伊頓 (ETN) 2006 Q2 法說會逐字稿

Welcome to the Q2 2006 Cooper Industries Limited earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's conference, Mr. Jeff Levos, Vice President of Finance.

Please proceed, sir.

Thank you, good morning and welcome to our second quarter earnings conference call.

This Jeff Levos, Vice President of Finance, I'll be conducting today's call.

With me is Kirk Hachigian, Coopers Chairman and Chief Executive Officer; and Terry Klebe, Senior Vice President and Chief Financial Officer.

As mentioned in our press release we have posted a set of exhibits on our website related to this quarter's earnings.

We will be referring to those exhibits during this call.

They may be viewed or downloaded from the investor center section of Cooperindustry.com under the tab marked Management Presentation.

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

These statements are subject to various risks and uncertainties, many of which are outside the control of the Company.

Actual results may differ materially from those anticipated by Cooper.

A discussion of these factors may be found in the Company's Annual Report on Form 10-K and other recent SEC files.

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 most directly comparable GAAP measures are included in our press release.

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

Thank you, Jeff.

Good morning.

I assume you've all had a chance to access our exhibits posted on our website.

I'd like to started today's call by thanking our 29,000 employees for working so hard to make the first half of 2006 such a great success.

They're focused on the customer, driving our competitive position in the global economy, and delivering great guidance to our shareholders.

To all of those listening to today's conference call if you liked the first quarter results you should be very pleased with today's conference call.

I'm referring to Page 2 now for a summary of the quarter.

We continued with very strong revenue growth, overall, 8% equal to the first quarter, Electrical Products revenue was up 9% versus 10% in the first quarter and Tools was up 3% versus 2% in the first quarter.

Three of our four end markets expanded, industrial production, non-residential construction, and the utility markets were all very strong, residential was flat to down, again not much change from the first quarter.

Our earnings per share came in at $1.27 up 25% from last year, very strong leverage on incremental volume, positive mix, favorable pricing, and improved interest expense and share account all contributed.

Our income from continuing operations was up 23% to 120 million.

Electrical Products return on sales was 16.1%, up 140 basis points over last year, over 30% incremental leverage on incremental sales and the best the Company has seen since the peek of 2000.

In addition, we are 100 basis points over the first quarter.

Total return on sales for Tools at 10.6% up 180 basis points and again, up 100 basis points over the first quarter.

Our second quarter free cash flow was $132 million, 110% of income from continued operations.

Our debt to total capital at 22.6% and again we're on track for another year where cash will exceed net income.

On Page 2, the key drivers to our success in the second quarter were industrial demands, factory utilization at 82.4 % the best level in six years, very strong utility spending, strength in non-residential construction, it's the ninth consecutive quarter that office vacancy rates have improved to 13.8%.

We saw strength in hospitals, office construction, and distribution warehouse.

We continue to see strength in global energy infrastructure, oil, gas, and minerals, and again the Company delivered very strong productivity across all business segments at 2.8% on cost of goods sold.

On issues or challenges for the quarter where there was some margin pressure from continued inflation on materials and energy costs, the volatility in those markets made it extremely difficult for us to make pricing decisions.

Our customer service while improved was still not at expected levels, and our retail sales were down against very strong comparables from the year prior.

We're seeing a softening housing market and we're seeing a tired consumer with higher interest rates, oil prices, and credit card debt.

On Slide 4, for Electrical products revenue trends, we had four businesses with revenues in excess of 10%.

Cooper B-Line, Cooper Crouse-Hinds, Cooper Megadeal, although helped primarily by acquisition and Cooper Power systems.

Overall sales in global Electrical distribution channel were up double digits;

Electrical retail as I said was down in the mid single digits and was negatively impacted both at Lighting and Wiring Devices.

Our utility demand was very strong for the quarter with orders again well in excess of shipments and Electrical revenues from developing markets was up nearly 20%.

Mexico, South America, Asia, and Middle East were particularly strong.

For the Tools group, second quarter revenues increased 3% driven by strong performance at Cooper Power Tools.

As projected in the first quarter we're seeing strong growth Industrial Power Tools and an improving order and shipment rate for our assembly business.

