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SPX (NYSE:SPW)

Q2 2013 Earnings Call

July 31, 2013 8:30 am ET

Executives

Ryan Taylor

Christopher J. Kearney - Chairman, Chief Executive Officer and President

Jeremy W. Smeltser - Chief Financial Officer and Vice President

Analysts

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division

Nigel Coe - Morgan Stanley, Research Division

John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division

Julian Mitchell - Crédit Suisse AG, Research Division

Jeffrey T. Sprague - Vertical Research Partners, LLC

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

John G. Inch - Deutsche Bank AG, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 SPX Corporation Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, to Ryan Taylor, Director of Investor Relations. You may begin.

Ryan Taylor

Thanks, Frances, and good morning, everyone. Thank you for joining us. With me on the call this morning are Chris Kearney, our Chairman, President and CEO of SPX; and Jeremy Smeltser, our Chief Financial Officer.

Our earnings press release was issued this morning and can be found on our website at spx.com. This morning's call is also being webcast with a slide presentation that can be accessed in the Investor Relations section of our website. This webcast will be available until August 14. I encourage you to follow along with the webcast, as well as the referenced detailed information on the slides. In the appendix, we have also provided reconciliations for all non-GAAP financial measures included in today's presentation.

Portions of our presentation and comments are forward-looking and subject to Safe Harbor provisions. Please also note the risk factors in our most recent SEC filings.

And with that, I'll turn the call over to Chris.

Christopher J. Kearney

Thanks, Ryan, and good morning, everyone. Thanks for joining us. As we've said throughout the year, we're focused on operational improvement, reducing our cost base and returning capital to shareholders. We made very good progress on these commitments during the second quarter. Q2 earnings per share increased 10% over the prior year to $0.80. This was driven primarily by increased profitability at the segment level. Segment income was up $9 million, and margins expanded 90 points.

The new management teams leading our Thermal segment and ClydeUnion business have made a positive impact, and I'm pleased with the progress they have made, particularly on the restructuring plans. We completed $18 million of restructuring actions during the quarter, focused primarily on headcount reductions at our Thermal segment and ClydeUnion. In aggregate, the first half actions target a headcount reduction of approximately 500 employees.

During Q2, we also purchased 1.5 million shares for $118 million. That brings us to 1.9 million shares repurchased or $145 million against our current $200 million share repurchase target. Over the past 6 quarters, we've repurchased a total of 7 million shares or 14% of shares outstanding for $495 million. We expect the restructuring and capital allocation actions we're taking this year to contribute approximately $1 of earnings per share on an annualized basis. We expect to see about 2/3 of that benefit this year with a full benefit realized in 2014.

We remain committed to improving the operational performance across our businesses. However, our strategy remains focused on our Flow Technology platforms.

Looking now at our second quarter result on a consolidated basis, revenue declined 2% over the prior year to $1.2 billion, about 3% below our target. The variance from last year was primarily due to Flow, as a result of project timing on food and beverage systems in Asia Pacific and lower OE pump sales at ClydeUnion.

Segment income was $124 million, up 8% versus the prior year, and margins increased 90 points to 10.2%. The increase in profitability was driven by improved operating performance at our Thermal segment and our power transformer business. We also benefited from continued strong execution on robust demand for our Flow oil and gas components.

Looking at our restructuring plans, we made good progress in the second quarter working with various European Works Councils to move our plans along efficiently. The restructuring actions taken in the first half of the year are primarily focused on reducing the European cost base at our ClydeUnion and Balcke-Dürr businesses. As I mentioned, we expect these actions to reduce our global headcount by approximately 500 employees.

Through the first half, we recorded $19 million of charges and cost-reduction actions, and we've got -- and we have at least another $11 million of restructuring cost planned in the second half. We'll provide more details on the second half actions once they're executed. We estimate about $15 million of savings from these actions in the second half of this year with annualized savings of about $30 million or approximately $0.50 of earnings per share.

Moving on to our end markets, beginning with Flow. Broadly speaking, we've seen steady demand for components and aftermarket services across all 3 end markets. On a regional basis, Q2 demand in North America and Europe increased year-over-year. Demand for oil and gas components and aftermarket services continues to be robust, particularly for pipeline valves in North America. Conversely, demand in Asia Pacific has been an area of weakness for Flow in the first half.

In terms of large capital project activity, we continue to see good quoting activity, and recently, order placements have started to pick up. At ClydeUnion, orders for OE pumps accelerated during the second quarter, up sharply from Q1 and also up versus the prior year period. We continue to see positive front log activity for large oil and gas projects that we expect will convert to orders during the second half.

In food and beverage systems, we announced earlier this week that we were awarded a contract valued at approximately $40 million to engineer, design and construct a powdered infant formula plant in Europe.

And in our Industrial Flow platform, we were awarded a $10 million contract in the U.S. to supply a process system that will generate powdered pigments used in various industrial applications. This order is a good example of our ability to integrate multiple flow technologies into a customer solution as opposed to simply providing components. This integrated system will include mixing, fluid handling, drying and cooling equipment.

Looking at our power-related markets, we saw a modest sequential increase in the backlog at our power transformer business and in our core Thermal segment backlog. However, not much has changed in these markets over the past quarter. In the U.S., replacement demand for power transformers remained at a high level in terms of unit volume. However, open market pricing is competitive, and average industry lead times are at approximately 6 months.

