伊頓 (ETN) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2006 Cooper Industries, Ltd. earnings conference call.

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

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

We will be conducting a question-and-answer session towards the end of this presentation.

If at any time during the call you require assistance, please key star followed by zero and a coordinator will be happy to assist you.

I would now like to turn the call over to Mr. John Breed.

Please proceed, sir.

Good morning and welcome to our first quarter earnings conference call.

This is John Breed, Cooper's Director of Media Relations.

Rich Bajenski, who was Cooper's Vice President of Investor Relations recently accepted a similar position at another company.

As a result, I'll be conducting today's call.

With me is Kirk Hachigian, Cooper's Chairman and Chief Executive Officer, and Terry Klebe, Senior Vice President and Chief Financial Officer.

As mentioned in our press release, we've posted a set of exhibits on our Web site related to the quarter's earnings.

We will be referring to those exhibits during the call.

They may be viewed or downloaded from the Investor Center section of cooperindustries.com under the tab marked "Management Presentations."

Before we proceed, let me remind everyone that [inaudible] 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 they have been anticipated.

Reconciliations of those measures to the post directly comparable GAAP measures are included in our press release.

Now, let me turn the call over to Kirk Hachigian.

Good morning.

I assume you've all had a chance to access our exhibits that have been posted on our Web site.

As most of you may not be aware, but today is actually my five-year anniversary with Cooper Industries.

And I cannot think of a more gratifying way to celebrate five years with such an outstanding organization than with the results that we just posted in the first quarter.

I'm referring now to Slide Number 2.

Overall our revenue was up 8% for the quarter, nearly all of that core growth.

The negative impact of FX was offset by acquisitions.

It's our best core growth rate in over 10 years, Electrical up 10, Tools up two.

We continue to see broad-base strength in all of our end markets, three of the four expanding, and residential roughly flat.

Earnings per share of $1.14 are up 24% from the first quarter of 2005, net income up 23% to $108 million.

Strong leverage on incremental volume, mix, productivity, lower interest expense, and a lower share count all contributed to the strong earnings growth.

Electrical Products return on sales was at 15.1%, up 110 basis points, Tools return on sales was at 9.6%, up 130 basis points.

So not only strong organic growth but profitable growth.

The first quarter free cash flow was $9 million putting us on track for our sixth consecutive year of free cash flow exceeding net income.

The key drivers to the quarter were industrial demand, factory utilization at 81.3%, the highest level in six years, and strong industrial production, improving commercial construction, lower vacancy rates and warmer weather, strong utility spending.

Some of this may be in advance of predicted or anticipated summer storms, strong global energy infrastructure, oil and gas and mining, and solid productivity in MVP programs leveraging higher volume to deliver accelerated productivity.

Issues for the quarter were a modestly negative foreign change of 7/10th of a point, margin pressure from continued commodity pricing pressure, copper now up over $3, oil over $70, continued expected to see higher pressure in the back half of this year.

And our customer service rates, while improving, still not at expected levels.

On Slide Number 4 now for Electrical Products we had five businesses with revenue in excess of 10% growth.

Cooper B-Line, Cooper Bussmann, Cooper Crouse-Hinds, Cooper Power Systems and Cooper Wiring Devices.

Cooper Lighting and Cooper Menvier in local currency had revenue growth in mid to low single digits.

Electrical retail was up double digits driven primarily by Wiring Devices with new products and new store sets at Lowes.

Utility demand was up very strong for the quarter with orders well in excess of shipments.

And again, we think some of this may be pre-storm related inventory stocking.

Electrical revenue from developing markets was up over 20%, albeit on a small revenue base of only $100 million in the quarter, but this clearly demonstrates the return on recent investments that we've made in globalization.

China, Mexico and the Middle East were particularly strong in the quarter.

For the Tools group, the first quarter revenue increased by 2%.

Hand Tools up 6 and Power Tools down 4.

The negative revenue trend at Power Tools was only associated with the automated systems business, and the good news is that the order rate for the quarter was substantially ahead of last year, and greatly exceeded shipments.

So as we predicted at the March outlook meeting, we think we finally turned the quarter at Cooper Power Tools.

Now, let me turn the call over to Terry for additional details on the quarter and our revised outlook for the remainder of 2006.

Thanks, Kirk.

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

On Slide 6, you'll note that our free cash flow for the first quarter of 2006 was 9.1 million compared to 800,000 for the first quarter of 2005.

