伊頓 (ETN) 2004 Q1 法說會逐字稿

At this time I would like to welcome everyone to the first quarter earnings release conference.

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

After the speakers' remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS).

Thank you, Mr. Bajenski, you may begin your conference.

Thank you, Mandy.

Welcome, everyone, to our conference call this afternoon.

This is Richard Bajenski, Vice President of Investor Relations for Cooper Industries.

Before we start our call let me remind everyone that comments 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.

Actual results may differ materially from those anticipated by Cooper.

And a discussion of these factors may be found in the Company's annual report on Form 10 K and other recent SEC filings.

In addition, comments made here may include non-GAAP financial measures.

Reconciliations of those measures to the most directly comparable GAAP measures are posted on Cooper's website in the investor center at the management presentation section.

And lastly, this call is a copyrighted presentation of Cooper Industries Ltd. and 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.

With that, to begin our discussion of the results for the quarter, let me turn our proceedings over to John Riley, Chairman, President and Chief Executive Officer.

John?

Thank you, Rich, and good morning, everyone.

Earlier today we announced that our earnings for the first quarter of 2004 were 81 cents per share, a 33 percent increase compared to the 61 cents per share we earned in last year's first quarter.

We are pleased with these results, which exceeded even our most recent projections for the period.

Now admittedly, some of this performance was due to improved conditions in some of the markets we serve.

However, better markets are not the sole reason for our strong first quarter results.

Our performance clearly reflects a continuing improvement in our operations.

During the quarter, we achieved gains in all of our key performance measurements metrics -- sales, margins, earnings and cash flow.

Before Terry and Rich give you more detail on these metrics, let may cover some highlights of our first quarter performance.

Our overall revenues for the quarter were $1.65 billion, 11 percent higher than $958 million reported in the first quarter last year.

Operating earnings increased 26 percent to $114.2 million, up from $90.8 million in the prior year period.

And our overall operating margins improved to 10.7 percent, again, up nicely from the prior year.

Net income for the first quarter of 2004 was $77.7 million, 37 percent greater than 56.6 million in the same period last year.

And finally, free cash flow for the quarter was $49.4 million, an improvement of over $75 million compared to last year's first quarter.

As you'll hear in a minute, all of our businesses experienced real revenue growth during the period.

Retail channels sales were very strong, positively impacting sales in our lighting and wiring device businesses.

Continued strong residential construction and improving industrial and electronic markets, as well as new product introductions and key market penetrations programs boosted sales of our Crouse-Hinds, Menvier line, our Bussmann circuit protection line, and our B-Line electrical systems businesses.

A welcome modest increase in maintenance spending by utilities resulted in revenue gains in our power transmission and distribution equipment business.

In our European lighting and security businesses, we benefited from new product introductions and improved penetrations of industrial markets in those regions.

Gains in our tools and hardware businesses were also driven by improved industrial markets, strong retail channel sales, and new product introductions.

Our reported revenues in this area would have been even better if these gains were not partially offset by lower shipments of assembly equipment to the worldwide automotive industry.

Now, while I mentioned we are experiencing some improvements in the markets we serve, we believe our performance also reflects the benefit of many programs that we have been putting in place over the last several years.

All indications are that our Cooper Connection sales and marketing program is helping us to improve our share of domestic markets.

Additionally, we are now seeing some modest benefit from our efforts to expand our presence in previously untapped international markets; some of the Chinese markets, some of the Korean markets, the Middle East markets, and an even greater portion of the Mexican market -- all of which have been traditionally underserved by several of our businesses.

Our ongoing productivity improvement efforts are clearly reducing our cost structures as are our efforts to move more of our production to lower cost environments around the world.

Finally, the development of our new company-wide enterprise business system is progressing nicely.

Our first two pilot sites converted to the new system in the quarter with little disruption to these businesses.

This is clearly good news as it relates to the rollout of additional sites and system modules as the year progresses.

And finally, late in March we announced the acquisition of RSA Lighting, a $12 million manufacturer of specification and commercial-grade lighting fixtures.

We expect to be able to use our existing Cooper Lighting sales and marketing organization to increase sales of RSA products and to further expand our overall presence in the markets -- the niche markets that RSA has been serving.