Cooper Hand Tools revenue were only up slightly in the quarter negatively impacted by the loss of our chain position at Home Depot.

Overall, we're very pleased with the progress we're making in our Tools group particularly with the expansion of the margins.

Now let me turn the call over to Terry for additional information on details on the quarter and to revise the outlook for the remainder of the year.

Terry?

Thanks, Kirk.

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

On Slide 6, you'll note that our free cash flow for the first half of 2006 was 141 million compared to 138 million for the first half of 2005.

While we were slightly ahead of last year on free cash flow, We could have done better on the operating working capital side in the quarter.

I'll touch on this in a minute.

There's no change in our expectations to continue to drive performance with 2006 being the sixth year in a row that free cash flow exceeds income from continuing operations.

During the quarter, we took advantage of the weakness in the stock market and accelerated our stock buybacks purchasing 1.3 million shares for for 116 million.

We also received 16.7 million during the quarter from option exercises.

Even with the stock repurchases, our balance sheet remains in great shape.

Our debt to total capitalization net of cash decreased 20 basis points from the end of the first quarter of 2006 to 22.6%.

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

Turning to Slide 7.

Our inventory turns were 5.9 turns through June 30, 2006 compared to 5.8 turns last year.

Our efforts to improve customer service have temporarily resulted in higher safety stocks and this coupled with continuing strong demand has put pressure on inventory performance.

On receivables, our day sales outstanding increased 1 day to 68 days compared to 2005.

While growth in international markets which include VAT tax and receivables puts pressure on day sales outstanding.

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

Our initiatives to improve payables performance have continued to pay off.

We have improved quite a bit on moving supplier terms closer to the terms our customers demand from us.

Overall, as a result our working capital turns improved to 4.9 turns compared to 4.5 turns in 2005.

On Slide 8.

Our capital expenditures were down 16% in the first half of 2006 compared to the same period last year to 40.2 million.

We continue to 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 continue to remain comfortable with estimated capital expenditures of 105 to 115 million.

In the first half of 2006, we've purchased 2.2 million shares of our common stock against issuances of 2.1 million shares for option exercises, 401K matches and payout of performance and restricted shares.

During the first quarter of 2006, we had considerable exercise of options by retired and other former employees.

However, as I mentioned earlier, we stepped up our share buybacks and at the end of June had purchased more shares than we have issued.

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

With our debt to total capitalization below 30%, we will likely purchase additional shares especially when the stock market softens.

Turning to the results for the second quarter in Slide 9.

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

In the second quarter acquisitions contributed 1.4% to revenues and currency translation made a small positive contribution.

Earnings per share from continuing operations increased 25% to $1.27 per share, exceeding our forecast of earnings per share of $1.17 to $1.23.

Revenues came in at the higher end of our estimate and lower share count driven by our acceleration of stock buybacks contributed to the performance.

Sales mix was favorable in both segments which also was a driver to the performance.

On the 8% total revenue increase, we leveraged with 25% earnings per share from continuing operations 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 90 basis points resulting in gross margins increasing to 32.4% from 31.5% in last year's second quarter.

In the quarter, we continued to experience significant copper, aluminum, zinc, and other metal price increases.

We did achieve adequate pricing to slightly more than offset the inflation we are experiencing; however absent partial hedging of copper prices, we have been slightly negative in the quarter.

The metal and energy price increases have resulted in our businesses implementing additional price increases in the quarter.

We anticipate that price increases will be adequate to offset the inflation in the second half of the year.

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

In the second quarter, selling and general administrative expense increased 5% on 8% revenue increase and as a result SG&A expense as a percentage of sales was 19% compared to 19.6% in the prior year second quarter.

From a segment reporting perspective, general corporate and other expense increased 1.5 million to 23.9 million compared to the second quarter of 2005.

In the second quarter, the benefits from the prior year headcount reductions were more than offset by increased pension expense and incremental business development and legal expenses.

Turning to Slide 11.

Solid execution on cost initiatives while continuing to invest in our companywide growth initiatives along with the volume leverage and positive sales mix drove a 22% increase in operating income and our operating margin of 150 basis points to 13.4%.

