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Hubbell Incorporated (NYSE:HUB.A)

Q2 2013 Earnings Call

July 18, 2013 10 AM ET

Executives

James Farrell – VP, Strategic Planning and Investor Relations

David Nord – President and CEO

William Sperry – SVP and CFO

Analysts

Christopher Glynn – Oppenheimer

Rich Kwas – Wells Fargo Securities

Ryan Edelman – Vertical Research Partners

Brent Thielman – D.A. Davidson

Mike Wood – Macquarie

Noelle Dilts – Stifel

Operator

Please stand by. We’re about to begin. Good day and welcome to the Hubbell, Incorporated Second Quarter 2013 Earnings Conference Call. This 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 Office, 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 and 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 may also 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 and materials. Now let me turn the call over to Dave.

David Nord

Okay. 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 I think 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, acquisitions are flat, and then the Power business and we’ll talk a bit more later.

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 stocks and permits, it’s a bit lumpy. Utilities side is a little weaker on both Transmission and Distribution, but also against 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 a 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’ve got some good activity that we expect to come through in the third to fourth quarter. And the Harsh and 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, we’re typically pretty pleased with being able to continue to expand our margins, up 50 basis points, to a combination of still holding a little bit of a 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 acquisitions that we closed. One in June and a 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 supplies and with our operations. I was just out last week and visited five of our locations. 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 Utilities business, Trinetics. And I was 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 methods that we have employed to integrate them. And on the new product side, we’re still focused on innovation.

In fact, at a recent LIGHTFAIR the Lighting business, where a lot of the innovation is focused, won two awards, one in our Kurt Versen business, a multi-source LED that actually is designed to allow a lot of plug and play for field conversion to fall from below the ceiling and in our building automation, a low bay sensor dimming device, now this is, if you’ve seen reports on LIGHTFAIR, some will 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.

We talked 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, it’s still competitive. 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, little weak markets in Harsh and 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 acquisition 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.

Residential markets remain 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 the Trinetics impact. Transmission and the substation business down low double-digits. We’ve got some challenging comps. I’ve mentioned a couple months ago that we’re seeing project deferrals although some of those might get pulled back in, in the second half of this year.

There’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. 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 de-stocking 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 toward the second half to the later part of the third quarter, they’re certainly going to want to make sure that they’re prepared for 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 than the transmission. So I think that has contributed to the power systems and 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 a 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 Norlux.

Small but important deal. It extends our knowledge into LED design and manufacturing, really helping us be first to market solutions within specialty markets. So I know the question has come up in the past about where our focus is on acquisitions, and we’ve said it’s in all of our businesses. And I think this is indicative of that and we’re very pleased with 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 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. To give you a little bit of flavor of that, we had five different acquisitions contributing to the quarter.

Dave was just referring to the breadth of that. Those investments spread across both the Electrical and Power segment and I think that gives you a reasonably interesting snapshot of the state of our business development activities and to the extent that you’re interested in we certainly can talk more about that in the Q&A.

The second part of sales will obviously be organic, end markets here where we had flat performance. In the non-residential side, which is our largest market, we continue to wait for a rebound in 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 public markets, which are not and I think one favorable place we’ve got so far is the fact that the balance between those two markets is a lot closer to 60, 40 now with private being the largest contributor. That compares to maybe 50, 50 when government stimulus was at its peak and we think this 60, 40 balance is a lot healthier. But we’re still waiting for that new construction to catch.

The renovation and re-light 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 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 decline, transmission providing the most volatility there. And the bright spot of the four markets is residential. I know the latest news had some derogatory insights into multifamily and we’re just trying to figure out what impact weather had. I think we tend to step back from specific month-to-month and the trend for us, certainty in the second quarter, continue to be double digit positive. And again we can talk about our outlook at the end. But that’s really our sales picture, which is flat in markets and the 3% coming from acquisitions.

