伊頓 (ETN) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter, 2005 Cooper Industries earnings conference call.

My name is Ann Marie, and I will be your coordinator for today.

At this time all participants are in listen-only mode.

We will be facilitating a question-and-answer session towards the end of today's conference. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's conference, Mr. Richard Bajenski, Vice President, Investor Relations.

Please proceed, sir.

Thank you, Ann Marie, and welcome everybody to our conference call.

With me today is John Riley, Chairman and CEO of Cooper Industries; and Terry Klebe, Senior Vice President and Chief Financial Officer.

Before we proceed, 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.

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, to the extent that we could anticipate these.

The reconciliations of these measures to the most directly comparable GAAP measures were included in our earnings press release, which is posted on Cooper's website, and was included in our recently filed 8-K.

And lastly, this call is a copyrighted presentation of Cooper Industries, Limited, and is intended for the exclusive use of the participating audience.

No rebroadcast, transcription, or other other use of this presentation may be made without the express written consent of Cooper Industries.

With those comments having been made let me turn this call over to John Riley.

John?

Thank you, Rich.

And good morning and once again, thanks to all of you for being us with to review Cooper's first quarter 2005 results.

I assume most of you have already seen this morning's press release, and I hope you agree with my comment embedded in in it, that we're off a very good start for 2005.

Earnings for the quarter were $0.92 a share, up 14% over the $0.81 per share number we earned in last year's first quarter.

Revenues for the quarter totaled $1.14 billion, up nicely, 7.5% from just over a billion dollars last year.

And finally, net income for the quarter was up 13%, to $87.3 million, compared to $77.7 million last year.

I think the bottom line is that we generated solid revenue growth and continued to improve our margins in spite of ongoing pressures related to high raw material, transportation and energy costs.

Our Five Key Internal Improvement Initiatives aimed at growing sales, improving productivity, and expanding the Company's global reach, continued to produce expected results.

We're feeling the positive impact of these programs on our balance sheet as well.

Our debt to total capitalization ratio net of cash at the end of the quarter was 25.9%, down from 26.1% at year-end, and significantly better than 31.6% at the same time last year.

All in all, it was another good quarter for Cooper.

Terry and Rich are going to give you more detail on our performance over the next -- over the first 90 days of the year.

Terry?

Thank you, John.

The four kinds of earnings for the quarter I will provide some highlights of our cash flow and balance sheet.

For the quarter, we generated free cash flow of $1 million compared to $49 million in last year's first quarter.

There are several reasons for that difference, all of which are positives.

In the first quarter, our normal payout of customer and employee incentives, earned in the prior year, was higher than 2004, as you would expect following a very solid performance last year.

We also typically build inventory to accommodate the beginning of the construction and renovation season and this year, we have also increased inventories to service the solid sales increases we have achieved.

Nevertheless, our inventory turns improved to 5.7 turns from 5.3 turns in 2004's first quarter.

In addition, we improved our customer service performance during the quarter.

With the strength, experience in most of our markets and a strong finish to 2004, customer service metrics deteriorated somewhat in 2004, and are now tracking around the normal measurements.

We anticipate inventory requirement levels will moderate as the year progresses.

On receivables, our day sales outstanding improved one day, compared to the 2004 first quarter.

Capital expenditures for the quarter totaled $20 million compared to $17 million last year.

We continue to forecast free cash flow to exceed net income for the year.

Included in our uses of cash flow this past quarter was the acquisition of a small Korean electronic fuse manufacturer.

We closed the acquisition at the end of March, paying cash of $2.4 million, of the $4 million acquisition cost.

We also purchased 400,000 shares of common stock, against the issuance of 700,000 shares for stock option exercises and matches to our 401(k) and other stock programs.

During the quarter, we also repaid short-term debt of $90 million that had been borrowed in the fourth quarter of 2004 to accomplish an international tax reorganization.

As John mentioned, our balance sheet remains in great shape with the debt to total capitalization net of cash at 25.9% on March 31.

Now, turning to the results for the first quarter, as John mentioned, earnings per share of $0.92 cents.

This came in at the higher end of $0.89 to $0.93 per share we had forecast in February.

For the first quarter, revenues increased 7.5%, including a 1% contribution from acquisition.

The acquisition contribution includes additional sales captured through utilization of base Cooper sales and marketing efforts and new product synergies, subsequent to the acquisitions.

Currency translation contributed 1% to overall revenue growth.

Overall, cost of sales as a percentage of revenue improved 90 basis points to 68.8% from 69.7% in last year's first quarter.

Favorable sales mix, realization of price increases, and continued operational improvements more than offset pressures from commodity price increases.

As expected, material transportation and energy-related cost inflation continue to create challenge throughout the first quarter.

Overall, our sales price realization exceeded material cost increases, and inclusive of transportation and energy cost increases, was close to overall parity.