Continuing to Slide 12.

On net interest expense, our tax rate and income from continuing operations.

Our net interest expense decreased 5.3 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 and effective 3.55 interest rate.

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

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

Income from continuing operations in the second quarter of 2006 increased 23%, slightly less than the 25% increase in earnings per share as a result of lower average shares outstanding.

Turning to the segments in Slide 13.

For the quarter, our Electrical Products segment revenues increased 9.2%.

Acquisitions contributed 1.7% of the revenue increase.

Currency translation in this segment was nominally positive.

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

Retail sales declined in Electrical segment midsingle digits against very tough comparables in the prior year quarter and double digit increases in the first quarter of 2006.

We expect the retail comparables to be challenging over the next several quarters as the residential market softens and the impact of our Lang division seeding certain product lines over pricing.

While retail is a challenge, both Electrical distribution and utility were up double digit driven by strong industrial and utility markets and improving commercial construction.

Electrical operating margins improved 16.1%, 140 basis point improvement from the second quarter of 2005.

Lower sales in the lower margin retail market and strong growth in energy and industrial markets provide a good sales mix.

In addition, while our utility business operating margins continue to be below the segment average, the business has been able to achieve efficiency and pricing and continues to improve it's operating margins.

In summary, Electrical Products segment earnings increased 20% on 9% revenue increase continuing the trend of great leverage on the incremental sales volume.

Turning to the Tools segment on Slide 14.

In our Tools business, sales increased 3.3% with currency translation representing 0.8% of the sales increase.

Revenues were impacted by the loss of the Home Depot chain business and soft retail sales.

Both Power Tools and Hand Tools industrial and commercial sales increased in the high single digits.

Shipments of assembly equipment turned the corner and were up slightly over the prior year.

Tools operating margin improvement was driven by positive sales mix and improvement in our Power Tools industrial product line sales and earnings.

Operating earnings increased 24% on a 3% revenue increase and operating margin as a percentage of sales increased 180 basis points to 10.6%.

Now, before turning to the outlook for the third quarter and year, an update on the revised agreement we reached with the Federal-Mogul parties.

Turning to Slide 15.

We issued a press release on July 7, that contained the details of the revised agreement and the changes from the prior agreement.

While it took longer than we would have liked to reach a revised agreement with the Federal-Mogul parties the end result is an agreement that we believe will be approved by the claimants in the bankruptcy court and that in the alternative provides us with a reasonable settlement in the event that we cannot participate in the 524 G Trust for any reason.

From an accounting perspective, we recorded a charge to discontinued operations of $0.21 per share in the second quarter.

If you recall, if the settlement included a stock component the stock had to be mark to market each quarter.

While we eliminated stock as part of the consideration, our stock price at June 30, was $92.92 per share versus the 2005 year-end stock price of 73.

Using the June 30, stock price under the prior agreement we have taken an 18 million after-tax charge for this component alone.

The charge recorded in the second quarter included an increased value for the stock and the fact that we'll pay defense costs and certain indemnity and other costs to the date Federal-Mogul's organization plan is approved.

Additional insurance partially offset these increases.

In the event that we do not participate in the 524 G Trust, the agreement provides us to receive a net 138 million when Federal-Mogul emerges from bankruptcy and for Cooper to receive 20% of any Wagner insurance settlements.

If we participate in the 524 G Trust, we receive 12% of the Wagner insurance settlements.

For accounting purposes, we could not consider the potential Wagner insurance settlement and the recorded charge which potentially could be over 40 million.

Currently, it is our understanding that Federal-Mogul is planning to achieve confirmation of their reorganization plan this year as we were one of the last major obstacles.

Whether their plan goes effective in 2006 or early 2007 is dependent upon how fast the process moves.

The Court may rule in our claim for the 138 million in late August.

And the participation of the 524 G Trust is subject to voting by the Abex claimants favorable ruling by the courts and other matters.

Now, before turning the conference call back to Kirk, I'll cover the third quarter and full year outlook.

Turning to Slide 16.

Our outlook for the year started at $4.60 to $4.75 with today's guidance at 4.90 to $5.05.

