伊頓 (ETN) 2003 Q4 法說會逐字稿

Good afternoon.

My name is Sylvia and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the fourth quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star then the number one on your telephone keypad.

If you would like to withdraw your question press star then the number two on your telephone keypad.

Thank you.

I will now turn the call over to Mr. Richard Bajenski.

Sir, you may begin.

Good morning or good afternoon depending on where you are respectively.

Before we start this call for the quarter, let me remind everyone that comments may be made during this call may include forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These statements are subject to various risks and uncertainties, many of which are outside the control of the company, such as the level of market demand, competitive pressures and future economic conditions.

A discussion of these factors may be found in the company's annual report on form 10K and other recent SEC filings.

In addition comments made here may include non-GAAP financial measures, reconciliation of those measures to the most directly comparable GAAP measures are posted on Cooper's website at the management presentation section.

Lastly this call is a copyrighted presentation of Cooper Industries, Ltd..

It is intended for the exclusive use of the participating audience, no rebroadcast, transcription or other use of this presentation may be made without the express written consent of Cooper Industries.

Now let me turn the call over to John Riley, Chairman, President & Chief Executive Officer of Cooper Industries.

John?

Thank you, Rich.

Good morning, happy new year to all of you.

I hope your holidays went well and you have gotten off to a good start in 2004.

This morning we'll be reviewing our fourth quarter and full year 2003 results and our thoughts about the coming year.

As you'll hear in a few minutes we feel very good about all three of these subjects.

Before we begin I would like to remind all of you we will be laying out our plans for 2004 in greater detail at our outlook 2004 meeting in New York City on February 25, 2004.

Please contact Rich, our Vice President of Investor Relations for more information regarding this meeting.

In a minute or two Rich and Terry Klebe, or Chief Financial Officer, will be providing you with chapter and verse on our 2003 performance.

I'll begin that discussion by giving you a few highlights.

After struggling with a difficult economy for most of the year, we ended 2003 on a reasonably strong note.

Fourth quarter revenues were up 6% compared to the fourth quarter of 2002.

Our best quarterly revenue comparisons in some time.

Our fourth quarter operating earnings before restructuring and other unusual items were up 14% compared to the fourth quarter of last year.

Here again, our best quarterly comparison in some time.

Finally, net income for the quarter was $74.7 million, that was almost 30% above last year's comparable net income of $57.6 million.

All in all, a pretty good finish for the year.

For all of 2003, net income was $274.3 million or $2.92 per share.

Compared with $213 million or $2.28 per share for 2002.

Again, adjusting for restructuring and other unusual items our 2003 earnings per share were up 9% compared to last year.

Our free cash flow for 2003 was truly outstanding.

Totaling $384 million and easily outpacing our net income for the year.

As a result our debt to total capitalization ratio net of cash at December 31, 2003 was 28.2 percent.

Down significantly from the 36.2 percent net of cash at the same time last year.

Our balance sheet is very, very solid.

As I noted in this morning's earnings release our performance beyond the numbers was quite good as well.

We made meaningful progress implementing key growth, cash generation and profitability improvement initiatives and the bottom line is we entered 2004 in very good shape.

As I mentioned a few minutes ago, our sales trends are showing improvement, additionally, we have well thought out programs in place to grow revenues, further enhance profitability and to extend our business profile globally through new product development.

We're also well positioned to expand our businesses today through selective acquisitions.

In a nutshell, we think we're doing the right things the right way.

We've continued to improve our financial fundamentals during a significant and prolonged recession.

And, in the last half of 2003, we began to see signs that the growth in profitability improvement programs we have been executing are positively impacting our businesses and we are optimistic that this momentum will continue in 2004 and beyond.

And result in increased shareholder value for all of us.

Before we talk about that, Terry and Rich are now going to walk you through our 2003 fourth quarter and full year performance in more detail.

Terry?

Thank you, John.

We had a very good fourth quarter.

Let me start out with unusual items in the fourth quarter.

These items had no impact on our net income or our free cash flow.

As we indicate in our 10Q in our conference call last quarter, we have had ongoing tax refund disputes with the IRS for several years.

These refund disputes primarily relate for the years '94 through '96, but certain of the items went all the way back to 1988.

During the fourth quarter we settled these disputes and received cash of $74.9 million which represented tax refunds in interest on the refund.

Due to the uncertainty related to the refund, interest on the refunds had not previously been recognized.

Therefore, we recognized interest income of $28.6 million in the fourth quarter from these refunds and reflected on the income statement a separate line item.

The refund had no impact on our effective tax rate.

We also took certain charges as discretionary expense in the fourth quarter that totalled $28.9 million.

As one of these expenses was discretionary and should not surprise anyone that the unusual income of $28.6 million was essentially offset resulting in no net earnings impact in the quarter.

The most significant restructuring action we took in the fourth quarter was an announcement that we are closing our New York wiring device manufacturing operations.

This is a union operation and the existing contract commits us to maintain employment through the end of the contract in August 2005.

The 12.5 million in charge we took relates to our legal obligation to continue to make contributions to the multi-employer pension plans that the union employees participate in.