All in all, a very good quarter; solid revenue improvement, steadily improving margins and very good cash flow.

Terry and Kirk will now give you more details on each of these areas.

Terry?

Thank you, John.

Before I turn to the earnings for this quarter I will provide some highlights on cash flow and our balance sheet.

As John mentioned, for the first quarter we generated free cash flow of 49 million compared to the use of 26 million in last year's first quarter.

We had great execution on operating working capital in the quarter.

With our 11 percent topline growth and improving sales trends, our investment in operating working capital for the quarter was only 33 million.

Our inventory turns for the quarter improved to 5.3 turns compared to 4.5 turns in 2003.

Our inventory management programs are working and continuing to deliver results.

Turning to accounts receivable.

Days sales outstanding were flat with the prior year quarter, with increasing sales in the latter half of the quarter making the underlying -- masking the underlying performance.

Increases in Accounts Payable provided 24 million of cash flow.

In the prior year first quarter, we made a prepayment to our VIVA (ph) trust for employee benefits.

Most of the change you see in the cash flow statement reflected in income taxes and other assets and liabilities -- on the cash flow statement reflect the timing of these VIVA trust prepayments.

Our capital expenditures in the first quarter 2004 totaled 16.7 million.

Our capital expenditures will increase as the year progresses with spending on our new China facility, the wiring device relocation and investment in our enterprise business system.

We continue to forecast capital expenditures to be 100 to 110 million for the year.

Our targets are for free cash flow to exceed net income, and we fully expect to achieve this objective for 2004.

During the quarter, we purchased 2 million shares of common stock for 109.5 million and issued 477,000 shares from stock option exercises and matches to our 401(k) and other stock programs.

We are currently targeting to maintain our diluted shares around 96 million shares, plus or minus.

In March, as John mentioned, we completed our first acquisition since 2000.

The total consideration was 10.6 million, with 10.1 million paid during the quarter.

This acquisition was evaluated through our disciplined acquisition screening process and matched up perfectly to our acquisition strategy.

Our balance sheet remains in great shape, with our debt to total capitalization net of cash at 31.6 percent on March 31.

Turning to the results -- earnings results for the quarter.

The results for the first quarter came in stronger than we had forecast.

We started the year close to our forecast, but following a strong February, raised our forecast in March.

As it turned out, March came in stronger than our revised forecast.

For the quarter, revenues increased 11.2 percent over the prior year with currency translation contributing 3.5 percent.

We experienced a nice improvement in all regions and primary channels and markets with the exception of non residential construction.

Non residential construction, as anticipated, remained a flattish market.

Retail channels sales contributed approximately 300 basis points of our core revenue growth for the quarter.

First quarter 2004 earnings per share were up 33 percent on 11 percent increase in revenue compared to the prior year quarter.

Now the comparability of our first quarter 2004 results with the first quarter 2003 results was impacted by Cooper voluntarily adopting, effective January 1, 2003, a new method of accounting for stock-based compensation that results in the expensing of all stock-based compensation on a prospective basis.

In the first quarter of 2004, our total expense related to stock-based compensation increased 2.2 million over the comparable period of 2003.

For 2004, our pension and other post-employment benefit expenses are anticipated to be lower than 2003 by approximately 9 million, reflecting the net benefit of a 2000 and 2003 additional funding of our pension plan and improved market performance in 2003.

This decrease in expense offsets increased medical insurance and other employee-related expenses, and as a result, we are not seeing a headwind in 2004 like we experienced in 2003.

Entering into swap agreements on 300 million of debt in the third quarter of 2003, along with higher cash balance, reduced net interest expense 3 million for the quarter compared to the prior year quarter.

For the quarter, our electrical products segment revenues increased 10.8 percent compared to the prior year, and our tools segment revenues increased 13.2 percent.

Translation increased electrical products revenues approximately 3 percent and tools revenue approximately 6 percent for the quarter compared to the prior year quarter.

In our electrical products segment, including -- excluding translation, all of our businesses experienced year-over-year increases in core revenues, with the strongest increases in the retail and electronics channel.

Pricing in electrical products continued competitive, but not at the levels experienced in 2003.

