伊頓 (ETN) 2005 Q2 法說會逐字稿

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

My name is Michele and I 'll be your coordinator for today.

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 call, Mr. Rich Bajenski, Vice President of Investor Relations.

Please proceed, sir.

Thank you, Michele, and good morning to all of our listeners.

This is Richard Bajenski, VP of Investor Relations for Cooper Industries to introduce the earnings conference call.

With me are Kirk Hachigan, President and CEO, and Terry Klebe, Senior Vice President and Chief Financial Officer.

As we begin this call, I remind everybody 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 the important factor's that may affect actual results can be found in the Company's annual report on Form 10(K) and other SEC filings.

In addition, comments made here may include nonGAAP financial measures.

To the extent that these have been anticipated reconciliations of those measures to the most directly comparable GAAP measures are included in our earnings press release and are part of our recently filed 8(K) both of which are accessible on our Web site.

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 use of this presentation may be made without the express written consent of Cooper Industries.

And here to begin our call this morning is Kirk Hachigan, Kirk.

Good morning.

Thank you very much for joining our second quarter 2005 earnings conference call.

I assume that you all have a copy of the 17 pages we posted on our Web site.

This is the first time we've used supporting documents on our conference call.

The purpose is to streamline the communications of relevant information, provide more transparency, and allow more time for Q & A. We'd appreciate your communicating your comments back to Rich on your views, and the effectiveness of this new format ,so that we can make additional changes to improve the overall quality of these calls going forward.

Now let me begin by reviewing the highlights for the quarter.

Solid end markets, favorable pricing and targeted marking programs led to a 7% overall revenue increase.

Electrical, up 9% to 1.10 billion, record quarterly revenues and the first time our electrical group has exceeded $1 billion in revenue in any quarter.

Tools and hardware down 1%.

EPS of $1.02, up 15% from last year, and at the high-end of our guidance.

Net income, up 16% to $97.3 million.

Electrical products return on sales at 14.7%, up 80 basis - points over last year, and our best ross for electrical in over four years.

Tools and hardware return on sales 8.8%, up 180 basis- points, and our year-to-date free cash flow, $138 million, bringing our debt to total capital down to 24% versus 29.8% last year.

The key drivers to our strong second quarter performance were certainly a continued strength in residential and retail construction, industrial demand, utilities spending, price realization, and great execution on our productivity programs.

On the negative side nonresidential project construction was slow, European demand is still slow on the construction sight for both Germany and Benelux, we saw cost inflation in copper, aluminum, electrical steel, resins and transportation.

We rolled out EPS at our largest division lighting.

May one.

And we lost some productivity and had some service issues associated with that roll-out.

Our automotive assembly business demand was down.

The power tools business was down double-digit revenue for the quarter.

And we saw additional SG&A pressure up 50 basis- points over last year, which we will discuss in more detail later in the call.

In summary, the pluses certainly outweigh the negatives, and our strong second quarter results certainly reflect the benefits of solid market conditions, moderating inflation, while having implemented aggressive pricing actions.

And the teams focus in execution on our five key initiatives.

The Cooper connection, globalization, productivity, strategic sourcing, and our enterprise business systems.

Obviously we are very pleased with our performance for the first half of 2005.

Now let me turn it over to Terry for more details on the quarterly results.

Thanks, Kirk.

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

On slide four you will note that our free cash flow for the first six months of 2005 was $138 million, compared to $188 million for the first six months of 2004.

For the second quarter we generated free cash flow of $137 million, compared to $130 million -- $139 million in last year's second quarter.

Free cash flow is tracking close to our annual plan for 2005 and we're on track to generate free cash flow in excess of net income for the year.

Our balance sheet remains in great shape and continues to strengthen with our debt -- net debt to total capitalization at 24% on June 30.

We have considerable fire power to invest in growth, buy back shares, and continue to pay a healthy dividend.

Turning to slide five.

Our inventory turns improved to 5.8 turns from 5.4 turns in 2004s first half.

The dollar investment in inventories impact by the increased material cost compared to a year ago, as well as, the impact of about 9 million from acquisitions and the consolidating of a contract manufacturing joint venture when we took over operation and ownership.

We expect our productivity programs to continue to improve our inventory turns throughout the remainder of the year.

On receivables, our days sales outstanding were flat compared to the 2004 second quarter.

Operating working capital turns improved to 4.5 turns compared to 4.4 turns in 2004 with continued opportunities being capitalized on for improvement.

On slide six, our capital expenditures are up 23% for the first half of 2005.

Compared to the first half of 2004 at 48 million.