As is typical in the first quarter of our calendar year, we do not generate significant free cash flow.

This is driven by the payout of customer and employee incentives earned in the prior year, and the build of inventory to culminate the beginning of the construction and renovation season.

In addition, with a very strong March performance, customer receivables grew.

We expect Cooper's strategic initiatives to continue to drive performance and result in 2006 being the sixth year in a row that free cash flow exceeds net income from continuing operations.

Our balance sheet remains in great shape with our debt-to-total capitalization net of cash at 22.8%.

During the quarter, we spent 83 million on acquisitions, and 16 million on stock buybacks net of proceeds from issuances.

Even with these cash expenditures in the typical seasonal free cash flow in the first quarter, our debt-to-total capitalization net of cash nominally increased from the 20.5% reported at year-end.

Our debt and capital structure remains in great shape and provides us outstanding flexibility.

Turning to Slide 7, our inventory turns in 2006 improved to 5.9 turns from 5.7 turns in the first quarter of 2005.

The dollar investment in inventories impacted by the strong revenue growth we experienced in the first quarter, as well as initiatives to improve customer service and the two acquisitions completed in the first quarter.

However, even with these factors, we can do much better as the year progresses on improving inventory performance.

On receivables, our days sales outstanding increased one day to 67 days compared to 2005's first quarter.

The strong March sales drove this increase.

Here again, we have room for improvement and we'll continue to focus in this area through the rest of 2006.

We improved our payables performance in the first quarter of 2006.

We have improved quite a bit on moving supplier terms closer to the terms our customers demand from us and expect to continue to improve in this area.

Overall, as a result, our operating working capital turns improved nicely to 4.9 turns compared to 4.5 turns in 2005's first quarter.

On Slide 8, our capital expenditures were down 16% in the first quarter of 2006 compared to the same period last year to 16.7 million.

We expect capital expenditures to increase as the year progresses as we have a number of projects that have been approved related to equipment capacity expansion.

For the year, we remain comfortable with estimated capital expenditures of 105 to 115 million.

In the 2006 first quarter, we purchased 845,000 shares of our common stock against issuances of 1.7 million shares for option exercises, 401(k) matches and payout of performance and restricted shares.

During the quarter we had considerable exercise of options by retired and other former employees.

For the remainder of the year, option exercises will be back to more of a normal trend.

As we have stated previously, our intention is to purchase shares at least equal to the numbers shares issued.

Turning to the results for the first quarter and Slide 9.

Revenues in the first quarter came in very strong and increased 8% over the prior-year period.

March had higher revenues than any month in 2005.

Clearly, the warmer than normal weather in North America helped, but as Kirk mentioned, we saw strength across most channels and geographies.

In the first quarter, the incremental revenue from acquisitions was offset by negative currency translation.

As a result, 8% revenue growth reported is equal to the core revenue growth for the quarter.

Both the Electrical Products and Tool segments revenue growth exceeded our forecast for the first quarter of 2006.

Earnings per share increased 24% to $1.14 per share exceeding our forecast of earnings per share of $1.03 to $1.06 primarily driven by the stronger revenue growth.

On the 8% total company revenue increase, we will average to a 24% earnings per share increase driven by operating performance and lower interest expense partially offset by a higher effective tax rate.

On Slide 10, our overall cost of sales as a percentage of revenue improved 60 basis points resulting in gross margins increasing to 31.8% from 31.2% in last year's first quarter.

In the quarter, pricing and commodity cost economics continued to offset, allowing us to continue to realize the benefits from our productivity initiatives and gross margins.

As we noted in our outlook meeting, in 2006 we expect to turn the corner on realizing the benefits from our investments and begin to leverage selling and administrative costs.

In the first quarter, selling and administrative expenses increased 4% on 8% revenue increase, and as a result, SG&A expenses as a percentage of sales were 19.1% compared to 19.9% in the prior-year first quarter.

From a segment reporting perspective, for the first quarter of 2006, we reported 20.8 million in general, corporate and other expense compared to 20.4 million in the comparable quarter of 2005.

In the first quarter the benefits from the prior-year headcount reductions were offset by increased pension and incentive and stock-based compensation expense.

Since 2005 was the third year we expensed all stock-based compensation, 2006 only reflects the change in the number and value of stock-based compensation granted.