At the time we acquired eagle, this pension plan was fully funded, but due to subsequent stock market downturns, the plan is underfunded.

The way regulations work once we announce the closure we are obligated to make up the funding over 15 years based on fixed annual contributions.

I do want to clarify this is the only significant multi-employer pension plan that our employees participate.

We participate in three other multi-employer plans but the number of our total employees is very insignificant.

In addition to the 12.5 million wiring device pension charge, we took an additional expense of 4.4 million for a total of 16.9 million in restructure charges.

The 4.4 million is net of accrual reversals of 1.5 million where, at certain operations we expended less than the amounts included in the 2002 restructuring charge.

The new charges were for additional severance.

The severance primarily relates to downsizing the power systems business for the lower volumes we have experienced, and additional severance as we further adjusted head counts as the 2002 restructuring programs were wrapped up.

The discretionary expense that completed the offset of the 28.6 million tax refund interest was a 12 million contribution to the Cooper Industries foundation.

The foundation is a vehicle whereby we match employee contributions to nonprofit organizations around the world and make contributions to support the arts, education and other nonprofit organizations in the cities our employees are located.

Prior to 2003, the last year we made a contribution to the foundation was back in 1997.

From a cash perspective, we utilized the 76 million tax refund to make the contributions to the foundation of 12 million, pay the pension plan contributions normally due in September of 2004 of 15 million and to pre pay future dispersements of 49 million for health and other employee benefits through our trust.

Like most companies, we utilize VIBA trust as a vehicle to accelerate tax reductions.

Due to our tax position in 2002, we did not make contributions to the VIVA trust at the end of 2002, but, instead, as I discussed in our first quarter of 2003 conference call, we made pre payments during that quarter.

In summary, we ended up with a neutral impact in the fourth quarter from an income and cash flow perspective from the income tax refund.

Before I turn to the earnings for the quarter and year, I'll provide you some highlights on our cash flow and balance sheet.

In the fourth quarter we generate free cash flow of 172 million bringing our free cash flow for the year to 384 million.

We significantly exceeded our forecast of free cash flow, as our businesses exceeded their commitments on operating working capital reductions and expended less than anticipated on capital expenditure.

Our inventory turns for the year improved to 5.1 turns compared to 4.5 turns in 2002, and 4.3 turns in 2001.

Clearly our inventory management programs continued to deliver results and there remains significant opportunity here.

Turning to accounts receivable.

Receivable day sales outstanding improved one day compared to 2002 following an improvement of six days in 2002 compared to 2001.

Our capital expenditure in 2003 totalled 79.9 million an 8% increase over 2002 capital expenditure.

The increase spending is primarily from our investments in our enterprise business systems.

We also benefited in 2003 from our new tax structure implemented in May 2002 with year-to-date deferred income tax expense of 99 million greater than in the comparable period of 2002.

With the U.S. tax refunds received, we ended the year with net refunds of income taxes.

The only other significant change between the periods from cash flow from operating activities is a change in other assets and liabilities.

In 2002, we generated 69 million, and in 2003 used 52 million.

A difference of 121 million. 119 million of this difference relates to the funding of the VIVA trust.

Our targets are for free cash flow to exceed net income.

In 2003 reductions in operating working capital contributed 47 million and in 2002, 76 million.

Also contributing was spending less on capital expenditure than depreciation which contributed 41 million in 2003 and 48 million in 2002.

In other words, excluding the swings in cash flow related to income taxes in the pre funding of employee benefits between 2003 and 2002, we generated a very high quality of free cash flow in excess earnings in both years.

During 2003 we purchased 153,500 shares of common stock for 5.5 million.

During 2004 we expect to continue to repurchase shares from time to time.

As John mentioned, our debt to total capitalization net of cash was 28.2 percent a year-end compared to 36.2 percent at December 31, 2002.

Clearly our balance sheet remains in great shape and we put together another very strong year generating free cash flow.

Overall the results for the fourth quarter came in stronger than we had forecast at the time of our third quarter conference call.

Our press release and our website contain the information that reconciles our reported earnings and earnings excluding the unusual items in 2003 and 2002.

Therefore, my remarks are primarily focused on the results excluding these items.

On a comparable basis, the fourth quarter 2003 earnings per share were up 26% on a 6% increase in revenue compared to the prior year quarter.

The effective tax rate was 20% compared to 23.7% last year.

In May 2002, we completed our reincorporation and the 2003 tax rate reflects a full year benefit.

As with the first three quarters of 2003, we did not recognize any income related to our agreement arising for the 1993 IPO Belden by Cooper.

The decision not to recognize this earnings from the Belden income reduced our 2003 earnings forecast by 10 cents per share.

For the quarter, not recognizing Belden income in 2003 cost us slightly less than 3 cents per share and the full year benefit of the inversion added about 3 cents per share.

The comparability of our fourth quarter of 2003 results with the fourth quarter of 2002 results was also impacted by our Cooper voluntary adoptive effective January 1, 2003 a new method of accounting for stock-based compensation.

In the fourth quarter of 2003, our total expense related to stock-based compensation increased 2.9 million over the comparable period of 2002.

As I mentioned in last quarter's conference call we entered into interest rate slots on 300 million of our debt.