Capital expenditures for the quarter totaled 28 million compared to 20 million in last year's second quarter.

In June we opened our Thomas A. Edison Research and Development Center in China and 170,000 square feet of manufacturing office space.

We held an Executive meeting with division presidents and the corporate management team at the new facility.

We already have over 200 employees occupying the R&D sourcing and administrative officers space and the factories will be fully utilized over the next few months as we consolidate and add products to serve the China market.

Capital expenditure forecasts for the year remain at 110 to 120 million, driven by the implementation of our enterprise business system, new products and capacity expansion projects.

Year-to-date we purchased 1.1 million shares of common stock against the issuance of 1.2 million shares for stock option exercises, matches to our 401K, and other stock programs.

During the second quarter we purchased 733,000 shares and are now close to matching the year-to-date issuance.

As we have previously indicated at a minimum we expect to purchase the dilution resulting from stock issuance.

Depending on cash forecasts for investments in acquisitions, debt repayments, and other purposes, we may purchase additional shares under our current five million shares Board authorization as the year progresses.

During the first half of 2005, we've repaid debt of $118 million.

We have close to $600 million of debt maturing in the second half of the year and are in process of evaluating the refinancing of a portion of our Euro debt issuance. e will use available cash to repay the portion of the Euro debt not refinanced and the U.S. note maturities.

We currently put in place -- we recently put in place a commercial paper program, where we have bank credit lines of $500 million to back up issuance, and we'll use commercial paper issuance as needed for seasonal fluctuations as well as part of our longer term debt profile.

Now turning to the results for the second quarter and slide seven.

For the second quarter our earnings per share were at the top end of the forecast we provided in April.

At this point I'd like to point out that we've had more than two years where our performance has been in excess or at the high-end of our quarterly internal forecast and guidance to our investors.

As Kirk mentioned, we reported earnings per share of $1.02 for the second quarter and our revenue increase of 7.2%.

Currency translation contributed about 1% to the overall revenue growth.

On slide eight our overall cost of sales as a percentage of revenue improved 140 basis points resulting in gross margin increasing to 31.5% from 30.1% in last year's second quarter.

Realization of price increases and continually -- continued operational improvements, more than offset pressures from commodity cost increases.

Sales mix I would characterize as average overall against tough comparables in last year's second quarter.

In last year's second quarter we had weak retail sales and very strong sales through distribution into the industrial and commercial markets.

As expected material transportation and energy related cost inflation continued to create challenges throughout the second quarter.

Overall our sales price realization approximated material transportation and energy cost increased.

Selling General Administrative for the quarter as a percent of sales was 19.6% compared to 19.1 in the prior year second 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 percent of sales.

During the second quarter we did incur costs related to the CEO transition and the strengthening of our Executive Management team with the addition of an Executive Vice President for the Cooper Connection Division and a Senior Vice President of Business Development.

I will address actions we are in the process of executing to capitalize on the investments we have made and are making to realize selling and administrative productivity later in the presentation.

Turning to slide nine.

Solid execution on revenue and cost initiatives while continuing to invest in our company-wide initiatives and great execution of cross our businesses and price realization drove a 16% increase in operating income and our operating margin up 90 basis- points to 11.9% compared to the prior year second quarter.

Continuing to slide ten on net interest expense our tax rate and net income.

Our net interest expense increased over the prior year driven by the impact of the increase in short term interest rates on our floating rate debt, partially offset by increased earning on and a higher cash balance.

Our major debt repayments will occur late in the third quarter in October.

Therefore, we will experience higher interest expense through the October time frame.

Our effective income tax rate remains at 21.5% during the second quarter.

The actual rate for 2005 will be determined by the level of our earnings and the jurisdictions in which the earnings are taxable as the year progresses.

Overall, even with some challenges and increased cost in the quarter, our net income increased 16% on a 7% revenue increase.

Turning to the segments in slide eleven, for the quarter our electrical product segment revenues increased 9% compared to the prior year with currency translation contributing approximately 1% and with a small contribution from acquisitions.

Electrical sales started out the quarter with a slow April after a strong finish for the first quarter and ended the quarter with both a strong May and June.

Electrical products cost of sales improved 100 basis- points from the prior year to 68.1%, partially offset by an increase in selling and administrative of 40 basis points.

Our electrical businesses achieved adequate pricing to offset material costs, transportation and energy cost increases.

Our investments in international and other sales and marketing activities have been exceeding our Selling General Administrative cost productivity realization.

We have been taking actions to further realize the benefits from our enterprise business system implementation in centralizing transactional processes as well as other initiatives, and we expect to begin delivery to leverage SG&A later this year and in 2006.