Turning to Slide 11, solid execution on cost initiatives while continuing to invest in our company-wide initiatives, along with the volume leverage, drove a 21% increase in operating income and our operating margin up 130 basis points to 12.6%.

Continuing to Slide 12 on net interest expense, our tax rate and net income.

Our net interest expense decreased 5.7 million from the prior-year quarter driven by lower outstanding debt and favorable average interest rates as a result of the prior-year debt issuance at 3.55% interest rate.

Our effective income tax rate for the quarter, first quarter of 2006, was 25.5% versus a 21.5% for the first quarter of 2005, an increase of 400 basis points.

Approximately 60 basis points of the increase was a result of the U.S.

Congress not passing legislation during the first quarter to extend the R&D credit.

The remainder of the increase is driven by the incremental earnings over the prior-year being taxed at a 36% to 37% incremental tax rate.

Net income for the first quarter of 2006 increased 23%, slightly less than the 24% increase in earnings per share, as a result of lower average shares outstanding.

Turning to the segments and Slide 13.

For the quarter, our Electrical Products segment revenues increased 9.5%.

The revenue contributions from acquisitions were offset by negative currency translation in this segment.

Core revenue grew, growth for Electrical Products was strong in all regions in all regions of the world.

Retail sales increased over the prior-year quarter at a slightly higher growth rate than the segment as a whole.

Both electrical distribution and utility sales were strong in the quarter.

All of our North American electrical divisions had strong core revenue growth with the exception of our Lighting business.

Lighting revenues were impacted by low single-digit growth in retail market sales at least partially due to our conceding a product line in 2005 over pricing.

Customer service has improved considerably, but pricing remains competitive in this market.

The good news is that orders have picked up and the industry is continuing to implement price increases.

In summary, Electrical Products segment earnings increased 18% and return on sales increased 110 basis points to 15.1% from 14% in the first quarter of 2005.

Turning to the Tools segment on Slide 14.

In our Tools business sales increased 2.2% with currency translation decreasing sales .9%.

Shipments of assembly equipment were down 4 million, partially offsetting increased Power Tool sales and Hand Tool sales.

Retail sales had low single-digit growth as the customer slowly began to restock after taking actions to reduce inventories late last year and early in 2006.

Tools operating earnings increased 18% and operating margin as a percentage of sales increased 130 basis points to 9.6%.

Before turning to the outlook for the second quarter and year, an update on where we stand in the negotiations with the Federal-Mogul parties.

Turning to Slide 15.

We have had continuing discussions with the Federal-Mogul parties in an attempt to reach an acceptable agreement.

We believe that resolving the issues with Cooper are one of the few items left before Federal-Mogul can attempt to emerge from bankruptcy.

Currently, the Federal-Mogul parties want Cooper to absorb certain of the costs incurred subsequent to the Court hearing where the bankruptcy judge denied the stay and to absorb certain other costs.

We continue to believe the terms of the settlement reached in December 2005 and the economic cost to Cooper is at the high end of a fair settlement for our shareholders.

At this point, it is impossible to determine the ultimate outcome of the negotiations.

From a financial reporting perspective, there are different financial reporting treatments depending on what transpires prior to the filing of our quarterly report on Form 10-Q for the quarter.

If we reach a renegotiated agreement before we file our 10-Q, we will be required to adjust the financial statements released today to reflect the settlement.

If common stock is a component of that settlement, we would be required to adjust the accrual to the market value of the stock at the end of the quarter as well as reflect any other components of the settlement and the accrual.

If we are unable to reach a settlement, it is possible that we will have to reduce the accrual for discontinued operations.

Clearly, a complicated situation but we are intent on only reaching an agreement that is in our shareholders' best interests.

Now, before turning the conference call back to Kirk, I will cover the second quarter and year outlook.

Turning to Slide 16.

First, for the year, we are raising our revenue outlook and earnings per share outlook.

Based on the strong results in the first quarter, we are raising our revenue forecast to a top line growth of 7% to 9% from the 5% to 7% we had previously forecast.

Acquisitions net of divestitures and currency translation add 1% to the revenue growth.

The Electrical revenues are forecast to increase in 2006 7.5 to 9.5% and Tools revenues are forecast to increase 3% to 5%.

Acquisitions net of divestitures and currency add a little over 1% to the Electrical Product segment revenue growth.

Earnings per share are now forecast to increase to a range of $4.75 to $4.90, an increase of $0.15 per share from our previous forecast.