The benefit of the swaps decreased interest expense approximately 1.6 million for the quarter.

During the quarter, we issued 643,000 shares of common stock, primarily from the exercise of options.

For the year, we issue 2.2 million shares from the exercise of option the September 2003 conclusion of our 2001 employee stock purchase plan,our dividend reinvestment program, and other benefit programs.

The issuance of these shares in the 59 percent increase in our stock price during 2003 resulted in our average diluted shares increasing 3.3 million shares from the prior year quarter.

Overall for the quarter, the higher diluted shares cost us in excess of 2 cents per share.

Increases in pension and other post employment benefit expense expense, increased insurance cost and healthcare costs decreased fourth quarter earnings per share by approximately 5 cents per share.

In summary comparing earnings per share from the fourth quarter of 2002 to the fourth quarter of 2003, the lower effective tax rate and lower interest expense were more than offset by the nonrecognition of Belden income, higher stock based compensation expense, increased pension and other benefit costs, insurance cost increases and higher diluted shares.

In total, these items cost us approximately a net of 5 cents per share.

In other words, we delivered a nice improvement of approximately 20 cents per share from other net operating activities in the quarter, including about 6 cents per share net benefit from our 2002 restructuring programs.

For the quarter, our revenues increased 6% compared to the prior year with our electrical product segment up 4.5% and our tool segment up 13.4 percent.

Translation increased revenues approximately 3.1 percent for the quarter compared to the prior year with translation increasing electrical product revenues 2.4% and tools revenues 6.5%.

During the quarter, the dollar weakened more than we had forecast.

But even with the additional revenue from foreign exchange, we saw a stronger orders in sales than we had forecast.

Electrical product segment, excluding translation, all of our businesses experienced year-over-year increases in revenue with the exception of our power systems business, which experienced a low single digit revenue decline.

The sales improvements were fairly consistent across our product line except in power systems which had increased transformer sales and international sales and lower North American sales in the higher margin product lines.

Both North American and Europe, excluding translation, had positive revenue growth in the fourth quarter.

While the economic growth was not robust, it was encouraging to achieve positive growth across our core markets and product lines.

Our sales through North American and European electrical distribution increased as did our OEM sales.

The electrical retail sales were relatively flat and pricing in electrical products continued competitive, but not at the levels experienced in 2002.

Our tools business excluding translation, both the hand tools and power tools businesses had increased revenues compared to the year-ago period.

While the fourth quarter sales were positively impacted by assembly equipment shipments exceeding the prior year quarters, both hand tools and industrial power tools experienced positive revenue growth in the other product lines.

Cost of sales overall as a percentage of revenue improved to 70.5 percent from 71.3 percent last year.

Electrical products improved 130 basis points from the prior year to 69.8% driven by benefits from touring programs and other ongoing productivity initiatives.

This compares to 69.7% cost of sales and electrical in the third quarter of 2003.

The slight unfavorable sequential decline in the fourth quarter compared to the third quarter is primarily due to sales mix which offset the incremental benefits from our restructure programs.

Tools cost of sales improved 70 basis points from the prior year to 73.6% driven by improved cost leverage from higher sales volume and the benefits from restructuring programs.

Partially offset by the higher proportion of assembly equipment shipments to total sales.

Selling, general and administrative as a percentage of sale was 19% excluding the 12 million contribution to the Cooper foundation.

The prior year quarter SG&A was 18.9% which included bad debt of 2.2 million.

Compared to the third quarter of 2003 SG&A increased 20 basis points on slightly lower revenues.

From a total SG&A expense perspective, excluding the Cooper foundation contribution, we are up 12.1 million in the fourth quarter of 2003 compared to the prior year quarter and 1.1 million sequentially from the third quarter.

The sequential increase from the third quarter is primarily the result of increased business, incentive compensation accruals as earnings and cash flow exceeded the forecast requiring an adjustment and the impact of a weaker U.S. dollar.

The 12.1 million increase in SG&A in the fourth quarter compared to the fourth quarter of 2002, approximately 4 million is a result of translating our international operations into U.S. dollars.

Medical, pension, insurance expense increased in excess of 5 million and our stock-based compensation expense increased 2.9 million over the comparable quarter of 2002.

In addition, in 2003, we have continued to vest in our company wide initiatives to grow revenue, improve productivity and reduce our cost structure.

Benefits from our fourth quarter 2002 restructuring and other cost reduction actions are mitigating a significant portion of these costs increases.

Flipping over to our segment reporting, I'll start out by discussing general, corporate and other expense.

The fourth quarter of 2003 excluding the 12 million contribution we reported 17 million in general, corporate and other expense compared to 17.6 million in the third quarter of 2003,and 10.6 million in the comparable quarter of 2002.

Majority of the IMs impacting SG&A on the traditional income statement also impact general, corporate and other in the segment presentations.

Specifically stock-based compensation, 2.9 million, a significant IM driving the increase in general, corporate and other relates to the 3 million of Belden income in 2002.

We delivered a very nice increase in segment earnings before restructuring charges for the quarter up 18.9%.