Selling, general, and administrative for the quarter as a percent of sales was 19.9%, compared to 19.6% in the prior year first quarter.

Increased expense from stock-based compensation, Sarbanes-Oxley compliance, and investment in sales and marketing initiatives to drive growth, were primary contributors to the increased spending as a percentage of sales.

From a segment perspective, for the first quarter of 2005, we reported $20.4 million in general corporate and other expense, compared to $18.4 million in the comparable quarter of 2004.

Stock base, incentive compensation increased audit Sarbanes-Oxley compliance costs account for substantially all of the increase.

2005 reflects the third full year of our expensing all stock-based compensation.

At substantially all of our stock-based compensations, as a three-year or less vesting at the end of 2005, we will have a full impact reflected in our results, and going forward, into 2006, the comparable results will only include differences from the value of stock-based compensation granted each year.

The income tax rate for the quarter was 21.5%.

The actual rate for the year will be determined by the level of our earnings and the jurisdictions in which the earnings are taxable as the year progresses.

For the quarter, the positive sales mix impact of growth in industrial, commercial, and utility markets more than offsetting lower retail sales; our execution on price increases, and execution on our five company-wide initiatives; more than offset the increased costs and a higher income tax rate, resulting in a 14% increase in earnings per share, on a 7.5% revenue increase.

For the quarter, our Electrical Products segment revenues increased 8.7%, compared to the prior year, with currency translation contributing slightly less than 1%, and acquisitions contributing approximately 1%.

If you recall, last year, approximately 3 percentage points of our year-over-year revenue growth in the electrical segment came from retail sales.

In the first quarter of this year, retail sales were down in the low double digits against these tough comparables in last year's quarter.

Both lighting fixtures and wiring device sales declined in the retail market.

However, global Electrical Product sales through distribution channels grew in the low double digits as industrial markets remained solid, and commercial construction markets improved.

Global sales of electrical support systems, hazardous duty products, lighting fixtures, and wiring devices, showed the greatest year-over-year sales growth in the electrical distribution channel.

Our power systems transmission and distribution products business sales, including sales through our electrical and other distribution channels, remained solid, with revenues increasing in the high single digits.

OEM and other customer direct sales grew closer to the overall sales growth of the segment.

Electrical markets remained competitive, but there has been acceptance of price increases in the markets.

We continue to closely monitor cost pressure in all of our businesses, and remain committed to achieving adequate pricing to cover commodity, transportation, and energy cost increases.

Electrical products cost of sales, improved 60 basis points from the prior year, to 68.4%.

Favorable sales mix, realization of price increases, and continued operational improvements more than offset the pressures from commodity cost increases.

Electrical Product segment earnings increased 12.1%, and return on sales increased to 14% from 13.6% in the first quarter of 2004.

The benefits of cost reduction efforts, price realization, and favorable sales mix more than offset the increased costs.

Overall, sales leverage and Electrical Products was impacted by the significant increase in material and other costs over the past year.

Overall, our businesses achieved adequate pricing to offset material cost increases, and made a contribution to overcome transportation, energy, and other cost increases.

As I indicated in our last conference call, fourth quarter commodity pricing increases would be a challenge.

The majority of these increases impacted our power systems and lighting businesses.

Our power systems business price realization caught us the first quarter such that pricing exceeded material cost increases.

Our lighting business came close to price recovery of material price increases, but did not recover transportation cost increases, and we incurred some additional costs at a factory going through product line relocations.

While we maintain earnings compared to the prior year, the higher revenues resulted in the impact on sales leverage and return on sales performance.

In our tools business, sales increased 1.5% with currency translation essentially equal to the sales increase.

Hand tool retail channels sales declined in the single digits year-over-year against strong comparables in the prior year period.

However, hand tool sales through distribution more than offset the retail sales decline with the industrial and commercial construction markets continuing to grow.

Industrial power tool sales in both Europe and North America were weak compared to the prior year quarter, following a strong fourth quarter of 2004 and tough comparables in Europe, where the prior year included strong sales to Air Bus.

The sales mix in the tool segment for the quarter was favorable, driven by the lower mix of retail sales.

Tools cost of sales in the first quarter was 70.8%.

This was an improvement of 210 basis points from the prior year quarter.

Sales mix and price realization and ongoing cost reductions were significant contributors to the improvement.

The tool segment operating earnings increased 24.6%, and the return on sales increased to 8.3%, compared to 6.8% in the prior year first quarter.

The segment benefited from cost reductions, price realization, and favorable sales mix.

Rich will now provide further comments on the regional revenue trends.

Rich?

Thank you, Terry.

Following are some quick comments for our two segments, Electrical Products and Tools & Hardware, as they faired around the globe.

First in Electrical Products, revenues overall increased about 9%, including an 8% contribution from an internal revenue growth, 1% from translation benefits.

Now, included in the internal revenue growth was approximately 1% from our recent product line acquisitions.