For the second quarter of 2006, we are forecasting revenues to increase 7% to 9% with Electrical increasing 8% to 10% and Tools revenues increasing 2% to 5%.

Acquisitions net of divestitures and currency translation add a little over 1% to the Company's revenue growth, and close to 1.5% to the Electrical Products segment revenue growth.

Earnings per share from continuing operation are forecast to increase 15% to 21% and be in the range of $1.17 to $1.23 per share.

Back at the March 1st outlook meeting we indicated the first quarter was expected to come in at the high end of our estimates.

As you now know, we significantly exceeded our forecast for the first quarter driven by March 2006 sales being higher than any month in calendar year 2005.

At our 2006 outlook meeting we also indicated that we could have an outstanding year if non-residential project markets improve faster and at a higher growth rate, Western Europe GDP growth accelerated and residential markets held up stronger than we forecast.

With the strength we saw in the first quarter, we are cautiously optimistic about the rest of the year.

While our forecast takes into account what we currently are seeing in our markets, we are closely monitoring the impact of higher interest rates and the impact on residential and other construction markets and consumer spending.

And also the significant increases in copper, zinc and aluminum and the recent increases in energy and steel prices.

We also recognize that the warmer winter may have pulled forward sales from the remainder of the year.

We also saw utility customers building inventory in anticipation of hurricane as other natural disasters, which, depending on the extent of the damage, could influence the second half the year revenues and earnings.

With all that said, we are comfortable with an increase in earnings per share to $4.75 to $4.90, or an increase of 15% to 19% for the year.

Kirk will provide a wrap-up on the 2006 first quarter results and comment on the 2006 outlook.

Kirk?

Thank you, Terry.

Again, 2006 is off to an outstanding start.

Our end market diversity plus our focus on globalization is generating store on core growth, the Cooper business model is delivering expected results, accelerated revenue growth, improved margins and strong cash flow and our team is executing extremely well.

Very strong leverage in the quarter, the new cultures and values are certainly taking hold.

We're focused on the upside at Cooper Power Tools with the aerospace market strengthening and at Lighting with commercial construction improving.

We continue our company-wide focus on the customer and service rates knowing that these will pay dividends.

And our balance sheet remains in outstanding shape.

The two our three small acquisitions we completed in the end of '05, early '06 are all performing well.

So in closing, we are off to a great start on what we expect to be an outstanding 2006.

With that, let me turn the call back to John for questions.

Cindy, I think we're ready to take a few questions now, if you could have people queue in, please.

Thank you, sir. [ OPERATOR INSTRUCTIONS ] And your first question comes from the line of Robert Cornell of Lehman Brothers.

Please proceed.

I had my pencil ready when you started to give the trend by piece in the Electrical Products business.

Could you just take a minute and go back and go distribution, retail, utility and sort of give us some color by business unit, please?

What I said, Bob, and I did this just for you, right?

I know.

I said five of our electrical businesses were up greater than 10%, Cooper B-Line, Cooper Bussmann, Cooper Crouse-Hinds, Cooper Power Systems and Cooper Wiring Devices.

Okay.

I said Cooper Lighting and Menvier in local currency, Menvier local currency, that's our European division, both had revenue growth in middle to low single digits.

I get it.

I guess Lighting, you flushed out, it's a little bit of a disappointment in the quarter but you talked about orders getting better and pricing improving, can you just flush out on that point a little bit for us?

The Lighting picture overall has been a little bit frustrating in that, when we went back, if you went back a year ago May when we started the systems conversions and such, Bob, what that generally does when you go on the EBS system, it exposes a lot of your process inadequacies and some issues.

And so we went through a difficult time in that transition.

We also have not been executing well on the initiatives.

We've had poor productivity, we executed poorly the transfers of work, our service levels have dropped off but are certainly improving.

And we've had to address some organizational issues in that business.

Overall there's been no real deterioration of margins, though, but the top line, as you point out, is weaker than we would expect it to be at this point.

But overall we're still very confident that we can turn the corner now for the back half of this year as that market continues to pick up.

We've got a great new product line in the pipeline, we've got a very competitive cost structure, we've got a big footprint in Mexico and in China, and so we're still optimistic that we're going to have a strong, strong year there for the back half of 2006.

I guess another question is March really surprised you on the upside, maybe you could go into that a little more detail and did that strength sustain itself into April?

This is Terry.

Yes, March came out much stronger than we had originally forecast and it really was across all of our businesses and all the regions of the world.

