different deals contributing to the quarter incrementally and they're spread across the Harsh & Hazardous business, connector business, as well as weatherproof boxes. And so, as Dave was highlighting, an opportunistic approach of good additions to our platform there. The organic volume of 2% being led by resi is our strongest competitor -- or contributor. Our Lighting businesses, for example, resi lighting business was up 13%, contributing to some of this growth. As we mentioned before, non-res has been driven by the reno, and industrial was a mix for us. Electrical segment picked up 60 basis points of OP margin to $89 million and 15.7%. They benefited from being able to pull price at the same time as receiving some material cost tailwind. So they picked up some benefit there, on the material side, both on the metals and as well, things like LED chips. And productivity and inflation, essentially, offset each other.

On Page 10, we've got the Power business. I think Dave made a good description here. I think our utility customers are facing some interesting challenges. We've shown here, for the quarter, a 2% decline in sales to $237 million, but with 2% coming from acquisitions, from the Trinetics business that Dave mentioned his recent visit to. Implying volume being down 4%, we were comparing to last year's second quarter, where we had reported a 15% increase, so it's a difficult compare there to a high level of spending. But I think our customers are facing some interesting challenges across 3 fronts. I think on the demand side, they're experiencing the impact of conservation and efficiency that people are trying to gain in electricity usage. On the regulatory side, certainly getting buffeted there by their ability to get price locally and whether or not rates of return are allowable or being decreased. On the input cost side, pretty dramatic swings in their fuel prices and creating a focus on a generation fleet and how they've got to rebalance gas versus coal. And we think that's probably creating some competition for their spending dollars. So we're obviously focused on the distribution and transmission side. I think we've seen slightly lower [indiscernible] tends to build the more stable side of the business, it's the larger side of the business for us, tends to be driven by maintenance and repair, which ultimately, we feel utilities have to spend that. The transmission side, the large projects have been down since the big level of last year and -- so you see the effect on our sales.

At the OP level, you see a pickup of 30 basis points to 18.2%. We talked about that favorable product mix where the large transmission projects being absent largely has a lot of pickup in that OP margin. And Dave gave a good description of the facility consolidation costs in order to invest in the platform's productivity and as a result of an acquisition that we've made in enclosures segment of power, we had the opportunity to close 2 different facilities, that Dave mentioned, largely completed, and a headwind to margin performance for the second quarter.

On Page 11, we've got cash flow. You see that we've improved slightly over prior year, driven by the increase in net income. You see working capital usage up a little bit. We need to keep our focus there. We got some more charts on working capital we'll talk about later. CapEx being up is a positive, from my perspective. Dave mentioned from LIGHTFAIR some of those new product development, but the need on our part to keep productivity and new product development going, very important, so we like that level of CapEx spend.

Okay, so Page 12, we transition now out of the quarter to the year-to-date, the first 6 months. And you see the first column, the year-to-date 2012 of $1.5 billion of sales. Just to remind everybody, that was a -- that year-to-date period was a 10% increase from the prior year, so nice high level of spending. And against that backdrop, we increased 3%. The OP margins were down 20 basis points, I think, as you recall, our first quarter was really driving this down. We had some mix, industrial mix drivers there, but a EPS increase of 6% to $2.47 for the year-to-date period. So for the 6 months, we consider ourselves to be -- we're in the locker room at halftime here assessing that. And it feels to us like we're making money with no real market help. And I think the implication is we're doing a reasonable job of managing price cost and doing a reasonable job of investing well, both in productivity and acquisitions. I think that's a summary maybe of the first half. And from here, I'll talk about the segments quickly because there's not a lot of news in the year-to-date period versus the second quarter.

Page 13 is Electrical segment, 4% growth, 3% from acquisitions. So again, very flat-ish 1% organic volume, same drivers. Good resi growth, non-res driven by reno and industrial being mixed with the lower high voltage. OP margin's flat there you see at 13.9%. We did well on price above material costs and productivity offset other costs, but that mix, you remember, of industrial products from the first quarter, dragged things down a little bit to create a flat year-over-year period.