Overall electrical product segment earnings increased to 14.5% and return on sales increased 80 basis- points to 14.7% from 13.9% in the second quarter of 2004.

Turning to slide twelve, on revenue trends in Electrical Product segment.

If you recall last year we had a very strong revenue growth in retail in the first quarter followed by slightly in excess of a 10% retail sales decline in the second quarter of 2004.

Offsetting this weakness in the retail channel in the second quarter of 2004 electrical distribution sales were up 14 to 15%.

Clearly last year we saw our electrical distribution sales beginning to reflect the industrial spending and our distribution partner stocking products in a more normal level.

As you would expect this dynamic had an impact on the revenue growth profiles in the second quarter of 2005.

That being said in the second quarter of this year retail sales were up over 20% against an easy comparison with the prior year, and distribution sales still showed a very solid revenue increase with sales up around 6% against the strong performance in last year's second quarter.

Industrial markets remain solid, and residential and light commercial construction markets continued at a high level of activity.

While light commercial activity remained strong, nonresidential markets have yet to show sustainable growth.

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

Overall the electrical sales mix trended toward normal with the impact of higher growth in retail offset by the strong growth in distribution in our higher margin product lines.

Excluding translation, U.S. and Canada had solid growth over the prior year.

Sales to Western European customers were strong but below the U.S. and Canada growth rates.

Europe overall did quite well considering the sluggish economies in a number of countries.

Sales to customers in the rest of the world increased nicely with strong project business activities, especially in the energy sector.

Turning to the tool segment on slide 13, in our tools business sales declined 1% with currency translation contributing in excess of 2% of sales.

We continue to see solid revenue growth in hand tools with retail industrial sales increasing in the high single digits.

However, shipments of assembly equipment were down 9 million.

We continue to experience slow activity in an unacceptable pricing environment for assembly equipment and expect weak performance in this area for the remainder of the year.

Tools cost of sales in the second quarter was 70.4%.

This was an improvement of 280 basis - points from the prior year partially offset by 100 basis- point increase in selling and administrative expenses as a percent of sales.

Our tool businesses have also achieved adequate price to go offset material cost, transportation, and energy cost increases.

Tools operating earnings increased 25.4% on a sales decline driven by realization of price, cost productivity ,and favorable sales mix.

As a result our tools operating margin, as a percentage of the sales, improved 180 basis- points to 8.8%.

Turning to slide 14.

As I mentioned, hand tool retail industrial channel sales increased in the high single digits year over year.

Industrial power tool sales in North America were weak compared to the prior year quarter offsetting the sales growth in Europe and the assembly equipments were down 9 million from the prior year quarter.

Excluding translation, tools, U.S. and Canada sales were weak driven by industrial power tool sales.

Europe declined significantly driven by the lower assembly equipment sales partially offset by higher hand tool, industrial power tool sales.

The rest of the world was up strongly as a result of increased penetration and strong activity in most markets.

From a segment reporting perspective for the second quarter of 2005, we reported $22.4 million in general Corporate and other expense compared to $19.9 million in the comparable quarter of 2004.

As I have mentioned in the discussion of selling, general and administrative expense, the build out of our Executive Management team and the management transition of the CEO increased our stock based compensation and other corporate costs.

This as well as increased audit, Sarbanes-Oxley compliance costs, accounted for substantially all of the increase. 2005 does reflect the third year of our expensing all stock based compensation.

As substantially all of our stock based compensation has a three-year or less investing at the end of 2005 we will have the 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.

Stock based compensation expense increased 3 million over the amount reported in the second quarter of 2004.

Before turning the conference call back to Kirk I will provide you with the details of our forecast for the remainder of the year.

Turning to slide 15.

We are raising our forecast for the year exclusive of the additional costs that will be incurred in the third and fourth quarter.

If we are not taking the SG&A and other productivity actions in the third and fourth quarter we would be increasing our full year guidance to 405 to 415.

Our current outlook for 2005 earnings per share is $3.95 to $4.05, inclusive of seven to ten cents per share of cost we expect to incur in the third and fourth quarter.

As we have mentioned in the past we continually incur cost as we relocate product lines, outsource, and take down facilities in high cost countries.

As we indicated we will continue to communicate the impact of actions we take that impact a quarter or a year beyond the normal level of activity.

As Kirk indicated at the EP G. conference we were evaluating the corporate structure and function and have completed that evaluation.

In July we began implementing actions to combine certain corporate functions and drive efficiency made possible by the investments we are making and have made over the past two years.