On Page 5, you’ll see an impressive 50 basis point pickup in gross margin. That’s really being driven by two sources. One is 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 in their contribution to us, you get a pickup as a result in margin. Second driver was a little bit of pulling of price, which combined with favorability and tailwinds from our material cost side and productivity was essentially balanced with inflation. So the net of that was a 50 basis point pickup 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 if 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 the R&D tax credit being included in 2013 and not in 2012.

On Page 8 the results of all those, there was a net income of $82 million an increase of $6 million, obviously higher OP and lower taxes 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 two segments and on Page 9 we’ve got Electrical. You see sales up 5%, $565 million with acquisitions adding 3% to that, volume adding 2%. On the acquisitions side, as Dave mentioned, a good amount of activity on the Electrical segment there. We have four different deals contributing to the quarter incrementally and they’re spread across the Harsh and Hazardous business, Connector business as well as Weatherproof Boxes. So as Dave was highlighting, an opportunistic approach of good additions to our platform there.

The organic volume of 2% being led by resi as our strongest competitor, or contributor. Our Lighting business, 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 is mixed for us. Electrical segment picked up 60 basis points of OP margin to $89 million and 15.7%. They’ve 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 materials side both in the metals and as well in 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% when we’re comparing to last year’s second quarter where we had reported a 15% increase. So a difficult compare there to a high level of spending. I think our customers are facing some interesting challenges across three fronts.

I think on the demand side they’re experiencing the impact of conservation and efficiency. The people are trying to get into electricity usage. On the regulatory side, certainly getting buffeted there by their ability to get priced locally and whether or not rates of return are allowable or being decreased. On the input cost side, pretty dramatic swings in fuel prices and creating focus in a generation fleet and how we’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 (inaudible) tends to be the more stable side of the business, it’s the larger side of the business for us and tends to be driven by maintenance and repair, which also means fuel and 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 affect on our sales.

At the OP level, we 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- had a lot of pickup in that OP margin. And Dave gave a good description of facility and validation costs in order to invest in the platform’s productivity and as a result of an acquisition that we made in the Enclosures segment of power. We had the opportunity to close two 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. We see that we’ve improved slightly over prior year, driven by the increase in net income. We see working capital usage up a little bit. We need to keep our focus there. We’ve 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 meat on our part to keep productivity in new product development going, very important. So we like that level of CapEx spending.

Okay. So Page 12 we transition now out of the quarter to the year-to-date, the first six months. And you see the first column in the year to date 2012 of a $1 5 of sales. Just to remind everybody, that was a – that year to date trade was a 10% increase from the prior-year. So a 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 EPS increase of 6% to $2.47 for the year-to-date period. So for the six months again we consider ourselves to be, we’re in the locker room at half-time 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 acquisition. 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 flattish 1% organic volume. Same drivers, good resi growth, non-res driven by reno and industrial being mixed with the lower High-Voltage. OP margins 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 we’re flat against that high level from last year. Acquisitions contributed 2%, FX was minus 1%. So the volume is really minus 1% and you see that it was driven by the transition compared to very strong front 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 one times cash flow at one time net income for the full year as we go forward.

Page 16 describes working trade, working capital in a little bit more detail. You can see a little bit of creep here from the second quarter of 2012 from about 18% up towards 19%. I think we’d 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 a 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 are 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 start about three o’clock on the clock of the pie here. Resi we’ve got a 15%, that’s the same as previous. As we’ve said I know the recent news has shown some choppiness in multifamily. I think for us we continue to get pretty favorable views from our customers, home builders. And so to us having an outlook for the year platform double-digits seems very reasonable. Non-res has not changed from 1% to 3%. That’s as we previously discussed. Again it’s a little bit up in new construction private, a little bit down in new construction public. And that growth has really been helped by the reno and re-lighting.

Industrial is low single-digits here, also not a change. I think what you’ll see different going forward is our high-volt business is starting to inflect. It’s been down now for several quarters and our anticipation second half of the year it’s going to be up better. That’s good from a volume perspective, also good for us from a margin perspective. It’s a high-margin business. So the place where we’ve made some changes to this outlook is on the utilities side. We really reduced our outlook by two points. We’ve now got a 0% to 2% market outlook and we discussed all the reasons contributing for that.