Geographically in the U.S. and Canada, we saw revenue increases of about 7% to 9%.

Here, continued strength in maintenance spending by utilities, primarily focused on system reliability, led to growth in sales of electrical distribution and transmission equipment.

Industrial spending continued to support increased sales of industrial electrical construction materials, circuit protection products, lighting fixtures, wiring devices and our support systems businesses.

Overall, as Terry mentioned, retail demand slowed in comparison to the prior year's strong shipments affecting our lighting fixture and wiring devices.

And commercial renovation and maintenance spending continued to add to the demand for both lighting fixtures and our other electrical construction materials.

In Europe, excluding translation, revenues increased about 4% to 6%.

We achieved growth in most of our major product areas in Europe, with modest local market increases aided by continued growth in export demand for the hazardous duty electrical construction materials.

In Latin America, excluding translation, our revenues were off by about 4% to 6%.

The local sales decline reflects a pause in growth in certain sectors of the local economies that we serve with products used in industrial and utility applications.

And in the Asia-Pacific arena, shipments to this region increased modestly from the prior year.

Turning to Tools & Hardware, where our revenues were essentially flat with the prior year on the internal growth basis, we gained 2% overall with the benefit there being from translation.

For the U.S. and Canadian marketplace, revenues were essentially flat to slightly improved from the prior year.

Industrial demand for tools was offset by retail sales that were lower than the prior year's strong quarter.

And in Europe, excluding translation, our revenues declined about 2% to 4%.

Overall growth in demand for industrial hand tools, was offset by year-to-year decline in power tool sales to the European aerospace assembly market.

In particular, the prior year sales included the benefit of product shipments for tooling up the new Air Bus model.

In Latin America, excluding translation, our revenues increased about 4% to 6%.

We continue to achieve here, continuing growth primarily from our extended hand tool presence.

And in the Asia-Pacific arena, excluding translation, our revenues were down about 2% to 4%, mostly reflecting small variations in local sales.

That's a wrap-up on the geographic basis.

I will pass this off to John for some further comments.

Thanks, Rich and Terry.

Now, before moving on to our outlook for the second quarter and full year, let me give you just a brief report on the federal mogul situation.

In a nutshell we saw very little change in the pending cases or settlement values during the period.

Claims outstanding as of March 31, 2005, totaled $46,854.

That compares to $46,700 claims outstanding at year-end 2004.

Likewise, the average value of claims settled on our watch as of March 31 was $1950 per claim.

Very lose to the $1911 per claim settlement number we reported 90 days ago.

Perhaps of even greater importance is the fact that, recently, there has been a lot of talk about a Washington solution to the country's overall asbestos problem.

Now, to that, we say it is about time, and we hope that a reasonable solution can be agreed upon sooner rather than later by our representatives in Washington.

In the meantime, we're not counting our chickens before they hatch.

We continue to talk to others involved in the federal mogul bankruptcy regarding ways to resolve our differences.

Now, a few comments on the balance of the year.

First, as I said at the outset of today's call, we're off to a very good start, and I like the pulse and pace of our business.

Key improvement programs are firmly in place and our people are dedicated to achieving the five objectives we outlined for you earlier this year.

For all those Cooper people out there, let me remind them of what those objectives are.

Greater than market sales growth, accelerated international sales growth, continued operating margin improvement, at least 100% cash conversion ratio, and accelerated acquisition activity.

All of that said, we're also mindful of the market and cost challenges that remain ahead.

And despite these challenges, we remain optimistic regarding our ability to achieve a very solid 2005 performance.

As a result, we expect that our earnings for the second quarter will be in the range of $0.98 cents to $1.02 per share.

Additionally, we see no reason to change our previously stated earnings objective of $3.94 to $4.12 per share for the year.

Now, before we take questions, I'm going to ask Terry to give you just a little bit more detail on what's behind our outlook for the quarter and for the full-year 2005.

Terry?

Thanks, John.

Revenues for the second quarter are expected to increase 6% to 8% over the 2004 second quarter.

This includes a very nominal contribution from currency translation.

The electrical revenues are expected to increase 7% to 9%, and tools revenues are expected to be flat to up 2%.

Sales mix is forecast to return to a more normal trend.

In Electrical Products, we had weak second quarter 2004 retail sales, following the very strong first quarter 2004.

Therefore, comparables in this channel are relatively easy.

However, comparables in Electrical Products distribution channel will be tougher, as the sales in this channel were up double digits in last year's second quarter.

Our return on sales in both segments are anticipated to increase from the prior year, with return on sales for electrical of 14%, to 14.5%, and tools of 8% to 9%.

We expect pricing realization to offset commodity transportation and energy price increases such that we will remain in a cost price parity in the quarter.

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

Interest expense is anticipated to be in the $17 to $18 million range, and earnings per share are projected to be $0.98 cents to $1.02 per share, a 10% to 15% year-to-year increase, with average diluted shares of 96 million plus or minus.