Power is on Page 14. Flat sales, again, to remind you that year-to-date period of 2012 was up 14%, so a flat against that high level from last year, acquisitions contributed, 2%. FX was -1% , so the volume is really -1% and you see that was driven by the transmission compare to very strong first half last year.

At the operating profit margin side, you see, $79 million of OP, 40 basis point decline in margin, driven largely by the facility consolidation that Dave described. Year-to-date cash flow, similar story to the second quarter we've got an improvement in net income. Some usage of working capital and, as I said, the desirable increase in CapEx . I think, given the seasonality of our business, we feel that we're on track to deliver onetime free cash flow at 1x net income for the full year as we go forward.

Page 16 describes working trade, working capital, little bit more detail. You can see a little bit of creep here from the second quarter of '12 from about 18% up towards 19%. I think we prefer that to be down in the 18% range. The areas of focus for us are inventory and payables. What we're trying to balance against is our customer service need for inventory, as well as the fact that, as we add acquisitions, it can create some inventory management challenges. So we keep working on this and we're trying to drive it down, it's an important metric for us.

Capital structure on Page 17 shows a liquid balance sheet with a debt to cap of 26%, and certainly, very capable of supporting the business development and CapEx investing that we're intending to do here.

All right, so here we're going to switch and start talking forward. I'm on Page 18, on our 2013 outlook. Let's talk about 3 o'clock on the clock of the pie here. Resi, we've got at 15%, that's the same as previous. As we've said, I know the recent news, it's shown some choppiness in multifamily. I think, for us, we continue to get pretty favorable views from our customers, homebuilders, and so to us, having an outlook for the year of double digits seems very reasonable.

Non-res have not changed from 1% to 3%, that's as, as we've previously discussed, again, it's a little bit up in new construction private, a little bit down in new construction, public, and that growth is really being helped by the reno and relight. Industrial is low-single digits here, also not a change. I think that what you'll see different going forward is our high volt business, it's starting to inflect. It's been down now for several quarters and our anticipation in the second half of the year that it's going to be up. That's good from a volume perspective, also good for us from a margin perspective of the high margin business.

So the place where we made some changes to this outlook is at the -- on the utility side. We really reduced our outlook by 2 points. We've now got a 0% to 2% market outlook and we've discussed all the reasons contributing to that. So the net of all this is a market contribution to our total full year 2013 sales of about 1% to 3%. On the next page, we'll talk about how that plays out over the 2 different segments. So at Power, given that reduction of 0% to 2% for the market, the Trinetics deal that Dave mentioned should add 2%, so we're expecting a 2% to 4% sales growth for Power. In Electrical, you see 5% to 7%, a new deal that Dave mentioned at CMC, and creating a 4% contribution from deals. And so what we have is a 1% to 3% organic outlook, 3 points from acquisitions, getting us 4% to 6%, overall. We were at 3% to 5%, overall, and what's really happened is we took 2 percentage points of growth out of our Utility outlook and added some deal and that's really the net change that you're seeing here from our previous quarter. And that has influence on the margins going forward. So that's kind of a market and sales version of the outlook and I'll turn it back to Dave on Page 20 to discuss the outlook more robustly.