Electrical products was up 14.9% on a 4.5% percent revenue increase and tools up 55.7% on a 13.4% revenue increase.

The incremental debt benefit of our restructuring was in excess of 6 million impacting both segments relatively equally.

Our electrical product segment return on sales increased to 12.9% from 11.8% in the fourth quarter of 2002.

This 110 basis point improvement compares to the 100 basis point improvement in the third quarter of 2003 over the comparable quarter of 2002.

Sequentially from the third quarter to the fourth quarter our electrical products return on sales declined from 13.4% to 12.9%.

Typically the seasons of the year result in somewhat different sales mix and typically volumes are lower in the fourth and first quarters of the year.

Aside from this normal seasonality the sales mix and increases in sales accruals lower comparable sales compared to the third quarter.

Our tools segment return on sales increased to 8.7% compared to 6.3% in the prior year fourth quarter.

Benefits from factory closing and increased volumes in both hand tools and industrial power tools leveraged the cost structure.

Unlike the electrical product segment, the tool segment is positively influenced by the holiday season resulting in higher hand tool sales in the fourth quarter.

Turning to the year.

For the year revenues increased 2.5% compared to 2002 with electrical products up 1%, and tools up 10.6%.

Translation increased electrical sales 1.5% and tool sales 5.2%.

Diluted earnings per share increased to 283 per share excluding the second quarter .09 accrual reversal.

This compares to 260 per year for 2002, excluding the 2002 restructuring charge.

During 2003 excluding restructuring charges and other unusual items the following impact the performance.

Lower effective tax rate contributed 13 cents per share.

Nonrecognizing Belden income cost us 10 cents per share.

Increases in pension, other post employment benefits, medical and insurance expense depressed earnings approximately 20 cents per share.

Increases in stock-based compensation decreased earnings ten cents per share.

If you have these items, we had a net head wind of 27 cents per share to overcome in 2003 and ended the year up 23 cents per share.

Overall, our segment return on sales were up 90 basis points to 11.7% with electrical products up 100 basis points to 13% and tools up 120 basis points to 5.5%.

All total, 2003 was a difficult economic environment with the -- giving of an economic recovery.

We met the challenge by overcoming cost increases while continuing to invest for the future and delivering very respectable results in a tough environment.

That concludes my remarks and I will turn it over to Rich to add some more comments on the segments.

Thank you, Terry.

To supplement Terry's comments following is a quick review of our performance for our two business segments on a geographic basis.

First electrical products wherefore the quarter fourth quarter versus the prior year's fourth quarter revenues were up 4% with 2 percentage points of that coming from growth in the quarter or base revenues and 2% being contributed by translation.

In the U.S. and Canada, our revenues increased about 1 to 3% this past quarter.

On balance industrial and commercial market demand has been the primarily source of the pick up where we saw moderate increase leading to increased sales of hazardous duty electrical construction materials for our lighting fixtures and for our wiring devices.

In addition, residential construction's resilience continues to benefit sales of our lighting fixtures and wiring devices and a modest pick up we've seen of late in the electronics markets as led to better sales of fuses and other circuit protection devices.

On the other hand utility product demand remains slow as Terry noted earlier, and continues to be impacted by the uncertainty in the regulatory environment that effects investments in capital projects in this particular arena.

Turning to Europe, excluding translation our revenues increased approximately 5%.

In the European market place the modest recovery we're seeing there is both driven by local market improvements and greater sales of products that are serving the export markets out of this particular geographic area.

This has been good four or construction materials, for our circuit protection devices for our lighting and our security products.

In Latin America our revenues for electrical products were relatively unchanged this past quarter.

We continue to see growth of our power systems business in this region.

This has been moderated somewhat by the slow commercial and construction activity predominantly in the Mexican market place.

In the tools and hardware area where revenues grew 13%, 7 percentage points of that growth came out of our core our base revenue of our business and 6% was contributed by translation.

In the U.S. and Canada we saw revenue increase of approximately 10%, this increase was primarily benefited from project related shipments of assembly equipment with additional year-to-year growth coming from improved demand for industrial hand and power tools, supplemented by gains from new product introductions, particularly in the hand tool area.

In Europe, excluding translation, revenues declined about 2 to 4%.

This is primarily just year-to-year differences in the relative size of assembly equipment shipments in our power tool business.

In Latin America excluding translation revenues increased between ten and 15% with demand here primarily being influenced by our improved performance throughout this region.

Just to wrap up this discussion about businesses a quick review of how our individual segments -- how our individual business lines perform within our segment of electrical products.

We saw a moderate increase in revenues in the neighborhood of 5 to 10% in signs, wiring devices, and member.

All of this again as core sales growth excluding any translation impact.

We saw a moderate increase of less than 5% in B-line, lighting and bus man this past quarter.

As Terry noted earlier a moderate decline of less than 5% for our power systems business.

That concludes my remarks.

I will turn this back to John Riley for some concluding comments.

Thank you, Rich and Terry.

Before moving on to our outlook for 2004, I would like to give you a brief update on issues revolving around the federal mobile situation.

First the usual quarterly numbers.

During the quarter we received relatively few new claims, 1580 to be exact.

We settled 1,067 claims during the same period.