As John mentioned, we are not changing our outlook for the year.

The only place where we will have maybe a little bit of a change, will be in the tool revenues that could come up slightly under the 5% to 7% that we had forecast back in February.

With that, I will turn it back to John.

Thank you, Terry.

Ann Marie, I think it is now time for us to take a few questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]

Your first question will come from Nicole Parent with Credit Suisse First Boston.

Please proceed.

Good afternoon, guys.

Hi, Nicole, how are you?

I'm good, thanks.

I was just wondering if you can give us a little bit more granularity in terms of, I guess, magnitude of rate of change within the electrical products business by actual business line?

Nicole, this is Rich.

Good question.

I hope you will take a note of the fact that over the last couple communications, both in our outlook presentation as well as in this conference call, we've been trying to give a lot more granularity on a channel and market basis.

And I think you will see us paying much more attention to communicating along those lines in the future.

With the many changes going on here, with our various resource sharing programs, and with many of our focuses on combining our business attributes through things like the Cooper Connection Program and our international resource commitment programs; we think this is an appropriate way to address these and give you some good information about that.

So you see us building more of our communications around that.

That having said that though, in direct answer to your question, on a divisional basis, in Electrical Products, all of our electrical divisions were up this past quarter with the exception our wiring device business, which as Terry mentioned, was down slightly as a result of the strong presence in the retail marketplace.

And in the tools area, it was a mixed performance, our hand tool business was up driven by good industrial activity there, and the power tools business was down slightly.

That's seen primarily because of the difference in timing of shipments last year versus this year for some particular applications.

One of those being the Air Bus order.

Great.

I appreciate that.

And just a little bit more color generally speaking on lighting.

How much was it up?

And I mean we've heard preannouncements out of other companies, can you just walk us through what you're seeing there in terms of the ability to realize price in both the residential and the commercial side?

I think Terry mentioned something about lighting in his comments Nicole, but I don't remember exactly what he said.

I'm not going to give you a specific number, but I think he clearly indicated that our lighting sales were up reasonably well in the second quarter.

On the pricing side, I'm going to let Terry talk about that.

He's got some pretty good data in terms of price costs, and he can expand a little bit on some of the comments that he made in his opening comments on the quarter.

On the cost equation audit, in the fourth quarter last year, there was some fairly significant cost increases on balance, as well as painted steel that rolled in late in the fourth quarter into the first quarter, and there was also a price increase that was announced late in the -- or mid, I guess it was mid fourth quarter.

We did achieve price increases in the quarter.

As I mentioned, it came very close to offsetting our commodity -- or our material price increases.

However, there are other cost increases such as transportation, et cetera, that did have an impact on us.

As well as, we had one factory where we're moving some production to other factories, that we had some variances, nothing real significant but it did impact it.

So our lighting business overall, earnings were flat with the prior year.

Revenues were up, which you would imagine they would have to be in our electrical business as far as to achieve the type of top line growth we did on it.

So, I would say a pretty good performance in our lighting business, but we have some price recovery to achieve yet going into the second quarter to get where we want to be.

Great.

And just on the corporate expense line, at the segment level, you beat my number, corporate expensing, is a little bit higher, should we think about that at a 20 million run rate for the remaining quarters of the year?

Roughly, right.

Thank you.

You're welcome.

Your next question can will come from Bob Cornell with Lehman Brothers.

Please proceed.

Well, the first question actually extends from Nicole's.

I mean, just in listening to companies talk about their business, in lighting there appears to have been like a 4% to 6% price increase in November that some suggest that Cooper didn't follow.

In your comments, Terry, that -- have some price recovery to achieve, does that suggest you're going to go back or at least adopt 4% to 6% price increase in November that some competitors did put in place and you guys may not have?

Is that --

Yeah, Bob, let's begin by not assuming that what you read in the papers is always correct.

All we know is what we see in the marketplace, and what we know our folks are doing and the numbers that they have produced.

I don't think there is any doubt in my mind that we would not have been able to achieve the kind of sales increase we achieved during the quarter, and the kind of margin improvement that we achieved during the quarter without achieving some of the -- some or a lot of the price increases that we have announced in the past.

So, I will just leave that comment at that.

I just don't understand why anybody would raise a price and not push very hard to get achievement on the price increase, especially with what is going on the price cost sort of situation in the marketplace.

I don't know, Terry, if you want to add anything to that, that's fine.

Well, Bob, as you know, if you ask our sales guys, they will tell you it is the other guy, and you ask the other company's sales guy, it will tell you it is the other guy.

Right.

So there is a lot of that going on.

But from our analysis of our business, we did achieve price increase, fairly significant price increase year-over-year, and did achieve some of the November price increase.

Was it as much as we would like?

No.

We -- there needs to be better pricing discipline as we move forward, which I think will come.

Go check the architectural and outdoor lighting business.

Well, I think you get it two ways.