David G. Nord

Okay. Thanks, Bill. Yes, let me just provide a couple of comments on the outlook and then I know you guys want to have some questions. First, on the top line, as Bill said, we're looking at 4% to 6% sales growth with 3 points of that coming from acquisitions. The acquisition pipeline has been good, our closings have been good. There's still more in the pipeline, but you can never guarantee that you can get them to closure. But I would think that we would have, likely, at least one, potentially, more in the second half of the year, our typical size range. The outlook on volume becomes more difficult to predict as our business has migrated a little bit more to stock business from the large project business, as well as some of what has historically been a very stable predictable market on the utility side to being much more volatile. So that's added some challenges but I'm --we feel good right now from what we've seen with our 4% to 6%, while we historically have been conservative, or been viewed as being conservative, I wouldn't say we're changing that, but I would say that we have a lot more. We don't want of the unduly conservative, but this is a good outlook for us, as of today. Our margins, 30 basis point improvement, that's down from our prior guidance and really just because of the impact of the acquisitions coming in, and certainly the impact in the early periods of those acquisitions. A lot of that, to date, has been due to some of the favorable price cost and other productivity gains. I think we'll get a little bit more from productivity and, of course, when we get some of the facility closing costs behind us, that helps. But I think there's also an element of easier compares, in some cases, particularly on the volume side in the second half. Because of the uncertainty around our volume assumptions, we're even more focused on our cost management and planning around that, if the market softens unexpectedly and we'll deal with that.

We also have some of the businesses that are recovering, like our high voltage business, as you know, is a very large project-oriented business and that can make the timing of the some of those projects and deliveries much more volatile. So we feel good about the second half. I can't give you, with precision, a third and fourth quarter bias. You know that we have a general strength in the third quarter due to construction, historically. But I think if you go back over the last year or 2, unfortunately, some of those historical patterns have been more volatile, with some of the dynamics in particular end markets. So all in all, we feel good about the second half forecast. But it's a weekly, monthly and quarterly challenge to navigate through that. So far, this month, we're about halfway through the month of July, I think our orders are okay. They're not supporting a big uptick in the third quarter. We're watching them closely, certainly the early part of the month is tough to draw any conclusions on because of holiday schedules and vacation schedules. But so far, we're okay committing to the range of guidance that we have.

So with that, let me turn it over to Jim, and get into some Q&A.

James Farrell

Thanks, Dave. Let's turn it over to the Q&A portion of the call. Thanks.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Christopher Glynn of Oppenheimer.

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

LED deal in terms of sales might be somewhat immaterial but any comments on size of CMC?

William R. Sperry

Chris, we got cut off on the first half of your question, sorry, I couldn't hear.

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

Okay. Yes, I was just asking about the size of the deals that I think the LED one sounds sort of immaterial, but maybe the size of CMC?

William R. Sperry

Yes, CMC is going to add about one point to the second half of the year. And as Dave was describing, kind of nice typical Hubbell-sized deal and the lighting one was a little smaller..

David G. Nord

Yes. CMC was about a $44 million purchase price and the lighting deal was in the mid-teens.

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

Okay. And then utility, do you think that's based, given what we've come through on the transmission, I don’t know if you'll call it a bubble, but do you see that resuming growth at some point, looking even into next year? Or do you think we're kind of moving along peak levels here?

David G. Nord

I would say we're moving along peak levels, from our side. I mean, we clearly see a big drop-off in quoting activity, which is the first indicator. And I think that's what most of the forecast had suggested, that somewhere the investment was going to peak somewhere around '13. Remember that's calculated when it's put in service and some of our stuff happens before that. So I think you're going to see that. Our belief is that, that's going to start to turn down. It's still at high levels but it's not a growth engine for us, by any means.

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

Okay. And then just lastly, the consolidation charges, are those done now? And what kind of payback are you looking at?

William R. Sperry

We've got a little bit, Chris, that'll finish off in the third, but quite small. And we haven't been explicit about the paybacks, but what when we're talking about closing facilities and moving that volume into existing footprint, and those projects are very attractive return-wise.

Operator

We'll go next to Rich Kwas of Wells Fargo Securities.

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

Dave, on -- you talked about the sales outlook, the 4% to 6% and saying it's pretty reasonable. But if I look at the margin here for the year, the 30 basis point expansion, which was revised downward a little bit, and I think about what happened here in the first half, you outperformed here in Q2 on the margin front, at least versus our numbers, you've got lower consolidation charges in the back half, you've got less of a drag from high volt and maybe that actually lifts a little bit in the second half. Harsh & Hazardous hasn't been great, it sounds like things are picking up a little bit there. So what are kind of the puts and takes on the second half margin and what are you most concerned about in terms of potentially -- essentially achieving the margin outlook? And then what are kind of the risks to potentially generating some upside.