Our actions are across the businesses and will impact production support as well as Selling, General and Administrative.

For the second half of 2005, the cost of these actions net of savings realized from the actions will be seven to ten cents per share.

As I mentioned we began the implementation of the actions and we will realize some of that savings during the second half of the year.

The carry over benefit into 2006, inclusive of the incremental cost from staff additions, from organizational structure changes, should be north of ten cents per share.

Clearly part of our intention is to get this behind us and position us as we move into 2006.

The forecast that I will provide includes the impact of these actions in the guidance.

For the year, our overall revenue forecast is unchanged from our previous forecast.

Revenues are expected to increase 5% to 7% including currency translation.

We now expect currency translations to be slightly negative in the second half of the year.

In addition the year over year impact of pricing in the second half of the year will be less of a contributor to revenue growth.

For electrical product segment our outlook is unchanged with revenues increasing 6% to 8% and return on sales of 14.5% plus or minus.

We are forecasting tools revenues to be flat for the year; primarily resulting from lower orders and backlog in the assembly equipment business.

Our return on sales for tools is forecast to be in the eight to 10%.

General, Corporate and Other expense is forecast to be 86 to 88 million reflecting the increase in stock based compensation and the addition of Senior Executives to the Corporate Team and other costs of the actions we are taking.

Net interest expense is anticipated to be 66 to 69 million range and our effective income tax rate is expected to be in the 21 to 22% range.

We currently anticipate diluted shares to average approximately 96 million shares and capital expenditures are anticipated to be in the 110 to 120 million range for 2005.

And for the fifth year in a row our free cash flow is forecast to exceed our earning for the year.

For the third quarter earnings per share are projected to be 1 dollar to $1.05 per share with average diluted share of 96 million plus or minus.

The forecast is inclusive of four cents to six cents per share of cost from our SG&A and other productivity actions.

That concludes my comments on the details of our guidance and I will turn the conference call back to Kirk for some overall comments on our outlook.

The key drivers to our second half outlook are slow but steadily improving economy.

GDP growth between 2.5 and 3.5%, continued jobs creation, durable good orders that remain positive, residential and retail businesses remaining stable, capacity utilitizations between 78 and 80% and market pricing remaining positive.

On a side note, it's not just the manufacturers in our industry that are benefiting from the recent positive price increases.

A recent report by the NAED, National Association of Electrical Distributors, indicated that electrical distributors profit margins are up for the last three years and 2005 are the highest profit levels since 1997.

On the negative side nonresidential project, we don't expect to rebound until early '06.

Commodity prices continue to provide a modest head wind.

European demand is still a concern with the stronger dollar.

We are putting two more businesses on the EPS system between now and the end of the year.

The power tools turn around has been addressed ,while the changes have been made we don't see substantial benefits into early '06.

And a realign of our SG&A.

Addressing the issue in the third and fourth quarter with the full benefits coming in 2006.

In summary, we had a great quarter and we are optimistic for the remainder of 2005.

We believe that general market conditions remain solid for the balance of the year.

Our industrial businesses, 35% of our sales are mid cycle, residential retail, 19% remain strong, a commercial utility, 42% of our sales could provide further upside in 2005 and '06.

Electrical products delivered a very strong quarter, revenue up nine, again exceeding $1 billion for the first time in our history and our return on sales at 14.7% the best in four years.

Our free cash flow is on track to exceed net income providing strategic flexibility and growth, margin improvement and cash flow initiatives are delivering strong results.

And lastly we are aggressively attacking the SG&A productivity.

Our improved outlook is reflected in the higher guidance for the full year.

Before I open it up for questions let me turn it back to Terry for a quick update on asbestos.

Thanks, Kirk.

Let me start out with some statistics.

During the quarter we had 1,756 new claims filed and resolved 6,931 claims.

Our claims outstanding as of June 30, 2005 totaled 41,679, compared to 46,854 claims outstanding at March 31, 2005; and 59,599 claims outstanding at the end of June, 2004.

We continue to see progress at the state level on limiting cases to individuals with actual medical conditions allegedly caused by asbestos.

Which we believe has been beneficial in reducing new claims.

The average indemnity payment as of June 30 was $2,130, compared to $1,911 at year end 2004, and $2,143 at June 30, 2004.

We continue to focus on the defense or settlement of the more serious meso and lung cancer cases and consistent with the favorable legislative development in a number of states defend against the weaker claims.

In the second quarter we cleared out a number of the Madison county meso cases that have been settled in prior periods and that were set for trial in 2005.

Our insurance collections were nominal in the quarter.