I think you get it through continued discipline on putting through the price increases people have already announced.

And then obviously, you will begin to pick up -- you ought to be able to pick up some modest addition to that, because of backlog orders being shipped at older prices, and then rolling in newer prices on the new products, on the newer orders.

So --

Well that actually brings up another point.

I mean some people have said that Cooper price protected too many people on too many jobs for too long a period into this year.

Do you have any comment in that regard?

I don't know how to respond to that, Bob, other than --

Well let me change the subject then.

How did the business --

I don't know how to respond to that other than our sales are up 9% in electrical and our margins are up significantly so that's the only way I know how to respond to that.

How about the way the whole business developed in the quarter?

People have talked about January being weak and February and that March was better than April, I mean, how did the business track for you guys and sort of rates of change as the quarter evolved?

Bob, I would say that the quarterly progression was what I would call a pretty normal quarterly progression.

Clearly, seasonally, you continue to increase January, February, and March, month over month over month, and that's exactly how it played out.

So the rates of change in March weren't especially different than the rates of change in January?

They were fairly close.

March was a little better than January which is actually pretty typical.

Some people said the weather has had an impact on some of the businesses.

Do you see any of that impact any place?

Or can you quantify it?

Nothing that I would consider of significance over a 90-day period.

You know, the weather may be bad for two or three days in a given location, but I don't -- I can't imagine why anybody wouldn't be able to pick that up over a 90-day period.

What's the indication of business so far in April?

I mean any comment there?

I don't have any indication of April orders but Terry, have you seen anything?

I haven't heard anything that is negative.

Let me put it that way.

The final question on the retail, is the retail business off for you because the sell-through in the stores was weak?

Or it because of line losses that you experienced because of an effort to get pricing up?

I mean, what is going on in retail?

Is the retail selling less or did you lose shelf space because of pricing actions or other things?

Well, we've lost a little shelf space over a year's period of time.

Quite frankly that's not the big issue on the retail side.

The problem that we and others have on the retail side, Bob, is that sales could be very erratic in both of the big players in that arena, and how they do their order patterns, and internal things that they did.

We are not seeing as far as off the shelf in those customers, the sales trends changing that much.

It is just primarily -- like last year, we were up over 20% in retail in the first quarter, and down double digits -- or 10% or so in the second quarter.

This year, we're down in the first quarter, and we will be up in the second quarter.

Why do you know you're going to be up?

We had -- while the comparables are relatively easy and the orders are coming in.

Okay.

That's what I like to hear.

Okay, I will get off the phone, thanks.

Bob, before you do, let me just make a comment here on sales trends.

Rich, I think we just -- either we released today's sales trends for the quarter, which is our rolling three-month forecast, you might want to update people on what that report says, because that will reflect, Bob, the timing issues on some of these reports.

Just to recap that, this report was followed along with our 8-K that we included with our press release filing earlier this morning, but for Electrical Products and I will give you the trend over the period since the fourth quarter of last year where our electrical products were up 11%.

In January, our business was reported up 12% to 14%, across electrical businesses.

In February, for the 90 days represented by that ending date, we were up 10% to 12%.

And then for the third quarter, as we reported today, we are up 9%.

Similarly, in tools, we're up for the fourth quarter, we were up 4%, progression through the January, February March 90-day reports were to be up 4% to 6%.

And then up 1% to 3% in February 90 days, and up 1% for this reported first quarter.

So, what you're seeing there is pretty solid underlying business, and the progression represents the rate of changes that have taken place in the periods that are coming in, versus the rate of changes in the periods that are dropping off.

Got it.

Thanks.

By the way, Bob, I'm looking forward to seeing all the competition publish the same kind of reports on a monthly basis.

Absolutely.

For your information.

Absolutely.

I agree.

And your next question will come from Deane Dray of Goldman Sachs.

Please proceed.

Thank you.

If we look at the core growth of 5.5% core revenue growth, can you break out how much of that is price and how much is volume?

Overall pricing is in -- around -- probably around the 3%, Deane.

And Terry is, that true for both Electrical Products and Tools?

Or is it mostly Electrical Products?

No, it's about the same in both segments.

Good.

And then if you were to size for us, from a cost of goods sold perspective, the impact of material costs, transportation and energy, how would you distribute those?

Is it 80% of the headwind is material costs?

And how would you put the three percentages there?

I would put material costs north of 80% of the increase.

And clearly, material costs side, we have very good information on.

When you get into things like transportation, it is a lot tougher to draw concrete conclusions on your exact rate of inflation, because there is a lot of mix in that.

By mix, I mean less in truckload, different modes of transportation, so comparative numbers on pure inflation on transportation, we do a fair job of that, but I -- it is a little difficult to get exactness on that.

But transportation is probably somewhere in the 10% of our -- of the total cost.

And then energy, a lot less than that, clearly.

Good.

And then separately, I would be interested in hearing some of your commentary on the health of the commercial construction market.