Lackluster electricity demand and conservation initiatives are leading utility customers to pace their investments. You see the same dynamic impacting power generation markets in the U.S. and in Europe. In these regions, regulatory uncertainty, weak electricity demand and fuel source changes continue to impact investment decisions.

Looking at our consolidated backlog, it was relatively stable sequentially, down only 1%. Book-to-bill in the period was right at 1x, and our Q2 orders were up 5% over Q1. We reduced our full year revenue target modestly to reflect changes in currency, delayed timing of orders for large projects and general softness in Asia Pacific, particularly for Flow.

Looking at our revenue target for the second half, almost 60% was in backlog at the end of Q2, and this is fairly consistent with past years. Jeremy will take you through a detailed analysis of our updated guidance after he reviews the Q2 financial results.

At this time, I'll turn the call over to him.

Jeremy W. Smeltser

Thanks, Chris. Good morning, everyone. I'll begin with earnings per share. On a reported basis, earnings per share from continuing operations was $0.80 in the second quarter, up 10% over the prior year. The primary driver of earnings growth was segment income, which increased $0.13 per share, driven largely by our Thermal segment. In addition, as a result of the capital allocation actions completed in the first half of this year, lower pension expense and our reduced share count combined to benefit EPS by $0.12. Earnings growth was partially offset by a $0.14 headwind from elevated restructuring expense, and net other items were a $0.04 headwind.

Looking at the segments, beginning with Flow. Flow reported $653 million of revenue for the quarter, down 3.5% to the prior year. The decline was essentially all organic. Organic revenue declined due to project timing of food and beverage systems in Asia Pacific and lower OE pump sales at ClydeUnion. These declines were partially offset by increased sales of components into the oil and gas markets in North America, Europe and the Middle East, as well as increased food and beverage system revenue in Europe.

Looking more closely at the revenue declines, last year, we recorded approximately $20 million of revenue related to 3 large food and beverage system projects in Asia Pacific that did not repeat this year. ClydeUnion's revenue declined 14% over the prior year to $123 million. This was due to a lower level of OE pump sales, reflecting our disciplined approach to new contracts, as well as customer delays on new orders over the past few quarters. However, as Chris mentioned, we had stronger order bookings for OE pumps in Q2, and we are seeing positive quoting activity continue in Q3.

We continue to make progress executing the distressed contracts in the acquired backlog at ClydeUnion. During Q2, we recorded $8 million of revenue related to these contracts. We now have only $15 million remaining in backlog.

Flow segment income was $67 million, down 4% year-over-year, and margins were flat at 10.3%. Decline in segment income was due to the organic revenue decline, as well as execution challenges on certain food and beverage system projects. These headwinds were partially offset by increased sales of oil and gas components and improved operating execution at our European and U.S. facilities.

Excluding the results at our food and beverage systems and ClydeUnion businesses, the balance of our Flow segment reported operating margins in the mid-teens. We are committed to increasing the overall margin performance in Flow and have actions in place at ClydeUnion and in food and beverage to drive the improvement. We believe these actions will have a positive impact during the second half of this year.

Flow's backlog declined 1% sequentially. We continue to experience steady backlog growth in our U.S. component businesses, highlighted by robust demand for oil and gas pipeline valves. ClydeUnion's aftermarket backlog continues to grow steadily, up 13% since the end of last year. This growth was offset by backlog declines in food and beverage systems and ClydeUnion's OE pumps. These declines reflect the order delays on capital projects we experienced throughout most of the first half, as well as our continued discipline on pricing and terms and conditions for large contracts.

As Chris mentioned, we have seen a recent uptick in order activity for long-cycle projects, highlighted by the 2 large orders that we received in July, as well as the increase in orders for OE pumps. The order pipeline for capital projects remained strong, and we expect to see some of these large orders placed during the second half of this year.

Moving on now to our Thermal segment. Second quarter revenue was $350 million, up modestly over the prior year. Organic revenue grew 2.6%, driven by the timing of execution on the large power projects in South Africa, as well as increased dry cooling revenue. This was partially offset by lower sales at our Balcke-Dürr business. Currency was a 2.1% headwind.

Segment income increased sharply to $26 million, up $10 million over the prior year, and margins improved 290 points to 7.5%. The improved profitability was driven by leverage on the organic revenue growth and improved project execution. It is notable that Thermal's Q2 segment income also benefited from solid execution on a large retrofit project at a U.S. power plant.

Thermal ending Q2 backlog was $700 million, down 2% in the quarter due to currency. The organic backlog for the total segment was flat. However, excluding South Africa, the core backlog increased 9% from the end of Q1. The backlog relating to the projects in South Africa is now just under $200 million. We expect to convert the majority of this backlog over the next 2 years.

Orders in the period increased both sequentially and year-over-year and were above the average run rate we've experienced during the past several quarters. We view this as a good order quarter, but not as an inflection point for power generation. Our view on the power generation end market is that demand continues to be relatively stable and at depressed levels versus historical investment.

Our Industrial, segment second quarter revenue was $213 million, down 1% organically over the prior year. The organic decline was due to lower sales of communications technology equipment. These sales are generally project-related and can fluctuate quarter-to-quarter.