We have a number of insurance carriers where we are getting close to reaching agreement and are actively pursuing agreements with other parties that have access to insurance which ultimately will result in collection of insurance proceeds for claims that have been paid.

In this regard I'll remind everyone that as disclosed in our SEC filings due to our liability arising from the contractual obligation under the bankruptcy laws triggered by Federal mobile bankruptcy, we account for our liability net of insurance and only record insurance recoveries when the cash is received.

This is unique to our situation and will not change unless we are unable to reach resolution within the Federal mobile 524 G. trust.

In that event we would have to record insurance receivable and our liability on our balance sheet.

One comment on this is that over the past year or so the accounting and reporting for asbestos liability and insurance recoveries has become very diverse and at this point you have to question what the SEC and GAAP would require.

On the Federal mobile front I do not have much to report.

We've had additional discussions with the representatives of current and future claimants regarding Cooper's possible participation in the Federal mobile 524 G. trust fund,but to date we have been unable to reach a mutual agreement with the parties.

Clearly our preference remains that we participate in the Federal mobile 524 G. trust at a reasonable cost.

There are numerous issues yet to be resolved relating to our claims against the bankrupt state and other matters and as is typical in these situations, there's rarely much movement until close to the end.

On the Washington front, while there's been some progress and the Bill has been sent to the Senate floor there remains significant uncertainty in the form of a final bill.

Let me now turn the conference call back to Rich.

Well, thank you, Kirk and Terry.

The operator will now given instructions on the procedure for asking questions.

We will take questions for a short period of time and then let you all get on to other calls and announcements during this busy earnings season.

Operator?

[OPERATOR INSTRUCTIONS].

Gentleman our first question was on the line of Bob Cornell of Lehman Brothers.

Please proceed.

Good morning, everybody.

One of the Company's announced yesterday talked about a progression through the quarter that June was the strongest month of the quarter and even though they didn't see a recovery that they defined explicitly they talked about the nonrez market being strong in June.

What do you guys see in that regard.

I think the same type, I think Terry addressed it, he said that basically we were a little concerned at the end of April, Bob, but the industrial businesses certainly gained strength both in May and June.

I guess the price increase that got put through in lighting is that sticking?

Like I say, some company's have suggested that's goes to boost margins in lighting the second half of the year.

Do you see that happening.

Bob, in our electrical group it's much more than just lighting.

I think that's one of the strengths is the breath and diversity.

We've been pretty consistent on pricing across all of our businesses across all the segments.

I don't think lighting is any exception to that.

But we have followed the trends in the industry and have gone up and tried to lead up in that situation.

So I'm optimistic that it will continue.

It's a bigger picture comment on the pricing.

At one point you guys thought you'd get sufficient price to have price ahead of cost in the second half of this year.

It sounds like that's not quite the case.

In the one point, I think you said you were at parity and in your concluding comments, Kirk, you said there was still commodity cost, where are you, are you at parity and are you going to be better than parity in the second half or at a deficit.

Bob, this is Terry Klebe.

Let me answer that.

We definitely were at parity in the second quarter.

We expect that to increase or at least stay flat in the third and fourth quarter.

There still is year over year price increases on the material cost side.

A lot of that today being influenced by energy as well as transportation costs.

But third and fourth quarter we clearly will at least maintain parity on recovering, not just material costs, but transportation as well as energy costs.

Final question, will you flush out the SG&A take out comments, the four to seven cents, what's really going on there and how much is the, maybe just give us a little more insight, what you're doing and why.

I will start out by saying we have a new CEO who has some different views on how we should operate as a corporate function.

So what we're doing is combining certain functions in the corporate office, taking out some people, and quite frankly our lease will be up in this space, you'll see us taking further cost out in the future as we move out of this location and in some more modest headquarters locations.

The big thing is just looking at different way perspective on how we operate the corporate function, take out some of the headcount and ,as I mentioned. our SG&A pressure is not just corporate, it's again across the divisions and we have SG&A as a percent of sales has not been leveraged in either of our segments, either.

ob, the challenge always on something like that is -- you hate pollute or tarnish a very, very good year, and so you delay something like that you step right into it and for leadership purposes, and as Terry said in his comments to get that behind us quickly, the management team decided to step into that in July.

Okay.

I got it.

Thanks.

Our next question comes from the line of Don McDougall of Banc of America Securities.

Please proceed.

Good afternoon, everyone.

Hello, Don.

A question on the restructuring, I'm sorry if I missed this, but can you give us a sense for what the pay back on that cost is going to be and how much falls into this year and how much falls into next year?

It's Terry, Don.