What do you see beyond just the distribution side to it?

But any color regarding projects, bidding, and so forth?

Deane, this is John.

Let me say this about our performance to date on it.

I think it is pretty much tracked what we thought was going to happen.

I think you will recall in February, we indicated that we thought nonresidential construction, quote "commercial construction," was going to be better in 2005 than it was 2004.

But that the majority of that improvement would be coming in the second half of the year.

Albeit it the first quarter and second quarter improving, but not at an accelerated rate.

I think that is pretty much what we've seen.

All of the indicators that we look at say that it is pretty much tracking that trend.

Said differently, the nonresidential construction numbers are better today than they were three months ago.

They're better three months ago than they were three months before that.

But it certainly isn't an accelerated pace, but very much like what we had planned on.

It is hard to get a read on what happens going forward in these markets, because you don't have a lot of statistical analysis, like mortgage interest rates, and permits and those kinds of things - the detail of permit reporting that you have in the residential construction market.

But we still think the second half will be better than the first half.

The question in our mind will be how much better will it be?

So, we're still pretty comfortable with what we had originally told you about how we thought the market was going to develop, and we think the first quarter sort of represents a pretty good indication of that.

Okay.

Thank you.

And your next question will come from Jeffrey Sprague with Smith Barney.

Please proceed.

Thanks.

Good afternoon.

Hi, Jeff, how are you?

Good.

There were a couple of brief comments about utility.

I'm not sure I caught them all.

But maybe you could just refresh again what happened there in the quarter?

And I'm specifically interested if you're seeing kind of any change in behavior in terms of where the spending is going.

Obviously you're tilted more towards distribution and transmission, but are you seeing signs of life anywhere in transmission projects or is it more distribution MRO driving the business?

I think it is the latter, in terms of it is more distribution MRO.

We're not seeing a whole bunch of increases, or let's put it this way, it is not obvious to us that there is a ground swell of activity on the transition -- the transmission side of that market at this point.

But generally speaking, business has been pretty good, in our power of business.

Terry, I'm not sure whether you or Rich maybe have additional statistics on, that but --

Actually, if you look at the product line sales, Jeff, they're pretty consistent across the range of product lines, with the exception of capacitors, which has been relatively weak.

But a good order book there, so that will probably catch up.

Okay.

And I was just wondering if you could address, kind of your liquidity position.

You know, obviously, you're starting to tiptoe in the water on acquisitions.

But the balance sheet is getting -- you know, improving faster than the deals appear to be materializing.

Any update on what your deal pipeline looks like and thoughts on, you know, more share repurchase if the deals don't materialize?

Well, on the share repurchase side of the equation, what did we say?

We bought roughly 400,000 shares back in the first quarter.

I think you probably could expect that pace to continue going forward.

That would get us in the order of magnitude of at least the creep shares for sure, and so, that's sort of what the game plan is there.

On the acquisition pipeline basis, I would say that the pipeline is certainly the one that we've got is better today than it has been in a while.

Now, you know, what is in the pipeline and what comes to the floor, depends on a lot of things in terms of quality of assets and pricing and so on and so forth, but I'm encouraged with the number of opportunities that we have on the plate right now.

And, obviously, being encouraged is one thing, and doing some good deals at the right prices is another thing, and we will just have to wait and see how time -- how that develops over time.

Jeff, you know, if acquisitions don't materialize as we move forward, clearly we will adjust our capital structure through some additional share repurchases.

And then just one last one from me on -- back on the price and cost dynamics, other than trying to kind of fight this fight to get some of what was maybe left on the table in lighting, are there specific plans for further price increases, even if it is kind of selective product areas over the balance of this year?

Well, I think there are always sort of selective product line price increases within the businesses that are going on all the time.

But -- and I think that will continue, but I'm not quite sure, Terry, I haven't heard of another pending increase, at least at this point in time.

Have you heard anything?

There are a few pending increases that will come out over the next quarter or two, Jeff.

Some of these -- every year, we try historically -- we've raised prices, some of our businesses have already done that, because they traditionally do it the first of the year on price sheet, et cetera.

Other businesses will continue to announce price increases as we move forward.

Some of it is selective, some of it more broad.

I guess there is actually just one last thing.

Any whiff of a little bit of relief anywhere in steel?

And just, can you give us a little bit of color on how your contracts work, if the steel does start to move materially lower, can you realize that as the year progresses, or are we going to have to wait until we renegotiate the contracts for '06?

Well, I have a personal opinion that we will do exactly what the steel companies did.

You know, we have -- unless we have an open purchase order on it.

So, I don't think there is such a thing as a long-term contract with the steel industry.

Today for sure.

Today.

But typically, we enter into commitments with them, typically our contracts allow outs to that.

So typically, we do not end up being in a position where we're -- more than a month or two that we're locked in.

Okay.

Thanks a lot.