The Industrial segment income was $31 million, up 6% over the prior year, and segment margin improved 100 points to 14.5%. The increased profitability was driven by improved operational execution at our power transformer business.

As we continue to grow into the expanded large power capacity at our Waukesha, Wisconsin transformer plant, the team there is also highly focused on lean initiatives and cost-reduction actions. Through the first 6 months of the year, the margins in our transformer business have improved about 400 points due to increased volume and the operating initiatives. We expect this level of improvement to continue in the second half.

The ending Q2 backlog for Industrial was up $10 million or 2.5% sequentially. This was primarily driven by our power transformer backlog, which increased 4% sequentially, mostly driven by new open market orders and timing of large power transformer shipments. Our backlog for aerospace components also increased from Q1 to Q2.

Moving on to our financial targets for Q3 and for the full year. In Q3, we're targeting low-single-digit organic revenue growth with a modest currency headwind. We expect organic revenue growth at our Flow and Industrial segments to be partially offset by lower revenue in our Thermal segment. At Thermal, we expect to see about a $25 million decrease in revenue from Q2 to Q3 related to the projects in South Africa as they begin to ramp down. We are targeting $132 million to $140 million of segment income with margins between 10.7% and 11.1%. We expect to record between $5 million and $10 million of restructuring expense in Q3, related to continued cost reductions at ClydeUnion and our Thermal segment. Our third quarter EPS guidance range is $1.20 to $1.30 per share, and we are using 46 million shares outstanding in our Q3 earnings model.

Looking at our second half targets at the segment level, you can see that our expectations for this year are fairly consistent with last year. On a sequential basis, we expect second half revenue growth in all 3 segments, consistent with historical seasonality.

In Flow, we expect increased sales of replacement components and aftermarket services. Over 60% of Flow's second half revenue target was in backlog at the end of Q2, consistent with prior years. And the recent large system orders we received will also begin to contribute in the second half. At Thermal, our seasonality is driven largely by our personal comfort heating businesses, which generate the majority of their revenue and profit in the second half of the year, as distributors stock up for the winter season. And at Industrial, we're expecting sequential revenue increases to be driven by increased sales of power transformers as we continue to ramp production in the expanded large power facility. In addition, we expect to see an increase in sales of farebox systems in the second half.

Looking at the segment income margins on a consolidated basis, we are targeting at least 12% margin on the second half, up over 300 points from the first half due primarily to leverage on the increased revenue, as well as continued operational improvements. We also expect about 50 points of margin expansion related to the $15 million of restructuring savings.

On a year-over-year basis, we are targeting about 50 points of margin expansion, driven by Flow and Industrial, partially offset by a decline in Thermal's profitability. Expected decline at Thermal is due to reduced project activity in South Africa, as well as lower boiler sales in Q4 versus last year, which benefited from Hurricane Sandy rebuilding efforts.

From an EPS perspective, looking at first half results versus our second half midpoint guidance, we expect the increase in segment income to grow earnings per share by approximately $1.83. Below the line, there are a handful of items that are also expected to benefit second half EPS. Reduced stock compensation, corporate expense and restructuring expense are expected to contribute a combined $0.51 per share of incremental earnings. Additionally, the lower share count is expected to contribute about $0.12 per share.

As the chart illustrates, our earnings profile from first half to second half is fairly consistent with last year. On a year-over-year basis, the second half earnings growth is driven primarily by the reduced share count, restructuring savings and lower pension and corporate expense.

For the full year, we have updated our segment targets to reflect the Q2 results, currency changes and our revised organic expectations. For Flow, we are now projecting flat revenue to 3% growth over the prior year. Currency rate changes reduced Flow's revenue target by 1%. We also reduced Flow's organic revenue target by about 1% to reflect the delays on large order placement and soft demand in Asia Pacific we experienced in the first half of the year. Based on Flow's Q2 margin performance and the lower revenue target, we have modestly reduced Flow's margin target to between 11.4% and 11.7%.

At Thermal, we have increased the full year revenue and margin targets to reflect the better-than-expected Q2 performance. We now expect revenue to be down between 7% and 9% with margins between 5.6% and 5.9%.

For the Industrial segment, we are now targeting 9% to 14% revenue growth from continuing operations with margins improving to between 14.3% and 14.6%.

At our power transformer business, we are being more selective on new medium power orders given the current pricing environment. As such, we do not plan to entirely fill our medium power capacity during the second half. This decision has reduced our revenue estimate for the full year. We still expect approximately 20% year-over-year revenue growth from the transformer business, and we believe the operational initiatives will continue to drive higher profitability during the second half of the year.

We have narrowed our full year EPS guidance range to $4.25 to $4.50 per share. Aside from the updated segment targets, there were no notable changes to the midpoint model. As a reminder, our full year model assumes 46 million shares outstanding and a 24% all-in tax rate.

I'll finish with a brief update on our financial position and capital allocation. We ended the second quarter with $353 million of cash on hand. During the quarter, we made a voluntary pension contribution of $250 million and also repurchased $118 million of shares. In addition, our dividend payment was $12 million. I'm pleased with the progress we made in the first half towards our capital allocation plans for this year, and I'll talk about our liquidity for the balance of the year in a moment.