We have announced price increases across our businesses; however, these price increases generally take effect for new orders and are announced in advance of the effective date.

Therefore, price increases did not have a significant impact in the first quarter other than some pull-forward of some orders in advance of the price increases.

In our tools business, excluding translation, both the hand tools and power tool businesses had increased revenues compared to the prior year period, with the hand tools business contributing the majority of the revenue gains.

The first quarter sales were impacted by strong retail and improved industrial sales, partially offset by lower assembly equipment shipments.

Overall, cost of sales as a percentage of revenue improved to 69.7 percent from 70.4 percent in last year's first quarter.

Electrical products cost of sales improved 100 basis points from the prior year to 69 percent, driven by benefits from the restructuring programs completed last year and ongoing productivity initiatives.

This compares to 69.8 percent cost of sales in electrical in the fourth quarter of 2003.

Tools cost of sales in the first quarter improved 10 basis points from the prior year quarter and 70 basis points from the fourth quarter of 2003, to 72.9 percent.

The benefits from restructuring programs were partially offset by continuing actions to reduce the cost base of the businesses and product mix during the quarter.

Selling, general and administrative expenses for the quarter as a percent of sales were 19.6 percent compared to 20.1 percent in the prior year first quarter.

Increased stock-based compensation and other incentive compensation was more than offset by the sales leverage.

From a total SG&A expense perspective, we were up 16 million in the first quarter of 2004 compared to the prior year quarter.

Of the 16 million increase in the first quarter compared to the first quarter of 2003, approximately 6 million is the result of translating our international operations into U.S. dollars, with the balance primarily volume related and the increases in stock-based and other incentive compensation expense.

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

For the first quarter of 2004, we reported 18.4 million in general corporate and other expense, compared to 16 million in the comparable quarter of 2003.

Stock-based compensation accounted for substantially all of the increase.

We delivered a very nice increase in segment earnings for the quarter, up 24.2 percent over the prior year comparable quarter.

Electrical was up 20.4 percent on a 10.8 percent revenue increase, and tools up over 80 percent on a 13.2 percent revenue increase.

Our electrical products segment return on sales increased to 13.6 percent from 12.5 percent in the first quarter of 2003, and increased 70 basis points from the fourth quarter of 2003.

Typically, in the first quarter of the year we experience our lowest quarterly return on sales, driven by sales mix and lower volumes.

In this year's first quarter, we experienced good volume on a reduced cost base, somewhat offset by a heavier retail sales mix.

Our tools segment return on sales increased to 6.8 percent compared to 4.2 percent in the prior year first quarter.

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

These benefits were partially offset by lower volume in the assembly equipment businesses following the record shipments in 2003.

The tools segment return on sales declined 190 basis points from the fourth quarter of 2003, primarily driven by the seasonal volume decline.

Rich will now provide some further comments on the regions and our individual business revenue trends.

Rich?

Thank you, Terry.

I will follow-up Terry's comments with some review of the performance of our two segments, electrical products and tools and hardware, focusing on the performance of their core revenue growth in the quarter.

For electrical products, the core revenues of this past quarter were up 8 percent.

As has been mentioned earlier, all of our businesses achieved year-to-year increases in their core revenues in electrical products this past quarter.

Our wiring devices, our Bussmann, and our power systems operations lead this increase, with year-on-year core revenue increases of 10 percent or more.

Following them were Menvier and B-Line, who had core revenue increases in the neighborhood of 5 to 10 percent, and just with increases slightly below 5 percent were our Lighting and our Crouse-Hinds operations.

Geographically looking at our businesses in the electrical products area.

In the U.S. and Canada, revenues increased approximately 7 to 9 percent for electrical products.

Here, industrial market demand continues to expand, leading to increased sales of hazardous duty electrical products, support systems and wiring devices.

The residential construction market's resilience and the very strong retail channels sales that we experienced this past quarter continue to benefit sales of lighting fixtures and wiring devices, and the improving electronics marketplace has lead to better demand for fuses and other circuit protection devices.

Increased maintenance spending, also, by utilities lead to good sales demand for electrical distribution and power transmission equipment again in the U.S./Canadian marketplace.

Turning to Europe, excluding translation our revenues increased approximately 6 to 8 percent this past quarter.