Yes, and trending, Jeff, I -- it would have been, what, maybe a month or so ago, I would have suggested to you that the trending on steel was softening a little bit in terms of coming down in the right direction, and I think that generally is true, but I did note a report the other day, I think, that indicated that scrap steel prices had sort of ticked up a little bit.

So, when you see that happening, that's always a little bit of concern, but hopefully that would be an anomaly, and the general trend of sliding down by bits and pieces will continue over the next several months.

It is pretty mixed, Jeff, across the -- you know, different grades of steel, and we have seen some relief in certain grades, but others have continued to increase, so --

Okay.

Thanks a lot.

You're welcome.

Thank you.

And your next question will come from Tony Boase with A.G. Edwards.

Please proceed.

Thanks.

I guess I thought I'd ask this question a little more directly.

You don't see a price war in commercial lighting?

And also, you -- to your knowledge, the commercial construction activity was not softer than what you had anticipated in the first quarter?

I think the answer to the second question is that is exactly what I think we saw.

It wasn't any different than we, at least, anticipated that it would be in the way we were doing our 2005 budget planning.

You know, within reason, you can't be totally precise on that.

But I think that market developed pretty much the way we thought it would develop over that period of time.

So, the real question for us is what happens out 90 days, 180 days, and 270 days.

And time will tell, and we will see how that develops.

On the question of price war, Tony, I don't -- I don't see a lot of benefit into getting into this you said, she said, that kind of stuff, in terms of pricing.

I've been around these markets too long to think that there is such a thing as quote, "a price war," in these markets.

I don't think that is developing and I don't think it has been there.

Now, if you're in a specific product line, are there times when you get into more competitive conditions than perhaps you have seen in the past?

Sure, there are.

But one of the -- I think one of the -- I think a lot of people see this benefit, but I need to sort of remind people all the time, and even our own people, is we're not a single line, product line company.

And we have lots of opportunities, when you get in a situation where you have a specific market or a specific product that gets a little bit more competitive, you have got opportunities to pick up that ball a little bit through your other divisions, and other differences.

And I think that is the beauty of Cooper, is the balance of our product line, and the balance of the markets that we serve in.

So, if somebody wants to get competitive, we can get competitive with them.

If that's what they want to do.

On the other hand, we're not -- our whole future isn't wrapped around one of those markets or one of those product lines, and I think that is a big advantage and a big plus that we have.

Do you think you've got a lower cost manufacturing footprint than your competition?

As best you can determine.

I don't know that I could say that with great specificity -- whatever the word is -- to be real specific about it.

But, I would suggest we've got a pretty good cost structure in most of our businesses, and getting better.

And will get better.

So do I feel competitively disadvantaged today, as we sit today, because of our cost structure?

The answer is absolutely not.

I do not feel competitively disadvantaged.

And I feel that we have an ability and the size and scale and scope, when we get done with things like EBS, and facility sharing between divisions, which we've never done before in the past, that we can maintain that competitive cost position going forward.

Great.

Thanks for your answers.

Thank you.

And your next question will come from Alex Rygiel of Friedman Billings Ramsey.

Please proceed.

Thank you.

I have two questions.

First, Terry, what is your optimal net debt to total cap ratio long term?

And then John, with regards to how the stock has traded over the last week, clearly the market was spooked by one of your competitors talking about the lighting and wiring device business, can you and not to beat a dead horse, but can you generally comment on the market's reaction relative to what you think would have been appropriate or not appropriate?

And then looking down the road, if for one reason or another there is a longer term weakening of the lighting and wire device market, what is the next product line that could be impacted by that?

Terry?

We typically stay in the 35% to 45% debt to total cap. 35% to 40% being more the norm.

Well, that's the answer on the debt to total cap.

I think that is a pretty -- that is pretty consistent with what we've said in the past.

And at least at this point, we're still comfortable with that.

Obviously, we're well under that today.

So we -- as Jeff questioned earlier, we need -- we're going to be doing some thinking about capital structure going forward as the year develops.

The question of the next business that might -- if there is a cycle here, I think you have to look at the company more on that pie chart we show you on the markets that we're in.

And keep in mind that we've got a fair presence in industrial, we've got a fair presence in commercial and residential construction, and then the utility markets, so it is pretty broad-based.

We're not necessarily totally dependent on any one product line or any market.

So, we've got them -- certainly the ability to moderate performance there compared to what you might see from companies that are more sort of single line and/or single market oriented.

So, I feel pretty good about that.

Secondly, you have to remember, a fairly significant part of all of those businesses is in what we would call the MRO or the replacement kind of part of the market, which I think, Rich, you've run some numbers on it, it is upwards of 40%, 50% of those markets.

So, it is a fair stabilizing influence in not only the market, breadth of markets we serve, but also the end user, customer and application of the products we make, and then you lay on top of that, some cyclical influence that you get out of individual product lines themselves, and I think we've got a pretty stable situation.