Looking at our Q2 free cash flow, excluding the voluntary pension funding, our adjusted free cash flow in Q2 with a net usage of $12 million. This is generally consistent with our historical free cash flow performance, which is seasonally low in the first half of the year. We invested $18 million in capital expenditures during the period and are targeting around $90 million of CapEx for the full year. Our adjusted free cash flow guidance for the full year remains at $240 million to $280 million. At the midpoint of our guidance, that represents approximately 130% conversion of net income. For the second half of the year, we are targeting about $323 million of free cash flow. This is consistent with our second half revenue and earnings growth expectations. We expect to complete the remaining $55 million of share repurchases during the second half of the year.

At year end, we are projecting approximately $600 million of cash on hand. And combined with $568 million of borrowing capacity from our existing facilities, this would give us an estimated $1.2 billion of liquidity. Based on these projections, we have sufficient financial flexibility to evaluate additional capital allocation decisions during the second half of this year as our free cash flow develops.

That concludes my prepared remarks. At this time, I'll turn the call back over to Chris.

Christopher J. Kearney

Thanks, Jeremy. So in summary, the actions we're taking this year are expected to benefit earnings per share by approximately $1 on an annualized basis. About 2/3 of that benefit is assumed on our EPS target for this year with an incremental $0.35 of benefit expected to be realized in 2014. As the year progresses, we'll evaluate additional actions consistent with our disciplined approach to capital allocation.

Our top priorities again this year are improving the operational performance across all our businesses and returning capital to shareholders. We made very good progress on these commitments during the second quarter, improving segment income margins 280 points versus the first quarter and 90 points versus the prior year period. The Q2 restructuring actions are expected to benefit our future profitability. During the second half of the year, we're targeting continued sequential improvement in margins and earnings per share.

Our capital allocation actions are on track, and we remain in a strong financial position with $1.2 billion of projected liquidity at year end. And our strategy is focused on further concentrating our business on our Flow Technology platforms.

So that concludes my prepared remarks. And at this time, we'll open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Shannon O'Callaghan.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Chris, can we just kind of go through the different pieces of Flow when we think about margins at this point? I mean, systems, you mentioned a couple of the execution issue there. ClydeUnion, this was kind of a heavy restructuring quarter. When you think of kind of 3 buckets, components, systems, ClydeU, where do you see the profitability now and where do you see them going?

Christopher J. Kearney

Yes, sure. Well, obviously, Shannon, the restructuring efforts that we've done at ClydeUnion, which have been significant, we think will impact the profitability of that business going forward. We've been very focused in how we position that business and the opportunities that we go after, and have successfully continued to build the aftermarket part of the business with a good solid order flow there. And a really good order flow picking up at the end of Q2 and then going through July on the OE side, and focused on opportunities that we want and that we believe will make the business better. On the rest of Flow, our components businesses across all 3 end markets, those markets remain very steady. Oil and gas, particularly in the Americas and in the Middle East, in Europe also, remained very strong, and that will drive profitability in that business in the second half. When you look at where we are with respect to backlog in that business, in Flow, generally, as we enter the second half, it's consistent with where we are or have been historically, and we're further encouraged by what we're seeing in terms of the pickup in orders. But the restructuring actions at Clyde, we believe, will have a significant impact on profitability, not only in the second half of the year, but obviously going forward.

Jeremy W. Smeltser

I'd add, Shannon, I think the components businesses across the globe, and I kind of mentioned in prepared remarks, that the margins there are really on par with historical highs, in the mid-teens. And the ClydeUnion restructuring actions we took in Q2 really didn't impact Q2 at all, so those savings are still on to come with more restructuring actions in the plans. And then on the food and beverage systems side, like Thermal, project execution can fluctuate quarter-to-quarter. So we did take about a $5 million cost adjustment on a couple of large projects in Q2 that impacted the margins that we think will be behind us as we head into Q3.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

That's really helpful. And then just on Waukesha, I mean, interesting that you're getting, I guess, a lot of leaning out of the plant there and seeing some benefits. Can you talk a little bit more about what you're doing? And is there more to do there in terms of driving margin improvement despite the market not really coming through as much as you might have hoped?

Christopher J. Kearney

Yes, sure. So we've had good volume going through the plant over the last couple of years, Shannon, as you know, with the volume picking up significantly. We've had a very concerted effort with respect to manufacturing efficiency, leaning the factory, how we plan and how we put product through the factory, which is reaping good benefits for us already. And we think we'll continue to see improvement coming out of the factories at Waukesha because of that. So it has been a very concerted effort, led by the Industrial team, Dave Kowalski and the folks running the operations in Waukesha. So we're doing a great job, I think, of absorbing, being more efficient. We'll continue to get better, obviously, on large power as we continue to ramp that up, and we're seeing the factory improve in that area as well. So we're actually quite encouraged by what we see there and, I think, making the best out of the situation, and we think it'll continue to improve. So we've seen, in the first 6 months, significant margin improvement in that business. We think that'll continue into the second half and beyond.

Operator

Your next question will come from the line of Mike Halloran.

Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division

So on the commentary on the order side, so on one hand, on the revenue line, it seems like you're getting some project push-outs, but on the order line, it seems like you're getting a little bit of an inflection on some of the Flow-oriented end markets. Maybe you could just talk a little bit about what specific end markets types of projects you're seeing out there. And then what gives you confidence when you look at that backlog that you can get some conversion at the back half of the year?