There's no indication that the markets are slowing down at all.

In fact, that's why we raised up our second quarter significantly and the year significantly.

Okay.

I guess one final thought.

How material are the costs you're talking about in the asbestos disagreement, if you will?

I'd rather not get too far into the details on that, Bob, but look, we've made our offer, which we think is a very fair offer.

We've consulted with our outside legal experts.

We've tried to leave enough room to continue to satisfy additional requests from the other parties.

But as we've said all along, there's a point where you just become indifferent.

And I think we've made a very, very fair offer.

We continue to work on some smaller issues, but the ball's in their court as far as we're concerned at this point.

So is there a drop-dead date here?

I mean you're talking about, it sounds like something's imminent when you're referencing the Q, which is going to be out pretty soon.

The issue, Bob, is Federal-Mogul is indicating that they're getting very close to sending out a new disclosure statement and attempting to emerge from bankruptcy.

They had an issue in the U.K. which is going to go out for vote if it hasn't already, which that was a major issue preventing them from coming out of bankruptcy.

And their indication is our issue is one of the few remaining issues to get resolved before they can start moving down the path.

So at this point, our estimation is they will move fast and that's why the caution on the second quarter if something breaks here in the next couple weeks.

Okay, thanks.

Thank you.

Thank you.

And your next question comes from the line of Nicole Parent of Credit Suisse.

Please proceed.

Good afternoon.

I apologize, we got dropped off.

Could you talk a little bit about price realization by business or end market and where you're seeing the most and where you think you'll continue to, I guess, continue to try and offset the higher raw material costs?

Yes.

In the first quarter, we had price realization that was up a little less than 1%, which more than offset the cost, material cost inflation.

And that's year-over-year compared to the first quarter of last year.

As we forecast out for the rest of the year, we see an improving picture on price realization but we also see significant cost increases through the remainder of the year.

So we have been very active on raising prices all through last year, clearly, but also this year that our forecasts indicate that we will significantly offset.

The toughest businesses right now are our Lighting business on it, and the rest of the businesses are actually doing pretty well.

Okay.

Great.

And I guess just to follow-up specifically on the issues at Lighting, you mentioned frustrations on execution and customer service.

I guess what specifically are you doing there and what's the time line you have the business on in terms of driving improvement?

We've basically completed all the transfers of work, Nicole, which generally are some of the big issues, and we have -- we are not addressing any other transfers of work as we speak.

We've changed a number of plant managers, we've taken our past due's down by over 80%.

We brought in a new VP of Ops, a new VP of Finance, and some additional people to help us focus on the issues.

And then we've reallocated some corporate folks to give them some additional resources as well.

But again, these are not huge issues, but it's just a lot of little things that we just don't seem to be able to get out of our own way on to execute well, or just to capitalize on the incremental upside, I guess I would say.

Sure, okay, great.

One last one just on -- I apologize if you did go into it -- residential seemed kind of flat, the outlook for her that for the balance of the year and also commercial construction seems stable.

Do you have visibility on the backlog they're building?

On residential, the housing starts, new housing starts have been all over the map but, certainly, there was this huge spike in January but that was the warm weather.

But if you look at it, we're 2.1, 2 million units, new units per month kind of a trend rate.

But from what I'm reading and the inventories stacking up and some things going on out there, it wouldn't be surprising to see that begin tail off.

But our model built out that we'd see some softness in residential.

The question is how quickly and how soon does that sort of impact the retail segment.

And different people have different theories, but we expect that to probably soften as the course of the year goes on modestly.

Commercial construction, we're optimistic.

We continue to look at the low voltage switch gear, HVAC people, everybody is seeing the same kind of growth.

We talk to our customers, the large and small electrical distributors we're seeing their commercial business pick up.

So we think that that trend will continue to accelerate as the year progresses.

Great.

Thank you.

Thank you.

Thank you.

And your next question comes from the line of Jeffrey Sprague from Citigroup.

Please proceed.

Thanks, hello everyone.

Hello, Jeff.

That's a decade already, hunh?

It feels like twice that.

Keep up the good work.

Thank you.

Just a couple questions on -- actually bouncing around.

On the T&D side, utility inventories, do you think they're actually above normal or are they just restocking after drawing down last Fall and kind of around the repairs that we had around the --

What happened, we were just out on the West Coast in Arizona and Nevada talking to some of those customers, where obviously there was no bad weather last year.