So the net of all this is 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 two different segments. So with Power, given that reduction of 0% to 2% for the market, the Trinetics deal that Dave mentioned should add 2%. So expecting 2% to 4% sales growth for Power.

In Electrical you see 5% to 7%. The new deal that Dave mentioned of CNC creating 4% contribution from deals. And so what we have is a 1% to 3% organic outlook, three 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% of 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 during going forward.

So that’s kind of the 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 Nord

Okay. Thanks, Bill. And yeah, 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 three 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 on, potentially more in the second half of the year in our typical size range.

The outlook on volume, it 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 utilities side to being much more volatile. So that’s added some challenges but I feel good right now from what we’ve seen with our 4% to 6%. While we historically have been conservative or we’re 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 to be unduly conservative but this is a good outlook for 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 these early periods of those acquisitions.

A lot of that to date has been due to some of the favorable price costs and other productivity gains. I think we 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 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 some of those projects and deliveries much more volatile.

So we feel good about the second half. I can’t give you a 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 two 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 half way 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 around because of holiday schedule 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 us into Q&A.

James Farrell

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go first to Christopher Glynn of Oppenheimer.

Christopher Glynn – Oppenheimer

LED deal in terms of sales might be somewhat immaterial. But any comments on the size of CNC?

William Sperry

Hey Chris?

Christopher Glynn – Oppenheimer

Yeah?

William Sperry

Chris, we got cut off from the first half of your question, sorry. We couldn’t hear you.

Christopher Glynn – Oppenheimer

Oh. Okay. Yeah, I was just asking about the size of the deals. I think the LED one sounds sort of immaterial. But maybe the size of CNC?

William Sperry

Yeah. CNCs going to, you know, add about a point to the second half of the year, and as David described, kind of a nice typical Hubbell-sized deal. And the lighting one was a little small.

David Nord

Yeah, CNC, I think specifically CNC was about $44 million purchase price and the lighting deal was in the mid-teens.

Christopher Glynn – Oppenheimer

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’d call it a bubble but would you see that resuming growth at some point, looking even into next year? Or do you think we’re kind of moving along around peak levels here?

David Nord

I would say we’re moving along peak levels from our side. We clearly see a big drop off in quoting activity, you know, which is the first indicator. I think that’s what most of the forecasts had suggested that somewhere, the investment was going to peak, somewhere around 2013. I remember that 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. Still at high levels, but it’s not a growth engine for us by any means.

Christopher Glynn – Oppenheimer

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

William Sperry

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

Christopher Glynn – Oppenheimer

Okay. Great. Thank you.

Operator

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

Rich Kwas – Wells Fargo Securities

Hi. Good morning, everyone.

David Nord

Hey, Rich.

Rich Kwas – Wells Fargo Securities

Dave, on – you talked about the sales outlook, the 4% to 6% and saying it’s pretty reasonable. But if we 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 versus our numbers. You 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 the second half.

Harsh and Hazard 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 must concerned about in terms of – essentially it’s heating the margin outlook and then what are kind of the risks to potentially generating some upside?

David 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 a 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 to be honest with you, it’s also a very difficult pricing environment. But we’ve been successful so far. We’re 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 don’t know what others will do in the market if demand is weaker. So, does that help?

Rich Kwas – Wells Fargo Securities

Yeah. It does. And then, Bill, I know I’ve asked this question in the past on the distribution piece. You see any signs of any benefit from the new construction side from residential? I know you’ve kind of said that, that probably is not going to really be impactful until next year. But what are you seeing here in the last few months?

William Sperry

Yeah. 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 this housing construction, it’s going to drive the need for some last mile construction, which will be very beneficial for our distribution business.

Rich Kwas – Wells Fargo Securities

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

William Sperry

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

Rich Kwas – Wells Fargo Securities

Okay. Great. And that’s revenues, right?

William Sperry

Correct.

Rich Kwas – Wells Fargo Securities

Okay. Great. Thank you.

Operator

Well go next to Jeff Sprague of Vertical Research Partners.