We've increased our forecast $0.30 per share as the year has developed.

In addition, our top line outlook is improved from 5% to 7% growth to our current outlook of 7% to 9% growth a 200 basis point improvement.

Industrial, energy, and utility markets have been very strong and we've seen improvement in the non-residential construction.

Our sales and marketing and globalization initiatives are delivering solid results and our productivity and enterprise business system initiatives are continuing to gain momentum.

Turning to Slide 17.

Before turning to the year and the third quarter forecast, there are two recent items I'll bring to everyone's attention.

First, we recently internally announced that we are freezing our salaried U.S. pension plan and discontinuing post-retirement life insurance.

This change resulted in a small net expense in the 2006 second quarter results; however, we are also required to remeasure the pension and other post-employment plans as of June 30.

With the increase in the interest rates our pension expense will decline around 3 million in the second half compared to our earlier estimates for the year.

Employee pension plan benefits for future service are being replaced by an enhancement to our 401K plan and these changes are all going to be effective January 1, 2007.

Second, in July, we sold an 11 million revenue business that was part of Crouse-Hinds.

We are a very small player in this market and the market channels were not synergistic Crouse-Hinds other businesses.

We expect to recognize a gain on the sale in the third quarter of 3 million to 4 million and this gain is not in our forecast for the third quarter and the year.

Now, turning to the forecast for the year.

First for the year, we're forecasting a top line growth of 7% to 9%, acquisitions net of divestitures add approximately 1% to the revenue growth.

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 Electrical Products segment revenue growth.

Earnings per share, as I mentioned are now forecast to increase to a range of $4.90 to $5.05, an increase of 15% -- $0.15 per share from our previous forecast.

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

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

Earnings per share from continuing operations are forecast to increase 19% to 25% and be in the range of $1.28 to $1.35 per share.

With the strength we saw in the first half of the year, 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, the significant increases in copper, zinc, and aluminum, and energy.

With that all being said, we are very comfortable with an increase in earnings per share from continuing operations to $4.90 to $5.05, or an increase of 19% to 23%.

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

Kirk?

Thank you, Terry.

Again, halfway through 2006 we're very pleased with the way the year is unfolding.

Our end market balance and mix supports continued strong quarter growth.

Our improved service rates, customer touch are driving strong order rates in core growth.

We had six businesses with orders in excess of sales in the quarter, two businesses equal to and only one business below.

Our initiatives, EBS, MVP, and sourcing are driving our margin expansion and free cash flow, very pleased with the Electrical group at 16% plus and Tools above 10% margins.

We're close to a final resolution on asbestos.

One way or the other we think we have a reasonable solution under either outcome.

Our M&A organization is gaining momentum, we're reviewing many interesting opportunities, and we're encouraged that we can close at least a couple more deals in 2006.

Our balance sheet remains strong.

We're preserving our strategic flexibility and again we're very happy to be targeting somewhere between 4.90 and 5.05 the high end of what we thought we could do in March and we explained our 2006 outlook.

With that I'll turn it back to Jeff to open it up for Q&A.

Thanks, Kirk.

At this point I think we would like to take a few questions.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Bob Cornell of Lehman Brothers.

Please proceed.

Hi, everybody.

Good morning, Bob.

The one business that I want to touch base on, lighting, I think you had a management change there, there were issues all of last year about pricing.

Maybe you could just give us a little bit more of an understanding how lighting is doing?

You mentioned that would be partly dragged down by the retail weakness, but maybe just a little better understanding of what's going on there given all of the changes?

Yes.

We saw a nice improvement on the C&I side of that business, Bob.

Revenue up just about double digits and again the retail business was down.

As we've been saying for the last several years, we take a very cautious eye on the retail side.

We want to make sure that we work with customers that value our brands, value new product introductions, value the relationship, and where we can control a relationship with the ultimate end-user.

And in some cases, you can get that done through a retail challenge in a lot of cases you can't.

So we're cautious there, so we've given up some ground there.

Our factory variances in the quarter were substantially improved and we think we'll continue to make improvement as the year unfolds.

