SPX Management Discusses Q2 2012 Results - Earnings Call Transcript

SPX (SPW)

Q2 2012 Earnings Call

August 01, 2012 8:30 am ET

Executives

Ryan Taylor

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

Jeremy W. Smeltser - Chief Financial Officer, Chief Financial Officer of Flow Technology and Vice President of Flow Technology

Analysts

Nigel Coe - Morgan Stanley, Research Division

Terry Darling - Goldman Sachs Group Inc., Research Division

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

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

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

Julian Mitchell - Crédit Suisse AG, Research Division

Jeffrey T. Sprague - Vertical Research Partners Inc.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Deane M. Dray - Citigroup Inc, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 SPX Corporation Earnings Conference Call. My name is Erica, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Ryan Taylor, Director of Investor Relation. Please proceed.

Ryan Taylor

Great. Thank you, Erica, 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; Jeremy Smeltser, our incoming CFO and new Chief Financial Officer; and Patrick O'Leary, our retiring CFO, is also with us today. Patrick today is wrapping up a [indiscernible] career.

Our earnings press release was issued this morning and can be found on our website at spx.com. This morning's call is being webcast with a slide presentation, which can also be accessed in the Investor Relations section on our website. The webcast will be available until August 15th, and I encourage you to follow along with the webcast as we reference detailed information on the slides.

In the appendix, we have provided reconciliations for all non-GAAP financial measures included in today's presentation. I'd also like to point out that portions of our presentation and comments are forward looking and subject to Safe Harbor provisions, and 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

Thank you, Ryan. Good morning, everybody. Thanks for joining us on the call today. Our second quarter results were highlighted by double-digit organic revenue growth in our Flow Technology and Industrial segments, both of which also reporting improved core margin performance excluding the impact of acquisitions. This growth was partially offset by lower revenue and profitability in our Thermal segment, where we continue to face challenging market conditions in power generation.

On a consolidated basis, organic revenue grew 3% year-over-year, driven by 23% growth in Asia Pacific and 1% growth in the Americas. In Europe, overall demand weakened during the quarter, and organic revenue declined 5% year-over-year. We have adjusted our full year expectations to reflect the ongoing uncertainty in the macroeconomic landscape in Europe.

Currency rate changes, particularly the weakening of the euro, were also a notable headwind to our Q2 results and our revised full year expectations. For the full year, we now expect revenue growth in the range of 11% to 15%, down from the previous target of 13% to 19%. As we said, 2012 was a year of strategic transition for our company as we are executing on several actions that we expect to improve our future earnings potential.

I'll begin this morning with an update on the progress we've made on these actions, and I'll provide an overview of the trends in our key end markets. Jeremy will then give a detailed analysis of our financial results.

The integration of ClydeUnion is a key focus for us this year. As we previously discussed, we have identified significant opportunities to improve ClydeUnion's operating performance. In the first quarter, we implemented several initiatives that have led to improved supply chain management and increased production at ClydeUnion key facilities. This had a positive impact on the Q2 financial performance as ClydeUnion's revenue increased 15% sequentially to $144 million with a 3% return on sales. We're pleased with the progress quarter-to-quarter and we expect to see continued improvement going forward.

As part of our improvement plan for ClydeUnion, we initiated restructuring actions during Q2 that include a 5% headcount reduction. We expect savings from these actions to benefit the second half of this year. On the commercial side, we continue to be very encouraged by the consumer reaction to this acquisition. We're now taking quotes that combine ClydeUnion Pumps with other Flow products most notably, control valves.

Moving on to our Transformer investment. We have now taken orders for 26 large power transformers and are pleased to report that in Q2, we delivered the first 3 units out of the expanded plant. We plan to ship an additional 12 units in the second half of the year and expect to increase production in 2013 as we grow into the new capacity. We're also pleased with the early developments in our joint venture with Shanghai Electric. In Q2, the joint venture booked 3 orders for dry cooling units with a combined value greater than $40 million.

The approval process for the sale of Service Solutions is progressing. In June, we received European regulatory approval and we're now in the latter stages of the U.S. approval process. We anticipate the final regulatory requirements will be satisfied over the next few months, and we expect this transaction to be completed shortly thereafter. The after-tax proceeds from this sale are estimated at approximately $1 billion. Once we have received the proceeds, we plan to pay down $350 million of debt and continue our share repurchase program. We completed the first phase of the share buyback program early in the second quarter. Phase 2 allows for repurchases up to $275 million. After these actions, we're projecting about $1.4 billion of liquidity that will provide us significant financial flexibility moving into 2013.

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