Christopher J. Kearney

Yes. Well, the backlog again, Mike, going into the second half is consistent with what we've seen in the past. We're encouraged by the OE pickup we've seen at ClydeUnion and the good, steady order flow we've seen in the aftermarket part of that business. Oil and gas, particularly in the North Sea, has been a pretty robust activity for us, and we believe that will continue. We saw -- we just announced this past week a couple of really nice food and beverage systems orders. Food and beverage. The food and beverage system business, frankly, in Europe has been quite good. And it's been slower in Asia Pacific, but there is good front log activity going on. And much like at ClydeUnion, we have been, I think, more selective about the opportunities that we pursued in that business. The component businesses, the aftermarket and service business, really across the Flow end markets, has been quite steady for us. Oil and gas, again, in the United States, Middle East particularly, has been very, very solid.

Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division

And then on the Thermal side, you made a point in the prepared remarks saying we haven't hit an inflection point in that business yet, despite what was clearly a nice quarter on that side here. Maybe you could just talk a little bit about 2 things: one, what you're seeing from the joint venture at this point in time. It sounds like things are tracking relatively positive there; and then, two, maybe just an update on how the restructuring side has gone so far and what steps you've taken and what the next step is here.

Christopher J. Kearney

Sure. So the -- first, with respect to the joint venture, it has gone very well in terms of the order build in that business, and so that relationship is off to a good start. In terms of the business building, frankly, a little faster than we thought. We think we've got a good partner in terms of our opportunity to expand that business, not only in China, but in broader Asia Pacific and, particularly, in India going forward. And we've seen -- if you take South Africa out of the picture, and that project is on the downslope, as we discussed in the prepared remarks and as we've said consistently in the past, and you look at the rest of the business organically, the order flow has been better. Having said that, we don't see an inflection point in terms of power markets changing around the world. What we haven't even seen yet is the impact of the significant restructuring that we've done at Balcke-Dürr. That did not benefit Q2. It will benefit the business going forward because the actions have been pretty significant, and they've been focused particularly on that business in Germany. So there's more to do there. We're doing the right stuff, I think, in terms of repositioning and rightsizing that business, and the headcount reduction has been pretty significant.

Operator

Your next question will come from the line of Nigel Coe.

Nigel Coe - Morgan Stanley, Research Division

Yes, just wanted to kind of calibrate your comments about no inflection point. I mean, I don't think anybody in this line thinks that power gen is inflecting, but you did talk about front log activities picking up. So I just want to understand, it seems that you're more confident on the kind of the projects set out there with the available set of opportunities, yet you still seem cautious. So I just want to try and calibrate those comments.

Christopher J. Kearney

Yes. I think you have to be reasonable in terms of what you see going on in the world. In terms of new power build and retrofit opportunities, we did, in Q2, get the benefit of one significant retrofit opportunity in the United States. And as I've said in the past, Nigel, those opportunities can really drive margins in that business. And they do and they have, and they did for us in Q2. The order activity has been better than it has been over the last couple of years, again speaking of the organic improvement x South Africa. And so we do feel better about that. But what we really feel good about in that business is the progress we've made on the restructuring front in Europe, which needed to be addressed and was addressed, and I think that's going to help the business certainly going forward.

Jeremy W. Smeltser

Yes. I think, Nigel, it's appropriate to be cautious, to Chris's point, that the real driver of the revenue increase year-over-year in that business needs to come from U.S. and Europe with the approach we've taken in China. And at this point, being cautious on new power gen in the U.S. and Europe is the right thing to do.

Nigel Coe - Morgan Stanley, Research Division

No, I agree with that. And then the JV with Shanghai Electric, we don't talk about that at all, but there's been some nice order flow there. And I'm just wondering, to what extent, if any, you're benefiting from that order flow? And if you could just maybe talk about how that's impacting your EPS.

Jeremy W. Smeltser

Sure, yes. And the order flow has been solid, but those are long-cycle projects. So really, the JV will start executing more on those in 2014, so not a lot of impact to the bottom line this year.

Nigel Coe - Morgan Stanley, Research Division

Okay. And then on capital allocation, you talked about -- with the potential for second half actions. And I'm just wondering, first of all, are we still more minded towards share repurchases versus M&A? And I'm just wondering, what could be the triggers for some further actions, and to what extent the share price is a factor there?

Christopher J. Kearney

Yes. Well, we've got $55 million remaining on our $200 million share repurchase target, which we expect we'll execute in the second half. And then we'll continue to review where we are with respect to cash availability and what our options are. But to be clear, and we've been, I think, clear about this, we don't plan to do any M&A activity in 2013. So our activity has been focused, and the cash has been directed, to the significant capital allocation programs that we talked about, going back to our guidance meeting in February. So we have the voluntary pension contribution, which has already benefited us and will continue to do so going forward. And we've been successful in terms, I think, of how we pace the share repurchase program, and we're focused right now on continuing that. And then we'll see where we are as the year goes out.

Nigel Coe - Morgan Stanley, Research Division

Perfect. And then just one quick one. You talked about ClydeUnion orders accelerating in 2Q. And normally, we see a seasonal uptick in order activity in 2Q. But would you describe that uptick as better than seasonal?