But what happened was when the South took the hit, they had trouble in getting inventory and lead times went out.

So I think what they're all doing is beginning to put a little bit more inventory on their yards in anticipation of the hot summer and the potential weather disruptions that you could have.

So I think what happened, Jeff, is we pulled a lot of, or some inventory or orders that would have normally been booked in the second quarter forward into the first quarter.

The fundamentals of the overall Cap Ex and the industry itself are still very, very strong, though.

And I think our comfort in raising our outlook continues to believe -- we continue to believe that there is massive strength underlining the utility markets.

Our biggest issues continue to be lead time and capacity as we go into this, but I don't see any fundamental shift in spending or this is not a one-time event on the inventories.

It could be just a little bit of a quarter-to-quarter shift, that's all.

Then kind of thinking about these materials cost issues from a different angle, is, I guess probably the answer is no in the quarter, but is there any sign that there's negative demand response to all this price and cost getting pushed up through these channels or is it more of an inflationary response of I need to buy it now because it's only going higher?

Jeff, we haven't been seeing indications of that with our customer base.

Generally, they're able to pass it along.

And on the utility side, clearly that's a little bit of a different market where utilities are buying it and putting it into their infrastructure.

But the answer to your question is, no, we really haven't seen that.

Pricing has been pretty good in just about all the product lines and pretty easy to pass through.

And Terry, did you -- is this tax rate you did in the quarter now where you think you're going to be for the year?

I mean, clearly you had higher and higher U.S. earnings which I guess is really what's blending it higher.

How should we think about that?

No, I think we will -- right now we're forecasting right in the 25.5 plus or minus.

And then --

We could have, in the second quarter, if Congress passes this R&D credit extension, we would probably have a catch-up in the second quarter that would reduce the rate a little bit.

How much of your Lighting business actually goes through retail, is it a significant piece now?

It is roughly, I would say -- I'm guessing a little bit here, 30 to 40%, kind of 40%ish.

A little less than that, 30, 35.

And there was a reference to a customer restocking in Tools.

That was primarily hand tools at the retail channel, and that was sort of held up in December, and then kind of blew back to normal spending levels in the first quarter.

Start with an S?

Yeah, probably.

All right.

Thanks a lot.

Good.

Thank you.

And your next question comes from the line of Alex Rygiel of Friedman, Billings and Ramsey.

Please proceed.

Thank you.

Quick question with regards to your capital expenditure budget for the remainder of the year.

You mentioned that had you would be adding some equipment to add capacity.

Can you expand upon that as to which divisions you plan on adding capacity to?

Sure.

We're putting more capital into our Power Systems business to expand the capacity there, and a lot of that, some of that's going into China, Alex, on the molded products in that division.

But as we've said in the past, Power Systems, we believe, has a long-term trend of increased demand and we're just gearing up to do that.

The rest of our business is a fairly low capital for additional capacity.

A lot of it is assembly and not big dollars on incremental.

There's really is no brick and mortar in the budget for this year.

Great.

With regards to acquisitions, can you refresh our memory as to which geographic markets and what type of product lines or end markets you're going to be looking at over the next 12 months?

We completed a couple of smaller deals in the first quarter with Wheelock and G&H.

We continue to be focused primarily on, well, the industrial businesses certainly, overseas expansion, including the emerging markets and the European market.

It's a broad list of opportunities for us.

At a number of the recent conferences and at the outlook meeting I tried to sort of walk through our businesses are really not very homogenous in nature, in that they all have these different platforms that we think we could build out to be big international platforms.

And so there's some things at Bussmann that we're looking at, there's some pieces in Crouse-Hinds, there's some pieces in Cooper Power Systems.

I think Tom did a pretty nice job at our outlook meeting walking through that.

Great.

Thank you very much.

Thank you.

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

Please proceed.

Thank you.

Just to circle back on the guidance, and if you said this before I apologize.

When you talk about total revenues up 7 to 9%, how much of pricing increase have you baked into that quarterly and the annual estimate?

We expect the pricing to be somewhere a little bit north of 1% -- between 1 and 2%.

And that's roughly equal to what you had last year?

Probably slightly less than last year.

Okay.

And then just if you -- to the extent you can comment on this, since you brought up the asbestos situation and the prospects that there could be a settlement, the previous settlement terms included a component of cash and stock.

It was 130 million in cash and 105 million in stock.