Ryan Edelman – Vertical Research Partners

Good morning, guys. This is actually Ryan sitting in for Jeff this morning.

David Nord

Hey, Ryan.

Ryan Edelman – Vertical Research Partners

Just a couple nuancey questions here. Just wanted to know what’s giving you the confidence in the turn in the High-Voltage. I know it’s something we’ve been talking about for several quarters and comps are getting easier. Just wondering if you might delve into a little bit about what you’re seeing and maybe size it for us in terms of the impact to the back half.

William Sperry

Yeah, Ryan. I think that the High-Voltage is unique for us in that we tend not to rely on forecasting data to tell us what to do. It tends to have a long lead time so we use our back log. And so it does give us a higher degree of confidence in describing that turn around.

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-Voltage.

Ryan Edelman – Vertical Research Partners

Okay. And then it seems like there was potentially a hint at possibly more of restructuring if things start to get a little weaker in different businesses. 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 are clearly slowing and based on utility CapEx budgets, T is definitely slowing in 2014, maybe some areas of the business that you might look to cut more costs.

David Nord

Ryan, 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 weaken 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 hope that helps.

Ryan Edelman – Vertical Research Partners

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

William Sperry

Yeah, I think Ryan I’ll give a little flavor on – we really haven’t been doing much share repurchase this quarter. We only bought (inaudible) $7 million worth of shares. We continue to kind of have an objective of [offsetting creed] [ph] that might come from 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, you know, so sometimes it’s helpful to widen the lens a little bit and if I were to look at the last eight quarters to give kind of a two year view, we’ve acquired nine companies, investing $222 million, if you try to cut that in half and set an average years of activity right now it’s about four and a half deals, adding over 3 points of sale - 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 three years, as Dave mentioned, hopefully no slacking on that in the future. So between the two, we continue to have our focus on acquisitions, Ryan.

Ryan Edelman – Vertical Research Partners

Okay. Thank you very much.

Operator

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

Brent Thielman – D.A. Davidson

Yeah. Hi. Good morning.

David Nord

Morning.

Brent Thielman – D.A. Davidson

Just on the acquisitions you mentioned now headed into margins this year. Should those be a little more consistent with the base business- businesses next year, or incremental headwind or tailwind in the margins?

William Sperry

Yeah. No, they should be much more trued up after we’ve owned it for a year or so.

Brent Thielman – D.A. Davidson

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

William Sperry

Yes. 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.

Brent Thielman – D.A. Davidson

Okay. Thanks, guys.

Operator

We’ll go next to Mike Wood of Macquarie

Mike Wood – Macquarie

I know you have a nice backlog in the high voltage test equipment business, gives you confidence in the back half of the year, but can you also talk about what you’re seeing in their recent order momentum if that’s continuing?

William Sperry

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

Mike Wood – Macquarie

Okay. And also you had mentioned previously some optimism for a gradual recovery into the end of the year new non-res. But you said that -- you’re not seeing any meaningful improvement yet, has that outlook changed at all?

William Sperry

Not sure if I heard you right. You’re talking about non-res?

Mike Wood – Macquarie

New non-res, in terms of new starts.

William Sperry

We really haven’t seen it yet. So we can’t really speak to anything specific that changed [inaudible]. And so we’ve retained our outlook where it was.

Mike Wood – Macquarie

Okay. Thank you.

Operator

We’ll go next to Noelle Dilts of Stifel.

Noelle Dilts – Stifel

Hi. Thanks. Good morning.

David Nord

Good morning.

Noelle Dilts – Stifel

I’d just like to go back to transmissions 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.

William Sperry

The transmission piece is you’d have to break that up into the two components, Noelle. I think the maintenance and repair side of transmission would have a more regular and typical order pattern and shipping. There would be a little bit more book-to-bill. The longer lead time is the large projects. And that could be, you could be building up orders; releases could be three months, six months, it could be a year even.

Noelle Dilts – Stifel

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?

William Sperry

Yeah. 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.

Noelle Dilts – Stifel

Okay. Great. Thank you.

Operator

At this time we have no further questions.

James Farrell

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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