As I've said before, I don't think this company is cyclical in any sense of the traditional word cyclical.

Is it economically sensitive?

I think all companies are economically sensitive.

But, we've been working very hard over the last four or five, six -- well, for even longer than that, to get out of the real cyclicality of our businesses.

And that is one of the reasons we got out of the oil and gas services businesses, it is one of the reasons we got out of the automotive businesses, apart from low margins, so I think we're pretty well-positioned in terms, of again, this question of being balanced and what you might see out of us versus the competition.

I can't -- on the final question on the market, I can't -- I don't know -- I think generally speaking, generally speaking, in the last 10 days or two weeks, people began to move a little bit away from more of the traditional manufacturing companies.

And we track stock performance I've looked at it -- I've looked at some numbers for the last two years, the last year, the last -- since the beginning of the year, and generally, we've performed on a relative basis pretty damn well.

I think of 16 competitors that we track to, I think we were, for this year alone, while our stock price is down from what it was at year-end 2004, we were probably -- in either number three or four position in terms of performance against the group.

So -- and that's been pretty consistent over the last two or three years.

So, people get a little antsy here or there, but generally speaking, I think we have been able to perform pretty well, and I don't see any reason why we wouldn't be able to continue to perform pretty well.

Great.

Thank you.

I'm going to interject here, this is Richard Bajenski.

We've got time for one more call and we will take that, and then mindful of your time and the busy schedule of earnings announcements, we will thank you all of for your attendance.

But we will take that last call now, Ann Marie.

Thank you, your final question will come from Sates Atoveil (ph) with KSA Capital Partners.

Please proceed.

Good afternoon, John.

How are you?

Pretty good, thank you.

Your cash flow was a little weaker than expected in Q1, your full-year outlook, also, your cash flow to exceed net income in 2005.

Can you outline for us how you expect the cash flow to develop for the remainder of this year?

And where do you see the biggest ring to come from?

Okay.

Thanks.

Terry -- you want to -- you're the cash flow man.

Our trend, if you look at over a number of years, our trend we had this quarter is really not that different than we typically would see in a normal growth environment.

Most of the increase in cash flow over the rest of the year will come from building accruals for customer incentives, as well as employee incentives, which we pay all those out in the first quarter of the year.

And that number, just on customer incentives, is a big number.

And you will see on the cash flow, accounts payable, and accrued liabilities - impact on cash flow was a negative number.

Well, payables was good performance.

Accrued liability is a payout of all those customers incentives as well as the employee incentives.

So, that will build over the year.

Inventory over the year will improve.

So will receivable performance.

Another trend you normally see is in the -- as far as DSOs, they tend to track downward as the year progresses.

So those will be the primary areas the cash flow will come from.

We remain confident that cash flow is going to exceed earnings for the year.

Okay.

And if I can ask a follow-up, your debt to total cap is significantly below your target range for the ratio.

And assuming you meet your target for the cash flow in 2005, it will be even lower than where it is today.

Can you talk to us about the use of cash flow?

Are you going to step up your stock repurchase program here?

Well, number one, I think your model is right.

That is -- and I think we laid that out in February, that said that if we did not do anything between now and year end, in terms of dividend increase, share repurchase, and/or acquisitions, that we would continue to see a more -- even a more rapidly improving debt to total cap ratio net of cash.

So, we're not differing on the model.

The question then becomes what are you going to do with it?

Number one, I think we've made adequate provisions in our forecast for capital expenditures.

I think we're -- I don't remember the number that we've given you, but it is something around 110 to 120.

Somewhere around there --

That's correct.

-- for the year.

And I don't see that getting hugely bigger.

I don't see it getting significantly smaller, either.

So, I think we're covered there.

So that brings you really down to complimentary acquisitions that you can get a decent return on, and share buyback, and I think we've said that we're open to both of those depending on what we see at any given point of time in the year.

And I think the fact that we're continuing to buyback shares on a consistent basis here, would indicate that we're willing to put some money where our mouth is on that.

Now, whether that gets accelerated, will obviously depend on what opportunities are uncovered out of this so-called pipeline that is -- that we all talk about.

And hopefully, we will be able to find some reasonable balance over time between the two.

Okay.

Thank you.

That's it.

Okay.

Thank you, let me just wrap up here by saying that -- thank you for your time and interest.

We really do appreciate this time you spend with us.

And I will remind you that for those who are planning to attend the upcoming Electrical Products Group Conference, I guess it is in Longboat Key Florida, Rich?

I think it is on May 17.

We're on -- we will be happy to be presenting there, and obviously happy to meet with anybody that wants to review what we're talking about or get further clarification of what we're talking about, to the extent that obviously we can in today's world.

So we look forward to seeing you all then.

Thank you.

Ladies and gentlemen, thank you so much for your participation in today's conference.

This does conclude the presentation. [OPERATOR INSTRUCTIONS] Have a nice day.