David G. Nord

Well, I think, first and foremost, it's volume dependent. So the closer we are to the 4% growth, the more challenge it puts on that, number one. Number two, keep in mind that, as we mentioned, the second quarter margin had a good contribution from the mix, which is not consistent and necessarily continual. So you have a shift back to some of the other growth areas in volume. Particularly, as you know, on the lighting side, the lighting overall is not a -- not all those businesses are incremental margin contributors, so when you have growth on that side of the business, that puts a little bit of a challenge on it. And then it's also a very difficult pricing environment. We've been successful so far with maintaining discipline, but at some point, you do have to balance that discipline on holding price to your share implications. We hold out as long as possible and so that's -- when you ask me what I am concerned about, it's how that's going to play out in the second half. We're not expecting to give up on price, but you don't know what others will do in the market if demand is weaker. So that help?

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

Yes, it does. And then, Bill, I know I've asked this question in the past. On the distribution piece, you're seeing any signs of any benefit from the new construction side, from residential? I know you kind of said that, that probably is not going to really be impactful until next year, but what have you seen here in the last few months?

William R. Sperry

Yes, we still don't see, Rich, any impact, certainly not in this quarter, and we're not anticipating any this year. I'm hoping to be able to describe some next year. But for now, we just don't see the impact of that although your logic is dead-on, that once we start to outgrow the installed infrastructure with some of these housing construction, it's going to drive the need for some last-mile construction which will be very beneficial for our distribution business.

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

Okay. And then just a cleanup question, last one. I think you mentioned residential lighting grew 13%, do you have the non-res numbers as well or a consolidated number for lighting in the quarter?

William R. Sperry

Yes. The non-res was up 6% and so the platform was up 8%.

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

Great. And that's revenues, right?

William R. Sperry

Correct.

Operator

We'll go next to Jeff Sprague of Vertical Research Partners.

Ryan Edelman - Vertical Research Partners, LLC

It's actually Ryan, sitting in for Jeff this morning. Just a couple nuance-y questions here. Just want to know what's giving you the confidence in the turn in high voltage. I know it's something you've been talking about for several quarters and comps are getting easier. I just wonder if you might delve into a little bit about that what you're seeing and maybe size it for us in terms of the impact to the back half?

David G. Nord

Yes, Ryan. I think that the high voltage is unique for us and that we tend not to rely on forecasting data to tell us what it can do. Tends to have a long lead time so we use our backlog. And so it does give us a higher degree of confidence in describing that turnaround. And I think, we -- in terms of order of magnitude, I would expect that the second half growth will largely offset the first half decline. So for the year, we'd have a reasonably flat high volt business.

Ryan Edelman - Vertical Research Partners, LLC

Okay. And then it seemed there was potentially a hint at possibly more restructuring if things start to get a little weaker in different businesses, and maybe I'm reading into that too much. But could you talk about some of the areas like maybe in the transmission business where things that are clearly slowing and based on utility CapEx budgets to use, definitely slowing in '14? Are these some areas of the business that you might look to cut more cost?

David G. Nord

I don't think there's any particular business. It's really more broad-based and what I'm referring to is just an increase in our cost discipline and our spending discipline. No radical impacts right now. But certainly, as I said, to the extent that the markets weakened dramatically, and we're surprised by that, we would be working toward looking at other actions that would occur. But nothing major at this point that's outside of what has been a continual process for us in our facility rationalization, in our productivity, in our hiring process. So I hope that helps.

Ryan Edelman - Vertical Research Partners, LLC

Yes. And maybe just one last one. If you could give us sort of a capital allocation update. Obviously, you've done a lot of work on the M&A side, I was wondering if we might start to look at more share repo now that we're halfway through the year?