Local markets have been fairly subdued; nevertheless, we have achieved good growth as a result of our stepped-up focus on new product development and introductions, growing market penetration, and some increases in export markets that are served from our European base.

And looking to Latin America, where excluding translation our revenues increased 10 to 15 percent.

Local sales increases here were achieved in many of our businesses and were led by the continued growth of our power systems business in this region.

For tools and hardware, our core revenues were up 7 percent this past quarter.

In the U.S. and Canadian area our revenues increased approximately 10 to 12 percent.

This revenue increase primarily reflects the improved industrial demand and the strong sales for the retail channel supplemented by new product introductions.

In Europe for tools and hardware, excluding translation, revenues declined about 2 percent.

This year-on-year decline is a result of the assembly equipment shipments that have declined in overall activity, which more than offset the gains that we saw in the industrial markets for our hand tools and our power tools.

And in Latin America, excluding translation our revenues for tools and hardware increased about 5 to 10 percent.

Here in this region, demand has primarily been influenced by our growing presence and a focus on the market opportunities that we find in this particular area.

That's my quick wrap up for these two businesses.

Now I'll turn this back to John for some additional comments.

Thanks, Rich.

Now before turning our attention to our second quarter and outlook for the balance of the year, let me give you a brief update on the Federal-Mogul matter.

Our asbestos experience for the past quarter followed recent trends we have seen in this area.

Overall, claims outstanding declined again, ending the quarter at 57,030, down from 62,695 at the end of 2003.

We added 5100 claims but settled almost 11,000 claims during the period, and that is a good thing.

And while I don't have final numbers on the final quarterly indemnity payment numbers, it looks like it will end the quarter at about $1900 -- close to what it was at the end of 2003.

Again, not bad news.

Once again, I think it's fair to say we are continuing to do a very decent job managing these claims.

Longer-term, we are presently awaiting information on rescheduling of Federal-Mogul's revised plan of reorganization with the courts.

Time will tell when that occurs.

In the meantime, our channels of communication remain open with all of the involved parties.

Now some comments on our outlook for the second quarter and the year.

As I mentioned a few minutes ago, we had a very good first quarter -- solid revenue improvement, improving margins, very good cash flow.

Even though we will see our future results impacted by escalation in metals and other commodity prices that have taken place over the last several months, we expect to see more of the same in the second quarter -- solid revenue improvement, improving margins, and very good cash flow.

We are responding to these higher cost conditions by increasing prices and identifying opportunities to achieve additional cost savings.

As a result, we are projecting earnings of 82 to 87 cents per share for the second quarter, up some 20 to 25 percent from comparable share earnings of 69 cents in the second quarter of 2003.

As we extend our outlook to the full year, we are cautiously optimistic about the prospects for a continuing recovery in the markets we serve.

Orders continue to show signs of strengthening in many of the markets we serve, but some others, like nonresidential construction, are showing little or no improvement at all.

We are also mindful of the increasing pressure that these rising commodity prices may have on our profitability as the year moves forward.

Additionally, we expect the impact of favorable currency translation to begin to subside as the year progresses.

All of that said, however, to us it's undeniable that we are seeing positive commercial dynamics both inside and outside our businesses.

As a result, we now expect our earnings for all of 2004 to be in the range of $3.25 to $3.40 per share, better than we anticipated just a few months ago.

Now before we take questions, I will ask Terry to give you some more detail on what is behind our current estimates for the second quarter and full year.

Terry?

Thanks, John.

First starting with the second quarter forecast.

Revenues are expected to increase 6 to 8 percent over the 2003 second quarter, including 1 to 2 percent from currency translation.

Electrical products is expected to increase 7 to 9 percent and tools 2 to 4 percent.

We are not expecting retail channels sales to continue at the revenue growth rate experienced in the first quarter.

In addition, the pull-forward impact from price increases is expected to be nominal by May.

Our return on sales in both segments are anticipated to increase from the prior year, with return on sales for electrical 13.4 percent to 14 percent, and tools 6 percent to 8 percent.

We do expect the second quarter to be our toughest quarter for matching commodity price increases with realized sales pricing increases.