And our service levels there are at least back to par with historic levels, Bob is the way I would categorize it.

Not necessarily world class, but certainly back at historic levels and I think as the year progresses we'll continue to get better and I think the market will continue to grow.

So we're pretty happy with the progress that we're making albeit quarter to quarter, but we're happy with where we are.

And actually that segued into my second question which is to expand on that comment about service levels.

I mean you talk service levels, maybe what are you really talking about and sort of where are you relative to the metric?

Well, even if you go back into Company three or four years ago, we didn't have good metrics around measuring surface.

And so across-the-board when we had our management meeting in January this year, we talked about a myopic focus on the customer and so we went back in and said how are we even going to measure our service levels and we put in some very, very tight measures that are standard across the Company.

As volume has increased and as there's been more strain on the supply chain for raw materials and frankly one of the mistakes that we probably made historically, Bob, is that we didn't do a good enough job measuring our suppliers on time delivery to us.

I would say that we're probably more focused on their cost to us and not focused enough on their service or their quality, overall quality as a supplier to us.

So again went back and put in supplier metrics around service rates and things like that.

So this is a companywide initiative and I think across all of our businesses, none of them were particularly good at measuring and tracking their customer service, and I think as a Company we can improve overall and there's more business for us to be had as we improve our overall service levels.

Final question on pricing.

I mean, I've heard from a couple other conference calls that people are putting incremental pricing in place broadly, maybe even contributing to the inflation problem Mr. [Bernacki] is dealing with.

What is your comment there with regard to the aggregate pricing outlook?

Is it getting easier, getting tougher, are you getting backlash?

Bob, this is Terry.

Clearly, customers generally don't like price increases unless they can pass it on to their end-users.

I have to say in the industrial channel, through our distribution, and even on the utility side, to date we have not seen a big pushback because the customers understand and they see what's going on with copper prices which have more than doubled, aluminum is up significantly over 40% from a year ago, oil up over 30%, so at this point I'd characterize it as really not much of a change from the past.

Okay, thanks.

Thanks.

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

Please proceed.

Afternoon, guys.

Hello, Nicole.

I guess with respect to just how we're progressing on the margin front, I think Electrical Products and Tools both came in better than I thought, and you cited mixed dynamics in Electrical which look like they are going to continue and I guess your cautious comments on the consumer, it sounds like what the retail business did was in line with your expectations and it's materializing as you thought.

Could you just kind of flush out mix for the rest of the year and what that means and I'm assuming that that contributes to kind of the upside in the numbers that you reported for guidance.

I'll comment first and I'll ask Terry to make a few comments, Nicole.

Yes, really, we're in our sweet spot, right?

Industrial is strong and we generally have very good mix there, there's no retail in industrial.

The utility business has historically not been one of our best margin businesses, but I think Mike has done a great job with the team, and both on price and productivity, and so that business is expanding their margins nicely, and then of course on the non-residential, commercial construction tends to be a very good margin mix as well.

Our weakest margins historically have always been on the retail side so if there's a place you're going to have softness, it's not a bad place to have it.

And I would say that the markets have pretty much developed -- I'd say the utility is stronger than we thought, non-residential we thought would come back during the course of the year and I think industry is about where we thought it would be.

Terry?

Anything additional?

Well, I'd characterize, Nicole, as we've said in the past, the retail channel is so difficult to predict month to month, quarter to quarter, and so it's hard to see a trend line unless you go over an extended period on what's really developing in that channel.

Now, what we saw this quarter in the second quarter was a little more weakness than we had projected for the quarter.

But we also saw very good strength in the utility and through the distribution channel which helped us on the margin side.

Where retail goes and for the rest of the year, we do expect some overall weakness because of what's going on the residential side, but do not expect it to be down like it was in the second quarter.

Okay, great.

Thanks.

And just one follow-up on M&A.

You kind of commented you've got things going on.

Could you just talk, Kirk, a little bit to average size of deals that you're looking at and where they would fit within the portfolio?

From a purchase price, Nicole, the largest is just slightly around the 200 million area and then they all pretty much fall below that, and there's a couple small pieces international and then I would say normal distribution, but the bulk of them are around that $100 million price range or a little bit smaller.