William R. Sperry

Yes. I think, Ryan, to give a little flavor on -- we really haven't been doing much share repurchase. This quarter, we only bought $7 million [ph] worth of shares. We continue to kind of have an objective of offsetting creep that might come from an option exercise. And so acquisitions continue to be a big area of focus. Dave was describing some of the recent activity and deals can get lumpy. Sometimes it's helpful to widen the lens a little bit, and if I were to look at the last 8 quarters to give kind of a 2-year view, we've acquired 9 companies, investing $222 million. If you kind of try to cut that in half and said an average years of activity, right now is about 4.5 deals, adding over 3 points of sales, that's a good snapshot, I think, of how we're doing on the deal front. And that represents a ramp-up over the last 3 years, as Dave mentioned. Hopefully, no slacking on that in the future. So between the 2, we continue to have our focus on acquisitions, Ryan.

Operator

We'll go next to Brent Thielman of D.A. Davidson.

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

Just on the acquisitions, you mentioned not additive to margins this year. Should those be a little more consistent with the base business -- businesses next year or incremental headwind or tailwind in margins?

William R. Sperry

Yes, they should be much more trued up after we've owned it for a year or so.

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

Got you. And then just on the Power side, the rest of the world component is smaller, but could you talk around some of the trends you're seeing in that area?

William R. Sperry

Yes, so we actually had some contraction in our international power business as well, consistent with the platform as a whole. That's largely for us down in South America. And so consistent trend there versus here actually.

Operator

We'll go next to Mike Wood of Macquarie.

Mike Wood - Macquarie Research

I know you have nice backlog in the high voltage test equipment business that gives you confidence in the back half of the year. But can you also talk about what you're seeing in the recent order momentum, is that continuing?

William R. Sperry

Yes, Mike. The activity has been improving as well. The customers, to remind everybody, customers for high volt are really, for us, the test equipment goes into 2 places. One is it goes to OEMs who are making transformers, and the other is utilities who are testing their grids and their networks. I think we -- the trends have been transformer manufacturing globally are running pretty mixed around. There's some people moving capacity to low cost countries, others adding capacity, others shrinking. So kind of an interesting mixed picture there. Utility customer side, I think, showing us a little more consistent activity, Mike.

Mike Wood - Macquarie Research

Okay. And also you'd mentioned previously some optimism for gradual recovery into the end of the year in new non-res, but you'd said that you're seeing any meaningful improvement yet. Has that outlook changed at all?

William R. Sperry

Not sure I heard you right. You were talking about non-res?

Mike Wood - Macquarie Research

New non-res, in terms of new starts.

William R. Sperry

Yes. We really haven't seen it yet. So we can't really speak to anything specific that changes that and so we've retained our outlook where it was.

Operator

I'll go next to Noelle Dilts of Stifel.

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

I'd just like to go back to transmission really quickly. I was hoping you could remind us what your typical lead time is between the quotation activity you're seeing and project construction?

David G. Nord

The transmission piece is -- you'd have to break that up into the 2 components, Noelle. I think the maintenance and repair side of transmission would have a more regular and typical order pattern and shipping that would be a little bit more book-to-bill. The longer lead time is the large project and that could be -- you can be building up orders, releases could be 3 months, 6 months, could be a year even.

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

Okay. And then a couple of other players in transmission have talked about Canada as being actually an opportunity, and seeing some acceleration there. Can you comment on what you're seeing in that market and how much exposure you have?

David G. Nord

Yes, we would agree that the project activity that does exist in North America happens to be in Canada. Our market share there, Noelle, has not been as good as our overall market share. The market's been a little bit more price competitive. There's some international competitors there. So we'll have to see how that market evolves. But I agree with what you're saying that the activity has been north of the border.

Operator

At this time, we have no further questions.

David G. Nord

Okay, thank you, everyone, for joining us this morning. Certainly, if anyone has any follow-up questions, they can feel free to give me a call. And thank you, again, for joining us this morning.

Operator

That does conclude today's conference. We thank you for your participation.

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