We'll end up getting somewhere in the 25, 35% of the savings side of it in the back half of 2005.

That's partially driven by the fact that we've already taken a bunch of those actions here in July.

As we move into 2006 we should get around 10 cents plus per share benefit.

That's net of the incremental cost we've put in place on the executive team here, as well as a couple other structural changes.

And the cash out for this program.

Net of the savings it should be -- should track the EPS pretty close.

Okay.

Jumping over to the nonrez commentary, Kirk, you had said, kind of looking more at early 2006.

Can you give us a sense for what that is based on is that how you see your pipeline of business evolving?

Yes, Don.

It's based on both quotation activity although that has been strong for awhile now.

But, the other thing we look for, there's of three packages to an electrical job.

There is the infrastructure piece that generally gets bid and quoted early.

One of the large manufacturers made comments earlier in the week that they are seeing that business picking up and we're more optimistic there.

The second piece is the lighting package and then the third piece is the flow goods package, which generally happens in that sequence.

So, based on those comments and based on what we've seen in the marketplace we are somewhat optimistic that's going to pick up.

Again we thought it would pick up in the back half of '05 and now we pushed that back another six months.

One final one.

You mentioned that you are maintaining your full year sales targets.

You are going to get maybe a little bit less benefit from price in the second half which obviously implies that volumes are a little bit better.

But I'm curious on the pricing, is that because raw materials, you're anticipating are going to be, maybe down a little bit in the second half?

And what's the driver on maybe volumes coming in a little bit better?

Don, just a progression.

If you look at last year on the price increases that were implemented last year they really picked up speed in the second, third and fourth quarter.

So the impact of that year over year, as we look quarter to quarter, is much less in the second half of the year.

There is still price increases being implemented across the, all of our channels, but the impact year over year becomes less of a number as you move forward.

So with that as well as translation being a negative you're absolutely right we do see some volumes picking up a little bit in the second half of the year.

And the source of that volume, upside.

The strength we've been seeing in the industrial markets as well as in the commercial markets and as Kirk said that's not necessarily driven by the big projects but the light commercial remains pretty healthy.

And utility and energy as well, Don, I would agree with both of those as well.

Just a related question, this was my last one.

With respect to pricing and raw materials have you guys crossed over or when do you anticipate you cross over with respect to recooping more than you've given up on the raw material side?

Well, ideally I would like to start seeing that in the third and fourth quarter.

It really depends a lot on what happens out in the marketplace.

Now we've seen steel costs come down.

Of course that's been offset by copper and some other commodity prices especially petroleum based product prices going up so you still have significant cost inflation out there and the real question is, can you keep the prices up as certain commodities go down.

That's why we're a big proponent of prices, if they do start coming down on the commodity's side, they come down slowly, big drops are not good.

Thank you.

Nice quarter.

Thanks.

Our next question comes from the line of Deane Dray of Goldman Sachs.

Please proceed.

Thank you very much.

On the point on the EBS roll-out bump that you hit in lighting can you give us some more color there, quantify what lost business you might have incurred in productivity issues, and then what does that suggest about what may or may not be in way of execution issues as you do the rest of the roll-out.

This is Terry.

The -- every implementation we do there's some little glitches in it and a lot of training and other activities you go through and you always no matter how good you do it you are going to lose some productivity on it.

Lighting is a difficult business to implement because they do a lot of make to order type business.

So as you go through the implementation and put in new systems processes you are always going to have some service issues as you work through that.

And we had those issues in the May time frame and really by the ends of June we were getting pretty caught up on that, pretty good shape.

SO, within 60 days we recovered some.

Did we lose some sales?

Possibly.

Just not being able to ship as faster as we'd like or the customer would like but the lighting business came in through the quarter pretty good shape.

So I would say, have to say it wasn't detrimental to our results or the profit side of it.

What's that mean for the next part of the roll-out?

Well, every one of them we do we will have some productivity lost in the first period we do that.

We always try and do the implementations early in the quarter and you've probably seen we don't do any major implementations in the last month of a quarter.

So we can recover nicely within the next 30 days.

Okay.

If I can just switch back to the nonresidential construction comments incurred , what's interesting, if you read your press release it sounds a lot more dower, I mean you used the word depressed in terms of the commercial construction market, but in the call here you actually made some points about the larger projects that bid and quote activity being strong.

At what point do you see the bid activity begin to turn into actual orders?

And what's your expectation that it's going to be not occur until '06?

And then what might be disrupting this?

Is this the raw material cost impacting the big projects?