Now, stocks, it's up 25% since then.

Was that a dollar amount or a share count that you were locking in to?

The original agreement had 1.4 million shares, which is typically how, when you do these settlements, they want a certain number of shares.

That's why we say -- have always said that until they emerge from bankruptcy and we would issue shares, we would have to mark that to market, which would mean a charge to discontinued operations and a corresponding increase in equity.

At this point, we don't have an agreement but the other side clearly would like to keep the stock component which would offset some of the areas that we're negotiating as far as the increased cost, at least from our perspective.

That is certainly part of our point, Deane, is that there's additional potential upside there on that side of it.

I understand.

We'll stay tuned for that.

And then last question, Kirk, on your comment on your not being where you want to be on customer service levels, is that all in the big box relationship or how much of that spread broader to the other commercial businesses?

No, I unfortunately would say that it depends on what point in time you looked at.

If you looked back at last year, we were pretty bad in several areas on some of the industrial businesses as well.

You had a couple of things, Deane.

You had the EBS conversion going on.

You had volume picking up.

And you had a number of transfers of work that we were still finishing off from the previous year.

And so you think about trying to run the Company while all those things are going on and the economy continues to get better and demands continue to go up by your customers.

So what we did this year at our management meetings we refocused the whole group.

We have basically shut down a large majority of any transfers of work.

We need the capacity, we have a pretty good footprint so those have all been pulled back or stopped completely.

We have focused and done a better job executing on the EBS and the implementations as you do more of these, you get better at them.

And so I think, again, as we've got 60, 70% of the Company up on the new system we're learning more and more about how to do these more efficiently than we did the first time through.

And we look very closely at weekly and monthly service rates.

Now we have got very good metrics on this.

We're comfortable with the progress we're making but we are not at world-class levels yet.

And so I would say that the issue is across the board in several of our businesses.

I'm not sure we're much worse than anybody else out there, but I don't think that's a good benchmark for comparison either.

We've got metrics that our customers require us to be at or ask us to be at and we certainly ought to work our butts off to get there, and that's the goal.

On the retail side, what would you say your fill rates are?

We do a pretty good job, you know, 90-plus percent on those.

They've got requirements at 95, 98% on-time delivery, we sort of muscle the system to do those pretty well.

So they're not pervasive issues on retail versus electrical distribution.

I think they're sort of more generic across the whole business.

Great.

Just the last point, unless I missed it, it didn't sound like there was any hiccup in the EBS conversion.

Is that correct?

No, I give the team excellent points for getting through that.

You look at the leverage in the quarter on Electrical, Deane, and you sort of put the framework that you're doing all that while you're going through an SAP conversion over the entire company and take the last three quarters, and I think they've executed extremely well.

You look at the SG&A productivity, you look at the incremental earnings on the incremental revenue, and once we get through this, the data and the productivity we're going to get when we get on the back end of this thing's going to be phenomenal.

So I give the team high points.

Great.

Thank you.

Thank you.

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

Please proceed.

Thanks, Operator, and Kirk, just following up on that, one of the more impressive numbers I thought in the quarter was the 18% profit growth on 2% top line in Tools.

Now, I know you have a new guy running the business and so certainly there's some cost efforts being accomplished there.

But can you talk us through that type of operating leverage and your guidance calls for a continuation of relatively modest growth in that business.

Should we expect that type of incremental margins going forward?

I think the business, as we said, has turned the corner.

If you look -- the Hand Tool business has always been a story in and of itself.

Those guys have performed exceptionally well.

They've been working on their cash flow.

Their margins continue to expand.

I think the revenue growth rate of our Hand Tool business has been at parity with the market if not better.

I think we've always executed over the last couple of years on that side of the business.

Within the Power Tool business our issues have been all assembly business, the systems assembly business.

And the team down there have done a nice job, we've made some changes out in Europe, we've tried to integrate better our U.S. operation with our European operation.

We're looking for a broader customer base, there's real technology there.

It just takes you time to get these orders and get all that done.

As I said in my comments, we had a terrific bookings month, or big bookings quarter for the assembly business, and we hope that that trend will continue.

I don't think it's so much a cost game in that business.

We've got aerospace picking up, you've got industrial business picking up, there's real opportunities over in Asia, we made a change in leadership out in Asia, and so we're optimistic that we can grow that business on the assembly side.

Okay.

Makes sense.

And then my follow-on question and this just reflects I guess my potential lack of understanding of tax accounting with the Bermuda tax issue.