Christopher J. Kearney

It's an improvement for us, particularly on the OE side. And remember, again, part of what we've experienced in terms of the OE order intake over the past quarters has been a result of our selectivity and the more focused process that we've established in that business. And so having done that and reset and refocused that business, the opportunities that we're getting now are the opportunities, frankly, that we want. And the aftermarket activity in that business has continued to remain strong, and it has been seasonal. And so the backlog of aftermarket opportunity for Clyde going into the second half of the year is seasonal, and will benefit margin performance in the business in the second half.

Operator

Your next question will come from the line of John Baliotti.

John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division

Chris, you guys talked about electricity being down. And it's obviously not a surprise, given where the economy is and weather and things like that. But I know it's one month, but the June -- the trends in durables in June looked pretty good. I mean, it was a pretty nice turnaround from almost a year of bad results. And I'm just curious, it seems like that would impact Waukesha sooner than Thermal. Do you have any sense for how much demand or how much electricity pickup would have to be taken up for it to impact Waukesha, given the backlog you currently have in that area?

Christopher J. Kearney

Yes. Well, we've been in a weird situation over the last couple of years, John, as you know, where we've been in what is -- appears from an -- from a historic perspective to be somewhat of an anomaly in terms of consecutive years of electricity demand declining. We've not seen that before. Part of that is the, I think, tepid industrial recovery across-the-board. Part of it is it's just focused on energy conservation. In terms of what would need to happen to meaningfully impact the business or change the profile of it going forward, it's difficult to say. I think if you see a more significant industrial rebound, as you continue to see new housing go in the right direction, those are all positive factors and, I think, would ultimately have a positive impact on that industry and on that business in terms of how pricing moves. And we'll just have to see. But it's a -- we're certainly in a recovery cycle, just given the volume we've seen come through that business over the last couple of years. What's different about this recovery cycle from past cycles is the extended nature of it in terms of pricing following. But we do believe and are committed that in the medium to long term, it's a very attractive place to be and it's an attractive business. In the short term, in that business, we're, as I've said earlier in the call, we're heavily focused on operational improvement, getting the plants more efficient and getting margin that way, and we are. And so I think we're going to continue to be successful on that front, and we'll continue to see margin improvement as a result of our operational focus. And then to the extent demand picks up at all, I think that just is a good tailwind for us.

John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division

So you think the customers, in general, even though you have a backlog and the backlog continues -- is stable, that they still want to wait and just see more proof of a pickup before they want to get into the queue?

Jeremy W. Smeltser

Yes, John. I mean, I think it's really about the customers' view, just like the rest of our views, and confidence in sustained economic recovery in the U.S. There needs to be confidence in that forward curve on electricity demand, which then gets modeled as they plan future years into their load growth. And that's where they start to see stress in certain aged parts of their infrastructure, which leads to more budgetary planning for replacements. So that's kind of the way I look at it, and you can really see that. I think, if you look at parts of Q2, where there was some short-term electricity demand pickup in the U.S., something that short is not going to drive behavior change. It really needs to be more sustained.

John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division

Yes. I guess you just -- you wonder how much -- as every time you guys report, you talk -- these things get older and older, and just wonder how much incremental stress does it need to start...

Christopher J. Kearney

Yes, that's right, and that remains to be seen, John. And you have to keep that in mind, because the age is a very significant factor. And so the average age of the transformer fleet in the United States now, medium and large, is around 38 years. And so if you do see that electricity demand reverse and pick up, it's certainly not a bad thing for the industry.

Operator

Your next question will come from the line of Julian Mitchell.

Julian Mitchell - Crédit Suisse AG, Research Division

I had a question -- just a question on the Flow business. Yes, you talked a little bit about some execution challenges on certain food and beverage system products. I just wondered how the transitional migration of that business from components towards systems is going. Is the problems that you had just some transitional effects as the business mix is changing, or is it just very specific to 1 or 2 items?

Jeremy W. Smeltser

Yes. And I don't think the business mix within components and food and beverage and systems is really changing, Julian. I think the reality is we have about $1 billion in food and beverage, and around 1/2 is components and 1/2 is systems. So not so much a transition within the business, really more to your latter point is around a couple of larger projects in the quarter. And to put it in perspective, the $5 million that I mentioned, the aggregate revenue on those projects is well over $100 million. And so it's not a huge move in relation to those projects, and it just happened to aggregate in this quarter on us.

Julian Mitchell - Crédit Suisse AG, Research Division

Okay. And then looking at your guidance for kind of the second half, if you're thinking about the -- I guess the progression in terms of the margin jump in your guidance this year versus what you had last year, I guess this time you've got a much bigger improvement half-on-half coming from savings from the announced restructuring. Is there anything in particular half-on-half that should be offsetting that when you compare this year with last year?

Jeremy W. Smeltser

No, I don't think so. I think we have the restructuring savings. We have the seasonal swings happen in the Thermal with personal comfort heating. We have the seasonal things happening in Flow, particularly with ClydeUnion aftermarket mix improving in Q3 and then further in Q4, typically. So it's really the same drivers, and it's, I think, a remarkably consistent first half to second half comparison from a numbers perspective in 2013 compared to 2012.