At the end of the year claims outstanding stood at 62758 compared to about the same number at the end of the third quarter and a much higher 71,142 claims claims at year-end 2002.

At the end of the year our average indemnity payment per claim was $1846 reflecting settlement of an unusually high number of [inaudible] cases during the fourth quarter.

We chose to negotiate settlement of these these cases rather than litigate them in court.

As I mentioned in past calls we have continued to pursue a balanced approach in this matter choosing to reduce our overall claims outstanding by settling the cases at reasonable cost wherever possible.

I think we're doing a pretty good job in that regard.

As far as the status of federal mogul is concerned it appears that things are a bit up in the air right now.

As most of you likely know the judge originally assigned to working with the company on its plan of reorganization has stepped down recently and responsibility for this matter has been reassigned to another judge.

While that may present some short-term challenges, it's our understanding that the company is continuing to pursue a 524 G trust methodology as a means of coming out of bankruptcy.

As I mentioned last quarter we continue to have constructive dialogue with the appropriate parties involved in this process and we expect these discussions to continue over the next several weeks, hopefully coming to a satisfactory conclusion for all involved.

Now on to the year 2004.

As I mentioned earlier, we made significant progress advancing important operating initiatives in both our electrical products and tools and hardware businesses.

I hope after hearing from Terry and Rich that you agree that all of these programs are evolving nicely with many already contributing to our results.

For example, during the year our margins continued to improve.

Driven by careful management of our overall cost structures.

Our strategic sourcing initiative is now part of the ongoing fabric of our company.

We live it, we eat it, we drink it every day of the week.

Our investments in globalization and our Cooper connection program are gaining momentum, allowing us to broaden our customer base.

And other newer programs like our new enterprise business system and our manufacturing variance improvement program are in the early stages of implementation and they'll provide additional potential later in 2004 and beyond.

As a result, we are -- we enter 2004, as you might expect, with a high level of confidence.

We continue to see signs in our order book that economic recovery seems to be taking root.

However, we recognize, as many of you do that many of these signs are fragile.

Consequently, we're continuing to operate our businesses on the assumption that we will see only modest top line growth in 2004.

Now, you're probably asking what do I mean by modest?

I'd say something in the 2 to 4% range for the year.

And based on that outlook, we believe that our 2004 earnings will be in the range of $3.15 to $3.30 a share.

And we think that range is very achievable.

That would be an increase of about 11% and 16% respectively.

And very much in line with the long-term goals we laid out for you in August of last year when we met in Peach Tree City.

With that we now have time to take a few questions.

At this time I would like to remind everyone, if you would like to ask a question press star one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Scott Davis of Morgan Stanley.

Good morning, yes.

Good morning, Scott, how are you?

I'm fine, thank you.

Excuse me if you answered this question in the commentary, but can you give us a little bit more granularity on the tools and hardware margin for the quarter?

It did come in ahead of expectations, even given the seasonal boost and maybe as an extension of that question talk a little bit about 2004, the outlook and sustainability for that margin.

Terry, I think can help you with that, Scott.

Yeah, our compare -- there's two major comparables.

One is the proportion of assembly equipment, shipments which compared fourth quarter '02 to '03 was not as significant an increase.

But more importantly as we talked about in prior quarters most of our restructuring programs were wrapping up towards the end of the year.

So the tools business got a big proportion of that benefit in the fourth quarter.

That is ongoing.

For '03 -- '04 on the tools side, we are forecasting relatively flat revenues.

This is driven by the fact that as we entered 2003, we had a big order book on large assembly equipment shipments.

We don't have that order booked for 2004, so we would anticipate that assembly equipment business will be down, and other business will be up, which changes our mix a little bit in those businesses.

Bottom we're, our ROS we anticipate a 7% to 9% return on sales for the tools business in '04.

Okay, fair enough.

Just a quick follow-up.

I don't think in the commentary you mentioned anything about price trends.

Have you seen any stabilization in pricing or any pick up in price given, A, the uptick in demand and also B, the uptick in raw material costs?

Yeah, good question, Scott.

I think Terry mentioned that it varied in his comments on pricing for 2003 was the thought that certainly we saw price decline continued price decline in electrical, but certainly not at the levels we had seen in 2002 and 2001.

So moderating price issues in electrical, and indeed if I'm not mistaken, Terry, we had a modest price on the tools side of the equation in 2003.

That's right.

That said, setting that as a base, you fit the two -- you've hit the two major issues.

One, if the demand curve continues to move up like we saw in the late in the third quarter and in the fourth quarter, that should be a positive reason to begin -- for our folks to begin to push the price line.

Secondly, that -- that -- that's a driver on the top line.

The driver on the bottom line is going to be exactly what you said, raw material costs have moved up.

We have a terrific strategic sourcing plan in place, but I think most of our heads are in the game that says strategic sourcing is going to give us a lot of benefit, but not enough benefit, potentially, to offset some of the raw material costs as much as we had done in the past, so-to-speak in the general inflation of the business, so we will need to push price there.

I mean you just can't be looking at steel costs going up the way they have been going up without getting your focus on the price side of the equation.