During the first quarter, some commodity prices ramped up very rapidly.

While we were aggressive in announcing price increases in the first quarter, including in some cases announcing several successive price increases, the price increases take time to work through.

We typically adjust price sheets with an effective date, and honor orders in backlog in place before the effective date of the price increases.

Our second quarter forecast reflects the timing of price increases as well as the material economics we are experiencing.

General corporate and other expense for the second quarter will increase from the prior year quarter, primarily due to increased stock-based compensation.

Interest expense we are anticipating to be in the 17 to 18 million.

Earnings per share, as John mentioned, are projected to be 82 cents to 87 cents per share, with average diluted shares of around 95 million.

Next, turning to the full year outlook.

For the year, revenues are expected to increase 5 to 7 percent, including 1 to 2 percent from currency translation.

For our electrical products businesses, our outlook is for revenue to increase 6 to 8 percent.

In tools, our forecast is for revenues to increase 3 to 5 percent.

We do not have the order book for the large assembly equipment shipments we experienced in 2003, and anticipate a decline in assembly equipment shipments for 2004 more than offset by improvements in industrial and retail sales.

For the year, we are forecasting a return on sales for electrical to be 13.5 percent to 14 percent, and our tools return on sales is forecasted to be in the 7 percent to 9 percent range.

General, corporate and other expense is forecasted to be 75 to 80 million, reflected -- reflecting the increase in stock-based compensation expense.

Net interest expense is anticipated to be in the 70 million plus or minus range, and our effective tax rate is expected to remain at 20 percent.

We currently anticipate diluted shares to average approximately 96 million shares for the year.

And for the third year in a row, our free cash flow is forecasted to exceed our earnings for the year.

As I mentioned earlier, capital expenditures are anticipated to be in the 100 to 110 million range for 2004.

John, I think we now have time for some questions.

I think we're ready to take some questions.

If you could get people queued up, that would be great.

Thank you.

(OPERATOR INSTRUCTIONS).

Robert Cornell, Lehman Brothers.

The issue of price to cost is coming up a lot on everybody's conference calls.

First of all, do you have an idea of what the pre-buy actually was in terms of dollars?

And then, help us with what in fact your dollar amount of raw material cost increase is you're actually looking at over the balance of the year.

This is John, Bob.

Let me address the first question on pre-buy, and Terry can walk you through the numbers.

I think he can give you a pretty good handle on how we see this thing developing.

We actually did a survey with our folks shortly after the quarter ended.

These are all the division marketing and sales folks and presidents, to get their views on what this pre-buy -- how significant a pre-buy may have been.

And surprisingly, Bob, we were pleasantly surprised to hear them come back and say that there was some very modest amount in their opinion, but not anything that was significant in terms of big numbers.

So that is the good news.

Now that is on the electrical distributor side of the business, the traditional side of the business.

Having said that -- and by the way, we did do some inventory checking, and it didn't look to us like there was a significant build in the inventories of these people either.

So that, again, was good news as it relates to the future in terms of volatility.

The one area we did see some inventory build was on the retail side of the business, and it's hard for us to determine how much of that retail was -- is sort of pre-buy or in anticipation of their markets improving.

But it's clear to us that the retail people are much more positive about their future in our product lines than they were let's say 3 to 4 to 5, 6 months ago.

So that's sort of the qualitative answer.

I don't have a specific number to give you but I hope that helps.

Terry can kind of walk you through the dynamics of the flow of this ebb and flow of cost price, as we have planned it.

Let me start out by -- I'll give you a little bit of a roll by quarter of what we are seeing, Bob.

In the first quarter, pricing was not very much, and we did not have big increases in our material economics.

So said another way, a pretty nominal net impact in the first quarter.

As we roll into the second quarter, year-over-year, on the commodities everybody talks about, we're up 15 to 20 million over the prior year in costs.

Now, we are offsetting some of that through our sourcing organization, productivity improvements, and of course price increases.

The price increases, clearly we will not get full realization in the second quarter.

And if I had to give a number, our plan would indicate that we have about 5 million of cost we would not -- we are not recovering in the second quarter.

As we move to the third quarter we're pretty balanced.

Pricing offset -- pricing being offset by -- the pricing increasing offsetting the material economics, along with the other activities we're engaged in.