Julian Mitchell - Crédit Suisse AG, Research Division

And then just lastly, you've talked a lot about the sort of dampening effects on grid investment from weak electricity consumption. I just wanted to check, I guess your exposure to the transmission part of the grid has increased as a result of the large transformer plant coming onstream. A couple of other companies have talked about transmission projects in the U.S. being delayed into next year. Have you seen the same thing, or that sort of project activity is still a little bit removed from your business?

Jeremy W. Smeltser

Still a little bit removed from us. I mean, we're targeting a very small portion of that market still and slowly ramping up our production. So we're comfortable with where our backlog is in large power and feel comfortable about how it's building for next year. Ours are still mostly on the replacement side with existing customers, customers who we've had for years on the medium power side.

Operator

Your next question comes from the line of Jeff Sprague.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Just a couple of specific questions. So is medium voltage transformer price actually down sequentially?

Jeremy W. Smeltser

No, I wouldn't say it's down sequentially, and there are different parts of the market there. It's just not improving. The volume remains steady, but we're really not seeing any improvement sequentially.

Jeffrey T. Sprague - Vertical Research Partners, LLC

The volume is steady sequentially?

Christopher J. Kearney

Yes.

Jeremy W. Smeltser

It is, in the open market.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Yes. And then on -- just on Clyde. Can you just help us on where margins were in the quarter and how you think the year plays now, given kind of the crosscurrents on restructuring and the stuff coming out of backlog?

Jeremy W. Smeltser

Sure, yes. Well, at the $123 million of revenue that we mentioned, as you know, historically, that's been about the breakeven point for the business. But for the year, I think we feel comfortable with where we were before on margins, and we feel comfortable on the restructuring savings impact in the second half and how the aftermarket backlog is building to support the full year numbers.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Then I was just wondering, back to Thermal in South Africa in particular, is there any unusual margin dynamic, positive or negative, as you kind of wind down the tail. Whether there's the possibility for kind of bonus payments for good execution or there's kind of less profitable kind of nits and gnats that you got to clean up at the end? Is there anything we should just be thinking about from a modeling perspective, say the next 12 to 18 months there?

Jeremy W. Smeltser

No. I expect it to be relatively steady from a margin perspective. I don't see a lot of major opportunities to the upside. But on the flip side, I don't see a lot of risk on the downside at this point. I think the real issue is modeling the revenue decline, which, in the second half of the year compared to last year's second half, is probably in the $60 million range and will continue to ramp down in 2014. But margins have been fairly stable to our original expectations, and the execution by the team there has been pretty decent.

Jeffrey T. Sprague - Vertical Research Partners, LLC

And then just finally on Thermal. Are there more of these profitable retrofit projects in your backlog currently that you have visibility on, or this just kind of emerged and happened in the quarter? I would assume not. But any visibility on more of that?

Jeremy W. Smeltser

I mean, there's, in the front log, there typically are conversations around potential retrofits. But often, they happen in the Q2, Q3 time frame, and there isn't any in the backlog at this point. So we've had this before. It's really about on time or early completion and solid execution to get those plants up and running, and we get bonuses for performance, which helped the quarter.

Operator

Your next question is -- will come from the line of Steve Tusa.

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

Just want to dig into the Industrial business, and sorry if I need a little bit of background here because there was some -- obviously, some restatements for the 2012 revenue as you discontinue a product line or something like that. So I guess you're cutting the rev guidance by 4%, 3% to 4% for the year, off of $870 million. So that's about, I don't know, a $30 million to $35 million revenue tweak-down, and I assume that's all in the -- is that all in the fourth quarter, or is that in the third quarter?

Jeremy W. Smeltser

It's in the second half, across the second half. And it's about half transformers, for the reasons we talked about, more selectivity, and then also some project timing likely moving out to the second half in the farebox and communications businesses as compared to our previous forecast.

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

And how big is medium duty now? Is it like $400 million and change, something like that?

Jeremy W. Smeltser

No. Medium power in total is less than $400 million. I don't have the numbers right in front of me, Steve, but...

Ryan Taylor

We're targeting -- this is Ryan. We're targeting the whole business now. Previously, we've been saying around $390 million of revenue for medium and large power. Now we're looking at more like $365 million to $375 million of revenue for the whole business with right around $300 million or a little bit less coming from medium power.

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

Okay. So $300 million, that's kind of a quarterly run rate of $75 million, and you're talking about, I guess, half of the $30 million to $35 million out of that. So I guess, if I kind of do that math, then I get to a quarterly run rate in the fourth quarter of, I don't know, $60 million, something like that, for medium duty?

Jeremy W. Smeltser

No. I mean, the production in the plants actually is still ramping up from first half to second half, both on the large power and the medium power front. So the volume exiting the year on both sides of the plant will be higher than it was entering the year.

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

Okay. So I -- but I -- but you're taking -- it's just not as strong of a ramp is what you're saying?

Jeremy W. Smeltser

Yes. As I mentioned in the prepared remarks, we've made a decision on medium power of potential capacity we likely could have executed on in Q3 and probably, more particularly, Q4 as we continue to make progress on these operating initiatives that Chris talked about. We've made a decision not to do that, looking at its impact on the business from a commercial perspective. So we'll more -- wait for a better inflection point on pricing to get to that level of production.