Yeah, Deane, we've been trying to forecast this for awhile now and again like I said when we originally laid out our budgets we thought residential would be down a bit this year and commercial construction would pick back up and there would be offsetting.

I think the answer is we had a tremendous quarter and a tremendous six months despite that still being slow.

And that is again because of our breath and depth in some of these other areas.

It's hard to project exactly when that's going to come back.

Lightly did not carry the day in our electrical group in the quarter.

So again it goes to the strength and breath of these businesses in that electrical package that we could have the kind of quarter we did despite that not hitting on all cylinders.

So that would be my comment.

Okay.

Just very quickly.

What was the organic growth for the two segments and in total?

This is Terry.

While we had about two to 3% price and that's consistent across both segments.

And translation ran right around 1%.

That's the same for both?

Yes.

Okay.

Thank you.

I'm sorry, Deane.

The translation was higher in tools.

It was 1% overall.

About 1% in electrical, a little bit over two in tools.

Got it.

Thank you.

Our next question comes from the line of Scott Davis from Morgan Stanley.

Please proceed.

Thanks.

Good afternoon, I guess slash morning for you guys.

I did want to comment, thanks for putting together the slide presentations.

That helps, I think versus prior quarters.

My question really relates to all the cash that you're generating and your balance sheet.

I think when you were in town, Kirk, for the meeting several months ago you really talked about having a pretty large acquisition pipeline and getting back into the acquisition game.

I don't think we've seen any announcements from you folks so maybe we can get a little bit of an update on how that pipeline sits now and your confidence on being able to close transactions this year.

Yes.

As you know we hired a Senior Vice President of Business Development.

In May we talked about that while we were down at EPG.

He's had a chance to come on board.

Obviously where you start in that process is of having him spend time with the divisions, and learn the different product segments and where we compete, and how we go to market.

We've looked at a lot of deals.

To be honest with you some of the them we just couldn't get comfortable with the pricing at all.

The numbers just couldn't work for us even though we're a strategic buyer.

So we still have a large pipeline.

We are still pushing those through.

And we will be disciplined.

We have a very tight criteria on return on invested capital and a number of other criteria that we look at before we decide to go forward but we are still optimistic that we can continue to buy around the platforms we have and go forward on bolt on and adjacent acquisitions.

I guess a natural follow on to that question would be to talk about the other side of the equation and as steel multiples are reasonably high you have a tools business that could be arguably noncore.

And there's been a lot of consolidation in the space.

So maybe two questions here, one, what are your thoughts in regard to potentially taking advantage of the marketplace and seeing what you can get for the tools business?

And second, how does the recent deals that were announced, for example the recent Stanley works deals, did these transactions impact you at all competitively.

On the tools question as I've described in the past we like our tools businesses.

It's got a big international presence.

There is technology with the industrial power tools, the Weller and some of the assembly and sparers businesses.

We take advantage of leveling the channel with our electrical side.

And we are optimistic that there's still opportunity both on the income cash flow and on the balance sheet side of both of those businesses.

As we've talked about we've been making management changes and thing to get those businesses up in the -- and the margins have been marching up and cash flow has been marching up.

They also provide overall scale and leverage on our strategic forcing and globalization initiatives and today, Scott, they are about 15% of our total revenues.

So we're not necessarily interested in getting any smaller and we're trying to leverage up our scale around the world.

The recent acquisition in Europe we are not a big hand tool player in Europe so it really isn't of much consequence to us at all on the competitive side.

We don't really compete in the same space and so it was interesting to read through.

I was a little surprised at the reaction on the Stanley side but by and large we don't really see them in the marketplace.

Okay.

That's great.

Thanks, guys.

Our next question comes from the line of Nicole Parent of CSFB.

Please proceed.

Kirk, I was just wondering, you had mentioned lighting didn't carry the day in the quarter.

You talked about revenue trends by channels, I'm wondering if you can quantify a little bit in terms of what you mean by solid or continued growth by business line and also geographically?

Well, I mean just the comment, we generally don't want to be pulling out different pieces of our electrical group and talking about them separately.

We do talk about the ends markets.

We tell you the percentage of sales, we give you conditions of the end markets but in the quarter when it's relevant we will talk about them, both good and bad.

And lighting because it is somewhat tied to the nonresidential.

Now again you have to be careful because when you talk about the halo side of the market, when you talk about the retail side of the market it's a very different picture.

But, by and large it was not one of the best performing businesses in the electrical group this quarter.

Revenue was up low single digits and margins were just slightly better than the previous year.

Okay.

I'm not sure if I missed the second part of your question.

No, I think it was more along the line of which were the businesses that you saw the most strength in the quarter.