By the fourth quarter, again, pretty balanced but probably a little positive on the pricing side.

That's a subtle message that is coming out of these conference call, is that having lived through three years of difficult markets and price weakness, that a number of companies are looking to recapture some of the price erosion that took place over the past three years.

We think that's a prudent thing to do, and it's well deserved, by the way.

Amen.

One final question.

I'm surprised that the utility business showed some signs of strengthening with just a little flush there.

It was mostly -- I mentioned, carefully mentioned, Bob, it was modest but it was in the maintenance area.

And my view of that is -- and based on the conversations, again, that we've had with the division folks is that that turned up a little bit because we're now -- we're, obviously, in the first quarter, and we're now beginning to enter in many parts of the country, and will later in different parts of the country, this hot weather season.

And it seems clear to our folks that people are becoming a little bit more liberal on the maintenance supply side of the business than they have been in the past, in terms of making sure that they have replacement parts available for critical parts of their systems, and so on and so forth.

Is this transformers, guys, or is it (indiscernible) switchgear?

No.

It would be more switchgear; it would be more power capacitors; it would be more of the switching and control kind of products and protection products, things like arresters and those kinds of things.

Again, not a huge increase, but a nice -- a pleasant surprise.

We did not anticipate our power systems being as strong in the first quarter as it turned out to be, and that is a good thing.

Just an anecdotal addition to that is, that does not alleviate, in my judgment, the utility's need to begin to spend much bigger bucks in terms of upgrading their transmission and distribution systems.

But I have to tell you, I don't see that occurring in terms of a windfall over the next three to six to nine months.

And we'll just have to see how our folks in Washington and all of the other people who are addressing this grid system issue will come out on it.

Obviously, the most recent reports that we have seen on it that were studies done indicate that this is -- it confirms our feeling that this has been an area of reasonably significant under-investment in the past, and there will have to be investments made in the future.

In my judgment it's just a matter of time.

Scott Davis, Morgan Stanley.

I want to follow up a little bit on what Bob was talking about, and separate this whole inventory issue -- try to separate out the pre-buy from what -- from kind of a traditional inventory build.

Is there any way to quantify, or at least talk about what historically you've seen the distributors do?

When business starts to come back like this, do you tend to see kind of double ordering and some patterns that last for a couple of quarters?

Or is there a little bit more -- I mean, I guess the question really is, is there any way to kind of quantify -- certainly there's some increase in inventories being built from a pre-buy.

But more importantly, kind of what are the distributors doing to prepare for an upturn business here?

Traditionally, our first quarter has not been our strongest quarter;

I think that's fair to say, isn't it Rich?

Yes.

So the strength of the first quarter this year was again welcome news.

I would say that most of the customers that we have, Scott, today are much more sophisticated in their inventory management methods than they have been the past.

I can't say with certainty that there wasn't some modest inventory build that was put in place as a pre-buy or -- a pre-buy to price increases or a pre-buy to make sure they had stuff on the shelf as they get into the busier seasons, which would be the second and the third quarter from the standpoint of the construction trends around the Company.

I can't say with -- in a finite way what that is.

I can say, though, that these folks are much more sophisticated in their inventory management methods.

And all indications that we have is that the likelihood that they are going to go out there and load up because of some outside influence, and let these inventories get way out of control, is very low today compared to what it would have been certainly in my experience 5, 6, 7, 8 years ago.

Terry, you may have a better feel for that because you're --

We actually have seen pretty good flow-through, Scott, on that from what we hear from our distributors to the end market -- end-users.

The big guys clearly are not building up inventories beyond what they normally do this time of year, which there is a little bit of that in the March timeframe as they prepare for the season coming up.

Some of the smaller ones may do a little bit, but it's not great.

And as far as people booking, double booking orders and that type of thing, we're not seeing that.

Okay.

Fair enough.

Moving on to a follow-up question, I just wanted to talk a little bit -- I mean, clearly you've done a solid job on restructuring and cost-cutting.

I think last quarter you quoted a number somewhere around $35 million of savings in '04.

What I'm trying to get at is now that business has kind of snapped back nicely for you, what does that really mean for you on the cost-cutting and productivity side?