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

All right. So I guess the easy question here is, basically, on a quarterly run rate -- given you're kind of walking away from some business, on a quarterly run rate basis, is that business -- if everything just stayed flat to where you are in the fourth quarter, is that business down next year? Just, basically, a factual question. Is the quarterly run rate from medium duty in the fourth quarter -- does that mean -- if you just annualize that, is that down relative to what you're targeting for '13?

Jeremy W. Smeltser

Yes. But I mean, I think all things being equal from a market condition perspective and what we expect on operating execution, given the first half being lower than the second half this year, you'd expect some level of volume increase in both medium and large power next year. And then we're optimistic, to Chris's point, on the operating improvements that we've seen and our ability to continue to make progress there.

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

Okay, that's very helpful. And then just on the food and beverage stuff. I mean, you guys talked more positively about the activity that's out there, and I guess a couple of your peers that serve that industry made some positive comments. But the -- what's in your slides on food and beverage is really more cautious than what you put in there in the first quarter. I mean, you said that -- in the first quarter slide, you said that you're optimistic about emerging markets and that there were some deals out there in Europe. And now, you're saying that there's -- the orders continue to be delayed by customers. So I'm just -- I'm trying to reconcile what you're saying about projects in Flow coming through, versus what the changes in your kind of documents here.

Jeremy W. Smeltser

Yes. And that's really about timing of revenue in the second half. So the orders have continued to be delayed in Q2, though they're still out there in the front log. And as Chris mentioned, we just announced the $40 million infant formula plant this week. So the point is on the timing of those and whether or not they impact 2013. And at this point, based on how long they've been delayed, we expect less revenue this year but it'll be more impactful to next year. And on the front log activity -- from a front log activity perspective, still really strong, a lot of projects out there, a lot of concentration in dairy, both in Asia Pacific and in Europe. And we feel -- we do feel optimistic that those'll -- that those will result in awards in the second half that will impact next year.

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

I'm sorry, one last question for you. On the large transformer side, just remind us of what you're booked through now? What kind of visibility you have on that business?

Jeremy W. Smeltser

Yes. We're -- I think our lead times that we're quoting in the market are just slightly under a year.

Operator

Your next question will come from the line of John Inch.

John G. Inch - Deutsche Bank AG, Research Division

So transformers, the backlog up 2.5% sequentially, how would that compare large versus medium? Again, just trying to go back to the discussion around transformers.

Jeremy W. Smeltser

Yes, most of the increase is in the large power side in the quarter.

Ryan Taylor

Just one correction it's the 2.5% is the Industrial backlog, for the segment. The sequential increase in the transformer backlog was 4%.

John G. Inch - Deutsche Bank AG, Research Division

It's 4%? Okay, Ryan. Can I ask you ClydeUnion, the $123 million? How does that compare -- like what's the year-over-year delta, and how would have that compared to the first quarter in terms of year-over-year?

Jeremy W. Smeltser

Yes, pretty consistent with the first quarter volume and down about $20 million from last year's volume in Q2 on the OE side.

John G. Inch - Deutsche Bank AG, Research Division

Down $20 million. And then if I look at your -- if I look at the comments with respect to restructuring, I think, Jeremy and Chris, the $15 million of restructuring savings in the second half is consistent with what you said previously. You did call out additional restructuring plans, and I'm not -- I'm just trying to understand, does that mean you're taking now more restructuring charges, or you have plans into next year? And part of the reason I'm asking, because I think, Chris, you had said your original plans were to take out 500 employees, but then it's not clear if you've actually already taken the 500 out just based on the slides. So I'm just trying to understand, are you sort of planning more actions really at ClydeUnion and at the Thermal business, or is this kind of a continuation of what you've been doing already?

Jeremy W. Smeltser

Yes, John. So a couple of things, kind of 2 different buckets here. So what we said in the prepared remarks and the slides is that we've taken $19 million of restructuring charges year-to-date. Those charges and actions will result in around a 500-employee headcount reduction. Not all have exited by start of Q3 but will, based on the charges already taken. And then as I said in my Q3 comments, we do expect to take an additional $5 million to $10 million of charges in Q3, which will be around additional actions beyond the 500, and then we do expect those will continue to be focused in ClydeUnion and in Thermal.

John G. Inch - Deutsche Bank AG, Research Division

And what's the nature of those charges, Jeremy? Is it just [indiscernible] things...

Jeremy W. Smeltser

Yes, as I said in the prepared remarks, more appropriate to talk about the nature after we've taken those actions, and we'll do so on the Q3 call. But likely, they would be some level of Q4 restructuring savings and certainly a bigger impact to 2014.

John G. Inch - Deutsche Bank AG, Research Division

Yes. And then just lastly on Thermal, it wasn't clear in the wording. Have you -- did you change or were able to sort of advance-recognize some of the South African revenues. Or is it just simply that's the way the cadence of these projects flows? Kind of -- it originally reads as if you were able to sort of get more benefit in the quarter than you originally thought. So I'm just trying to understand that.

Jeremy W. Smeltser

No, it's a natural cadence of the projects as they're timed out. Nothing's changed in our approach to the accounting or revenue recognition or anything like that.

Ryan Taylor

Thanks, everybody, who listened to the call. This concludes our Q2 earnings call for today. As typical, I'll be around for the day to follow up with any questions that weren't able to be asked on this call.

Thank you so much.

Operator

And ladies and gentlemen, this concludes your presentation. You may now disconnect. Enjoy your day.

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