And we've asked each and every one of our division president just a last week, as a matter of fact as we have gone through a summary of the plan for 2004, to come back to us with their plans to maximize price in their businesses.

And this is a difference scenario than they have been faced with in a long time so it's going to be a challenge.

I have every confidence that these folks are up to that challenge.

Okay.

Thank you.

Next question comes from Nicole Parent from Banc of America Securities.

Good morning, guys.

Nicole, how are you?

I'm great, John, thanks.

Happy new year.

Same to you.

I was actually wondering if you could talk a little bit about mix in the quarter.

I think it's understandable based on where we saw the biggest increases in core sales which are typically look to me like the lower margin businesses and how should we think about operating margins in the sales mix as we move throughout 2004?

Nicole, this is Terry.

I'll answer that question.

Fourth quarter sales mix electrical was primarily transformer.

We had a good month or good quarter.

Also in Europe on our lighting business we had a good quarter as well as our wiring device business which, some of that is seasonality trends where we see that every year.

But typically, those trends will drive our fourth quarter ROS, as well as our first quarter ROS at lower than the average for the year, and with our two highest quarters being the second and third quarters of the year.

So as it relates to carrying on into next year, if the industrial markets continue to improve, Nicole, obviously that's -- that's prime territory for us.

Those are relatively high margin businesses that deal day in and day out in those markets for us and that's going to be a positive.

We're--I guess just running down this without -- might as well get to this.

Our outlook for these markets is kind of like this, and you know how we break that pie down.

We have a construction segment -- we're not expecting any great things out of the nonresidential construction market in 2004.

Perhaps a modest pick up as you turn the corner at mid year, but no great shakes.

A whole card will be residential construction which has held up relatively nicely and we're anticipating that that will hold up at least close to the current levels.

It may drop-off a little bit, but we're not -- we're not forecasting any significant decline in that at this point.

Retail we think is going to continue to be strong for us.

Another question mark is the utility markets.

We've seen some relatively erratic spending patterns for the utilities.

One quarter they look like they're beginning to spend on maintenance and repair because of concerns about system reliability and then the next mother' not spending so much.

So that's the other question mark.

In electrical and electronic -- electronic and telecom we think that's going to pick up gradually as the year progresses.

That looks like there's some signs that are working pretty well.

We've seen some of that in our busman business some signs of that in the cabinetry work and "The Bee" line business.

So that -- I don't know.

I don't think there's going to be any great swing in margins due to mix as we go into 2004.

The positive news is that if the industrial markets do pick up as they appear to be gradually picking up, that is probably a little bit more our sweet spot than some of our other product lines.

Great.

Could you also talk a little bit about the organizational changes at the company.

I think Ralph retired at the end of the year and how you kind of see that shaping up and along those lines the operational efficiencies that are being driven throughout the business.

Yeah.

I think most of you know, I think almost everybody know's that Ralph Jackson our previous deputy chairman and Chief Operating Officer retired at year-end.

He may actually be on this call as a retired investor.

I may have to be careful what I say on here.

Ralph was with us 27 years.

Obviously a lot of experience and a lot of knowledge in the company.

And I would say, to be fair, for the latter part of his career, the last two or three years, he spent a lot of that time bringing along some of the younger people that you all met in Peach Tree City.

And you got a chance to see his replacement firsthand, Kirk Hachingian, who is now our Chief Operating Officer.

You got to see several of the division president that we have either promoted from within or brought in from the outside.

You saw Grant, and a lot of the people who are driving -- who are going to be responsible for driving our businesses going forward, including a fair sprinkling of the international people that we have put in place to begin this globalization effort.

So I -- I'll let you all make your own judgments on that.

I'm quite pleased and quite happy and quite enthused about that operating team and their ability to drive home those five major initiatives that you saw in Peach Tree City, globalization, strategic sourcing, Cooper connection, the EBS program that they will be working with hand in glove with Terry and his folks, and -- I'm sorry -- in cash generation -- in our manufacturing improvement program.

So on the operating side we're quite comfortable.

I don't want to leave this conversation without spending a minute or two on the nonoperating side.

I think to be candid and fair, I think most of you are quite pleased with what you have seen out of our new finance organization and certainly the plans that Terry and his folks are putting in place for our enterprise business system.

I they we have very capable people in our legal area and in our human resources area.

All of those are down in Peach Tree City.

I hope you had a chance to talk to them.

I don't want to leave without calling your attention to the addition of Tom Kelgear who is our Senior Vice President of strategic planning and business development, which I hope you take as a sign that we believe that we are now positioned to begin to -- I wouldn't say be more aggressive, but certainly be in the game on the acquisition side of the equation, which, again, as we mentioned in Peach Tree City is a piece of the puzzle of getting our growth rates up to that high single digit low double digits range which will drive our earnings into the 12 to 15% range going forward.

So we feel very good about it.

Great.

To that last point, could you just talk a little bit about, should we start to think about acquisitions more in a bold on nature in some of the core platforms or do you think you'll expand beyond that and accelerate into other areas you don't compete in today?

Well, I think -- if you're talking with sweet 1309s, obviously we have some great franchises in these businesses you've seen.