Does it mean that that $35 million starts to really lever up and move up substantially, or is there another component here and you need to start adding back some headcount and start adding back some capacity, and that you have some cost structures on the other side that kind of limit that?

I think the two headwinds on the other side of that -- of those cost savings efforts today, Scott, are twofold.

One is the issue of price cost and how much of that price are we really going to get of those increases that have been announced, versus the amount of the cost that Terry was talking to you about in terms of what's happened in raw materials.

So that's headwind number one.

And headwind number two, I think, is the cost that we're putting back into the business on things like our enterprise business system and the infrastructure to build out our greater international presence, those kinds of things.

But those things, I think, are good -- certainly the latter is a great investment for the future, and we're not going to stop that.

And we'll just have to wait and see where we come out in terms of the price cost on the material and pricing issue.

Terry, do you want to add anything?

Scott, on the -- a lot of it's driven by where the volume is coming from, too.

Our 30 to 35 million -- we're very comfortable we're going to realize that and build on it, quite frankly, with our lean manufacturing program.

But the increase in that number is driven by the product lines more than anything.

If our increase come for example out of the retail channel, we do not get as much leverage on that, because a lot of that product is sourced from low-cost countries, etc.

But in the pure industrial side of it, we will get some leverage with the volume increases from taking that fixed cost structure out of our business.

Deane Dray, Goldman Sachs.

You made a couple of references to contributions from new products across the segments.

Do you have a sense of what that contribution was in any particular product lines?

I don't have it specifically in front of me, Deane, we could probably get that -- we can easily get that for you.

We could probably have Rich give you a call on that.

Do you have it, Terry, or any sense of it?

I don't have it handy.

I know its spread across -- I know on the tools side, Deane --

That's a big help there.

Tools are the big help, and that's really going into the big box side of it.

Fairly significant revenue gains on that; across our other businesses it's pretty spread out.

Except wiring devices has done a great job on new products.

I think in the electrical area, wiring device would be one; the hand tools area would be (indiscernible).

Lighting has done well in terms of the introduction to new products.

Some of the other ones are a little but more moderate, but those would be the three or four that I would single out as having good solid programs put in place where they have actually introduced new products and they're now getting sales out of the new products.

The other ones are coming along behind them.

Thank you.

Just going back to some of the commentary on your ability to get some pricing.

Where do you stand in terms of your competitors in terms of raising prices?

Are you ahead of the game at the same time?

And is there any game of chicken that will go on here, is everyone going to get the same?

I think it's fair to say based on everything we have seen, most of the major competitors have announced price increases.

I can't say that every single competitor we see -- some of the smaller people have done that -- I'm just not that close to those people.

But the bigger ones have announced price increases.

And I think for the most part we are all pretty much in lockstep in terms of the timing of those increases and the general numbers that are involved in those increases.

You've asked the $64,000 question, and I guess I've never looked at it as a game of chicken, but that's kind of what it is at this point.

This is a critical period of time.

People have to keep their eye on the ball and they have to implement these price increases.

The good news here is there have been price increases introduced over the last two or three years, albeit them few and far between.

But there wasn't any initiative behind those price increases that would drive people to make them work.

And in some respects this escalating raw material cost is a bad thing, obviously.

Higher costs are not good.

But in some respects, that escalating raw material cost is a good thing, because it now introduces into these markets -- which has been really a vacant period over the last two, three, four years -- the issue of prices are important, in terms of how you run your businesses and what kind of returns you get out of your businesses.

And if you think about it, you know -- if you're a brand-new salesman and you've only been on board for a couple or three years, you really don't know what a price increase is.

But now, necessity is the mother of invention, and that's kind of where we are in this.

I am reasonably sure that most people are going to do the prudent thing here going forward from a pricing perspective.

But again, time will tell.

I can't be a predictor of that.

I just have that sense.

How's this since we haven't seen it for a while -- would next quarter you be able to break out in your core revenue growth how much was volume and how much was price?

I think we have pretty good numbers on that.

I think that's -- when Terry cited the number about the first quarter it was pretty much a push.

I think that was -- those are the kind of numbers I think Deane is talking about.

Last question.