The tax rate going up is substantially is it dead, it certainly makes sense given your incremental growth, but maybe, Terry, if you could spend a minute and just refresh my memory at least on the benefits of the Bermuda tax rate, is this something that the benefits over time become less pronounced as revenues are strong or is it more just a geographic mix issue?

Most of the change is driven by the fixed structure that's in place with Bermuda.

When we reincorporated in Bermuda, there was a incurrence of debt in the United States and that debt is a fixed amount of debt with interest on it.

And that interest reduction in the U.S. offsets U.S. income.

So if you think as status quo, any incremental revenue in the U.S. would be taxed at the incremental U.S. and state rates.

And then beyond that, it depends upon what we do on the international structure.

Companies owned directly by Bermuda are to a certainly extent where income is earned.

But that tends to be a minor impact on the overall rate.

So, no, that makes sense I mean given your tax rate trough in 2003 at 20% when business was obviously weak, is this something where we just continue to see a little bit more of a convergence up towards statutory rates over time just given that you're going to grow as a company?

Yes.

You'll see the rate move incrementally -- one way to look at it, is just on the incremental earnings year-over-year being taxed at more of a global average rate which tends to be in the 36, 37% rate.

Okay.

That explains it perfectly.

Thanks guys, and congrats on the numbers.

Cindy, we have time for one more call, if you could pull that call through, please.

Thank you so much, sir.

Your last question will come from Robert McCarthy of CIBC World Markets.

Please proceed.

Good afternoon, gentlemen.

On Lighting fixtures, I just wanted to get some sense there, you have had some service issues, et cetera.

Did you -- do you think you lost some share in the quarter on that market or do you think it was just a function of the end market?

No, I think we've said all along from time to time we will give up share if it's business that we don't find particularly attractive business.

So I don't -- I think there's maybe a small component of that which is service related.

As Terry pointed out in his notes, there was a component that have that we just didn't like the pricing on and so we left that business -- let that business go.

So I think it's a combination.

Have you found pricing to continue to be difficult there in Lighting in general, and certainly in some of the large project work?

In general, yes, but we've continued to go out to the market and test the market to see if we can't move things forward.

As of late, again, since the beginning of this year, there have been dramatic increases on a lot of the raw materials that go into these lighting products.

And so I think just recently we've gone out with another increase and we'll see how we do with that.

I guess [balance] has run pretty significantly I guess since the beginning of the year.

Is that correct?

Correct.

All right.

And then just, Kirk, how much of your time are you spending on the asbestos issue now, much more reduced or --

No, it's not reduced, it's a lot.

We've got to either go one way or the other and they both have implications of a strategy.

And you can't put in the infrastructure to go it alone until you figure out which way you're going to go.

I think that's why, I think Terry's point is a good one, that Federal-Mogul emerging from bankruptcy's a good thing for Cooper, any way you look at it because you have finality on which way you're going to play the cards here.

Okay.

And clearly, you've put up a great quarter and it looks like prospects for just a tremendous year, but just looking at the risk of the back half of the year, can you talk about some of the dynamics?

You did talk about perhaps some of the utility pull through and we don't know how the utility market's going to hold up.

Alternatively, could you talk about maybe perhaps some of the comparable issues in the back half of the year with some of the restructuring initiatives and corporate initiatives you put in place the back half of year?

Maybe you'll get some incremental benefit there.

Clearly, if you're looking at the down side in the back half of the year, which we have built in our forecast is the residential side, which as we told you at the outlook meeting on the resi side we thought it would be decline through the year as the year process.

We still believe that we'll see some pressure on that side of it.

But as I said, that's built into our forecast.

On the cost side of this thing, as far as restructuring type costs we did in the second half of the year, we will pick up a little bit in the back half of the year on those.

But as I said at the outlook meeting, pension expense is going to be up about $9 million this year, and so will some of the incentive stock and bonus-type things which will offset that, albeit pretty steady through the year.

Congratulations on a great quarter.

Thank you very much.

Thank you all for joining us today.

As we conclude this call, let me remind our listeners that we will be presenting at the Electrical Products Group meeting on May 23rd.

That meeting will be Webcast for those who are interested in getting an update a month from now.

With that said, thanks for joining us today, and thank you.

Thank you for your participation in today's conference.

This does conclude the presentation and you may now disconnect your lines.

Have a wonderful day.