I think it's almost a natural and a given that bolt ons to those businesses would sake success assuming that those bolt ons fill strategic gaps in the product lines or give us the opportunity to take significant cost out of certain operations.

So I think initially you'll probably see us moving in that direction, but that's not to say that we are not interested in adding platforms to our electrical businesses at this time.

Like "The Bee" line, like a wiring device, and things that we are not -- areas that we are not currently participating in, visualize that pie chart moving those areas of participation in the electrical departments of North America, certainly from let's say roughly 45 to 50 percent of that pie to perhaps 60 to 70 percent of the pie.

Those, obviously take a lot more thought, they are a lot more difficult to do and to find the right candidates.

So I think your sense is right, Nicole.

Bolt ons first, continuing to look at segment additions primarily within the electrical at this point.

We'd like to see our tools business produce the kind of numbers that they're suggesting they can produce in 2004 and we're confident they can produce, but keep that focus on building the electrical franchise at this point, and that's kind of how we're looking at it.

Great.

And one last follow-up for Terry.

You may have already said it.

To you -- do you have a Cap Ex forecast for 2004?

Yes.

We are looking at 100 to 110 million of Cap Ex.

The increase is primarily driven by our enterprise business system.

We also have a project we're looking at in China to consolidate our operations over there.

And thirdly, relocation of our wiring device business out of New York.

So that's primarily the increase from what we saw in 2003.

Thank you.

Next question comes from Jeff Sprague from Smith Barney.

Thanks.

Hello everybody.

Could we expand a little bit more on the acquisitions?

You know, we're -- you know a lot of us on the phone, I think, are hearing expressions of increased acquisition interest by -- from a lot of different CEOs, many of whom are, you know, clear are peripheral competitors to Cooper.

I just wonder, you know, what the range of opportunities look like and, you know, what -- kind of what you see going on with valuations and kind of seller expectations as kind of a first question?

Um -- Jeff, I think you're absolutely right in terms of CEO attention to the acquisition arena.

I think it's fair to say that while our balance sheet has improved significantly, truly significantly, that's not to say that others who would be competing in the same arena that we are for acquisitions aren't seeing improved balance sheet conditions, too.

So when you get to that point, obviously everybody looks at external growth through acquisitions.

I -- I don't have any -- um -- issue with the pipeline, so-to-speak.

I think the pipeline is from based on what we see in the businesses and the markets we play in, there's still plenty to do and plenty of opportunities.

I think when the day is done, this will come down to strategic fit, and then value, and I can't give you a sort of a hard cold guideline on value, other than to say, you know, in these kinds of markets you have to be careful that you don't overpay for things.

And we think we're pretty disciplined, and I -- I don't think we're going to make that mistake.

But -- but again, it is a competitive market when you get to acquisitions so you can't be Polly Ann-ish about this and say you can build your whole future on this.

That's why we put in place Cooper and that's why we put in place this globalization effort.

I've read recently some of your materials about the U.S. manufacturing base and that a that means to the growth potential going forward.

Yes, it is true the industrial markets in North America in my judgment are beginning to show improvement.

I happen to be in the camp that if you're sitting there hoping and planning on these markets to come back to the buoyant times of five to ten years ago, I think you're going to be disappointed.

There will be growth.

We are keenly interested in increasing our share of that mature market, and that's why, again, we did things like Cooper connection and those kinds of programs.

But we put a significant amount of time and effort, and frankly money into developing our international position.

We have just opened an office in -- a Cooper office in Korea which will be the central brain of activity that our divisions will be able to rely on to make their reads in that part of the geography.

We are doing -- as Terry mentioned we are going to be putting some money into a consolidated facility in China where the divisions can go for access in terms of design and market intelligence in that area.

We will be doing the same thing, as a matter of fact there's a meeting in the next 30 days over in Saudi to establish that same kind of a matrix position for the middle east.

We've done it already in Latin America, we've done it already in Europe, general what we would call the old Europe.

So, you know, you just can't rely on this market coming back.

You just can't rely on acquisitions, you've got to have multiple probes out there and multiple programs going on at the same time.

If we're fortunate and they all hit and they're all on the same cylinders at the same time, Katie by the door in my opinion from the standpoint of our earnings potential.

But to be practical and realistic, you can't rely on one market to carry you any more going forward.

You have to have -- you have to have your risks reasonably spread.

And I think that's the direction we're heading in and I think we're in pretty good same shape on that right now.

I think we made a lot of progress in that regard.

Just on China, John, when you look at the opportunity and the threat, I guess kind of maybe a couple part question.

You know, the -- your electrical business as it exists in China, who do you find that you're competing against?

Is it other western world players who have, you know, are trying to plant themselves there and grow with the market?

Or do you see kind of a, you know, viable indigenous, you know, Chinese industry taking root there?

And I guess, you know, the core of the question is, you know, is anybody kind of rising up out of the dust there that's maybe a competitor on the world stage that, you know, out of China, that we don't see yet?

On the first point, I must tell you that in terms of China, per se, in seeing our traditional competition in that market in these product lines that we have chosen to promote over there, and you could probably easily understand which ones they are, Krause, Busman, lighting the stronger businesses some of our power systems businesses, we are not really seeing a lot of those same people that we have traditionally seen as competitors in those markets.