I think I will just end my comments there, I don't want to drill down piece to piece.

As we said the industrial businesses were very strong, energy, utility, we saw residential being vert strong as well.

Okay.

I guess one last question, Terry mentioned some of the new hires that have been added to the company in the past couple of quarters.

Do you feel like you have all the players on the field to move forward?

The last one that we have to do and it's not the last, but the one we have right in front of us is the President of Busman.

We moved Mike [Stutsall] over to Power Systems as you know at the end of last year and January of this year and we are within weeks of closing on a candidate.

We 're down to two candidates there.

So, I think we'll announce something relatively shortly there.

By and large you are never done, Nicole.

You are always working through these issues.

I think by and large we are in pretty good shape.

Great.

I guess one big picture question in terms of the strength of the electrical margins in the quarter, do you, I guess do you take a relook, you've upped the restructuring based on what you think needs to happen?

As you look forward in terms of what the underlying potential of the businesses are if revenues continue to grow at a nice prejectory is there anything fundamentally that would give you some pause in terms of being able to achieve significant margin upside?

Nicole, we went back and looked at '99 and 2000 and as you know the electrical was around 17% the tools and hardware, that 11 to 13% range.

With a steady GDP a good industrial market, modest inflation, and good pricing discipline, and we execute on the productivity and sourcing program, we think we can get back into those kind of the ranges.

And so when we meet in February, we ought to be giving you more details around those kinds of targets.

But I think one of the mistakes we probably made way back when is giving you this 15 percent, 10% target.

We don't talk about targets like that internally.

When our businesses come up for strategies for the three-year look, they certainly don't relate back to those and we don't try to back into anything near a 15% kind of a margin percent.

Great.

That you.

Our next question comes from the line of Alex Rygiel of Friedman Billings Ramsey.

Please proceed.

Thank you very much.

With regards to your power systems business you referenced it was up high single digits.

Can you break out what the price and volume mix was as well, provide a little bit more color with regards to the outlook for the power segment?

I won't get into specific numbers by business unit but pricing was probably close to around half of volume half if I had to guess or, I don't have it in front of me here.

Pricing has been strong there because of the material content in certain products.

And other products don't have as much content and there clearly is left in case.

The sales profile of that business during the quarter was on the international side, we had a little slower sales against some very tough comparables in the prior year.

Domestically volume was up very nicely.

Thank you.

Great.

This is Rich Bajenski, we will take one more question here and then release you for the day.

Our last question comes from, is a follow-up question from the line of Bob Cornell from Lehman Brothers.

Please proceed.

Yes.

Going back I think Terry went over the asbestos issue and made a number of comments.

I mean, did you say that you did not get any insurance collections in this quarter?

How are the insurance collections running relative to expectations?

Well, what I said, Bob, is they were nominal amounts and by nominal I mean significantly less than 1 million.

We had, in the insurance collections this year have been slow.

We have a number of policies that are just being triggered at the next layer

.So what are you trying to say?

It sounds to me like what you are trying to say is obviously you are making a lot of head way on the actual claims and the cost per claim then type of thing but the insurance collections sounds like they are a bit of a puzzle or a problem.

Well,more of a requiring actions to get them done, Bob.

They are not really a problem.

Ultimately we will get the insurance.

We have access to the policies, et cetera, just takes time sometimes and the timing takes longer than would you expect and quite frankly we would like to get some of this ducks in a row and start collecting on the policies.

Then you mentioned the potential to change the accounting to reflect a liability and receivable?

I mean what would be the size of those numbers.

Are they in the $300 million range?

Am I thing correct yes.

Historically we have carried a net on it and we've got a economist who is running those numbers for us now as a matter of fact, an insurance expert helping on the insurance side on it.

The issue, t the issue is, companies are all over the place on what kind of numbers they are putting out there, how many years they are going out and number of other thing also really been in turmoil from what I can see in the last 12 months or so we're calling in some of the troops on how that would be addressed if we end up going that way which is clearly not our preference.

Our preference remains to try to get the settlement isn't a cash payment, payment over time in the 524 G trust.

Thanks.

Thank you all.

Before we close out this call for the day let me turn this over to Kirk Hachigan for concluding remarks.

I would like to thank everyone for joining us today.As we continue to see strong ends markets for the majority of our businesses and we are well-positioned with the right customers and write channels around the world.

We made right strategic invests in new products, technology and people to continue to deliver expirer results for both our customers and our shareholder also.

Thank you very much.

Thank you are for your participation in today's conference.

This does conclude your presentation.

You may now disconnect.