You realize, Deane -- within reason, we can try to do that.

Sure.

Last question is regarding the automotive assembly equipment.

What should we be thinking about in the next quarter or so in terms of the lower shipments you saw first quarter?

Is there any margin or is there any share gain issue or loss there?

I don't think so.

From a share -- I think it's just that people have now put some systems in place, and now they're sort of beginning to look back and see where is the next area that they're going to retool their shop.

And I think it's more of a cyclical thing than anything else.

Europe is our biggest piece, Deane, on the assembly equipment.

And Volkswagen had major programs going and they have cut back, just under total expansion.

You read about what Volkswagen is going up against right now anyway.

So they've scaled back, and so have all -- most of the other Europeans had big capital programs going on in the '02, '03 timeframe, and most of those have slowed down.

So indications are it's not really a market share issue, it's just the timing of the CapEx spending, primarily driven by the Europeans.

Mandy, we'll take one call.

I think we've got time for that.

Thank you.

Jeff Sprague, Smith Barney.

Just one more on the cost issue.

Terry, the 15 to 20 that you characterized in Q2; just so we understand what you are trying to overcome.

Is that the same type of pressure you expect in Q3 and Q4, or does that kind of ratchet up?

Just looking at the cost on a gross basis, not the price side.

On a gross basis, we are forecasting it to be about the same, Jeff, for the remaining three quarters of the year.

Okay.

Great, and --

I think it's fair to say the big pop in these announcements was really in the first quarter as it goes through the balance of the year.

Is that correct, Terry?

That's correct.

And on the commercial construction, you kind of characterized it as pretty dead.

I mean, do you see -- it sounds like you're comfortable with stabilized, is that fair to say?

I don't think it's deteriorating.

If it is, it's a modest deterioration compared to what it was.

But there's no -- nothing that we see there, Jeff, that's going to sort of kick start in the short-term office building, or the two big pieces of that which would be office building or industrial -- new industrial construction, certainly not here in North America.

The money is being spent now on maintenance and build-out of existing buildings that have been put in the ground, and some renovation and modernization, and that's still good steady business.

But I think on -- for example, on our lighting business, the strength is going to be on the residential side of the business.

And I think commercial is -- C&I is pretty much flat, flattish, a little bit better than flattish because of some new products.

But other than that, I think that's kind of where we read it for the balance of the year.

That's the one market that we just don't think right now is going to show much improvement over the balance of the year.

We've got others that are showing improvement -- clearly, industrial maintenance and repair activity is picking up.

Clearly, electronics is moving in the right direction.

Residential has held up surprisingly well, and I think it will hold up certainly through the building season now for the second and third quarters.

Hold cards will be what happens with utility; will they continue to sort of maintain this current rate of spending, which is modestly better than it was, and surprisingly better than it was from my perspective, because I didn't think it was going to pick up at all.

So that's kind of where we are.

But the one real weak spot, I think it's fair to say, is the commercial construction business.

The only positive in that market that we see is it has finally turned the corner on net absorption of (multiple speakers) plus.

And we watch that, because that's -- can be an indicator of what's going to happen.

One last one, thanks.

Just on deals and M&A -- your first deal since 2000; that's obviously a real little one, but can you characterize the pipeline and how active it might be over the next 12 to 24 months?

I think we have said that we're going to crank up the engine there and I think we're doing a reasonably good job now of building the book and looking at a bunch of things.

And I think you can expect -- we don't have anything, quote, big big big on the horizon that I can think of, certainly in the short-term.

But that kind of acquisition -- that 10, 20, 30, 40, $50 million acquisition that fits with our existing businesses -- I think is sort of where we're looking right now.

And I'm encouraged by the amount of opportunities our division guys are beginning to uncover here.

And I'm also very pleased with the approach that Tom Pelliger (ph) and Terry and Kirk Hachigian are taking in terms of screening these to make sure that they're the right things before we go out and spend a lot of time and effort on something that isn't going to make sense.

So I'm feeling like we're moving in the right direction then.

We appreciate your time, and hopefully we've given a little bit more color to our press release this morning.

As I said, we're looking forward to a very solid second quarter, and if things fall in place here, a very solid 2004.

Thanks very much and have a good day.

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