Said differently, we believe we are ahead of the game -- ahead of many of our competitors in terms of establishing our roots in what we think is going to be a very good market.

There are some local competitors who do -- who we do see in some of those product lines, none of which are of the size, and scope and breadth that we are.

But, having said that, you know, those people can be advantages also.

For example, we're pretty close to doing joint venture on one of the -- one of the key pieces of our power systems product lines.

I don't want to tell you what that is right now because we've got some things to work out.

So we're very selectively looking at the local suppliers in those markets where we think we can go it alone, we're going to go it alone, but we also have to acknowledge that there are many people, some people in China who do things pretty well, and they may be a better partner than doing it alone on our regard.

So I think it's sort of a product by product, business by business kind of approach, and it's not a -- you know, this -- none of this is a slam dunk.

These are new markets, developing markets and you just have to be out in front of them as best you can.

Just one last thing for you or Terry.

Just given the strength of the balance sheet, I'm surprised you have let the share count creep up.

Should we expect that to continue, or do you get at least a little bit more active on the share repurchase front?

We've of had a great debate on that and I'll let Terry answer that.

The answer to your question, Jeff is you should expect us to take a more active role in 2004.

I'd anticipate at a very minimum we'll buy back a million shares and that could end up going well over two million.

Okay.

Thank you.

And I think it's fair to say, Jeff, that that program is going to be implemented sooner rather than later.

Okay.

That's the only thing I would add to it.

This is Richard Bajenski I'm going to interrupt us here.

Mindful of your time and commitments and other companies who have announcements coming out we'll take one more question and then we'll wish you all a good day.

If I may have the next question.

Thank you.

Your next question comes from Barry Hanes of Sage Asset Management.

Hi, guys.

Just got in under the bell.

Great, Barry, how are you?

Good.

Good.

Wonder if we go get a little more color on the power markets over the next year or so in the following sense.

Obviously we've had the generation of rebuilding the financial problems with the utilities, the energy bill which didn't pass, you know on the other hand, you know the T&D side there's probably a lot of old stuff out there.

As you kind of talk to customers and look at the year ahead is this going to be another year of they just don't have the money even though the stuff is old, or do you think resolution on some of these things might help, what's sort of sense do you get talking to the power customers?

Thanks.

That's a tough question.

You know, we've seen it erratic as John mentioned during '03. '04, looking at our order book going into '04, we see some of the same things going on.

Our people, our managers, president of power systems and the operations folks see some pick up in the business in '04, but at this point, I gotta tell you, we are a little hesitant to jump up with big numbers on the power systems increase revenues in '04, the president is and the group is, simply because we don't see much movement in an election year on the energy bill, and utilities are having to spend some more money, but it's primarily maintenance money at this point.

Yeah, I think they would, generally speaking, Barry we are looking to sort of flat to up a little bit sort of in the 2 to 4% kind of range that I mentioned earlier for the whole business.

That is not anticipating any ground swell or any huge increase in system upgrading spending out of the utilities.

The other positive, if that comes, that would be very helpful, and obviously very important to that business.

Business will perform well in 2004, it could perform very well in 2004 if we saw that kind of activity picking up.

But we -- we can't -- in all fairness, I can't sit here and tell you that we're beginning -- we're seeing that kind of activity at this time.

We're seeing the normal kind of activity.

I will say that the pipeline there on new products at power systems is as good as I've seen it in a long time.

We're going to be kicking off a major new product in terms of environmentally friendly product for our transformer product line in a few weeks here, and the folks have done a very good job in terms of introducing electronic technology and control into a lot of these traditionally old line products to eliminate and help the utilities, help the utilities eliminate a big cost for them, and that's their labor cost.

So, for example, rather than having a lineman having to get in the truck and go out drive miles and miles and miles and miles and check lines and go up a poll and down, a lot of this electronic technology will allow that to be done a lot more efficiently and we are hopeful that will give us a nice pop on those businesses.

With all of that said, enthusiastic as I am, your original question is, I think, are we anticipating to see a big pop in utility spending in 2004 because of the blackouts?

And my candid answer to you is I don't see anything that's going to force that happening in 2004.

It could -- the energy bill could help if it gets passed in the early session of 2004.

But I think even from what I read on that, that's a question mark as to whether that's going to get done.

All right.

Great.

Thanks very much.

Thank you.

That concludes our comments for today.

John if you have any wrap-ups you want to add to this before we let people go?

No.

I don't have anything to add, other than to say I hope that you sense -- you all sense the same sort of enthusiasm and focus and commitment today that you saw in Peach Tree City when we presented the new management team and the new programs to you, and I just -- we're just feeling very good about where we are.

We recognize that none of this gets done without a lot of hard work and good planning, and thinking.

We also recognize hey we may stub our toe here and there but if you got a lot of tires to kick, you can eventually, you know, the cream is going to rise to the top and we think we're well-positioned to do that.

So we thank you for your time and look forward to speaking with you throughout the year.

Have a great 2004.

Thank you for attending today's conference call.

You may now disconnect.