So they are adjacencies, they are bolt-on acquisitions, they are very consistent with what we've been doing.

Great.

Thanks.

Thank you.

Our next question comes from the line of Tony Boase of A.G. Edwards.

Please proceed.

Hello?

Tony, yes?

Yes, this is Adam Poole.

I have a couple of questions.

Basically regarding configuring your products, how are you streamlining the selling process to allow your customers to configure your product more efficiently to reduce a lot of order inaccuracies out there?

Well, the SAP system is certainly a step in the right direction and then we're running what we call TMVP, Transactional MVP projects to synchronize with our Electrical distribution customers, and there's a number of projects being done on that side and then when you link up your electronic interchange between manufacturing distributions that helps as well of course, because you're standardizing on standard protocol.

What have you seen as some of the challenges out there that are being expressed by the market, by customers saying we have trouble configuring your product, help us out?

What's the selling process?

What are you seeing out there?

I don't see any issues out there.

The distributors want to do this because it eliminates waste, it takes out people in the process and it expedites the non-value-added profits, which is that exchange of information both technical specs and product availability and physical transactions, so I don't see that -- there's nobody or nothing that's an inhibitor to the process.

Final question, as we go into '07, what is the top initiative you'd like to accomplish in terms of improving on sales and how do you plan to accomplish that?

Well, I think the quarter demonstrates what we've been focused on, right? which is an improved core growth rate in our key markets, Electrical distribution, a renewed focus on new products.

We had a great lift in the quarter from new products.

Our resources are paying dividends on the international again, almost year-to-date, nearly 20% in developing economies, and so we're real happy with those initiatives and we augment that with some basic acquisitions so we're real happy with the profile that we're seeing on the top line overall.

Great.

Good luck down the road.

Thank you very much.

Thank you.

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

Please proceed.

Thank you very much.

Kirk, I believe you mentioned or Terry mentioned something with regards to capacity expansion.

Can you expand upon that, please?

Sure.

As you know, especially in our Power Systems business in certain product lines, it's been a -- demand has been very very good and as Kirk said, once again, this quarter orders exceeded the sales in that business.

So we are investing in the molded products area, opening up a facility in the Asia Pacific region to help on that and help expand our market share.

We have several projects where we are taking bottlenecks out of the process if you will, which may mean adding some equipment as well as using our MVP lien manufacturing Tools to get more throughput through.

So a lot of the capital today is going into the Power Systems side.

A lot of the bigger projects, but across-the-board with the increased demand, we've had to upgrade equipment to get the throughput.

I think, Tony, as Terry said, it's not brick and mortar.

Excuse me, Allan, it's not brick and mortar.

It's higher speed in facilitating throughput through existing equipment, so maybe another piece of equipment here or there, but there's really no new brick and mortar on the horizon.

Great and with regards to the very strong demand coming out of the utility segment, obviously the hurricanes that effected the second half of last year are long past us.

Are we still seeing any kind of inventory replenishment of any sort out there?

It's hard.

The difference now, Alex, is that you've got this heat wave that's going across the country so there's a couple pieces that drive the grid harder.

Obviously if you knock it down and destroy it that's a piece of it.

Ice and hurricanes are not good for the grid, but the other thing that runs these systems is the higher temperatures across the country drive more air-conditioning, more useful electricity and that tends to overload the grid and again you need the replacement and the protection products that we make for the distribution grid.

So I would tell you that we will probably see a different reason for the demand, but you may see an acceleration if this heat wave stays across the country for the remainder of the year.

And on the inventory specifically, I think mild.

We were more concerned about that in the first quarter.

I think our concerns have subsided as the year progresses because again, continuing to see very, very strong orders and as we get out and visit with the customers, I think a lot of this is going just, again to replace old equipment and to continue to upgrade the grid.

Great.

Thank you.

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

Please proceed.

Thank you.

Just a follow-up on Terry's earlier comments regarding the price and raw materials.

I mean you said that you would be able to be at parity in the second half.

Does that imply that you need further price increases to go through or is that based upon announced price increases to date?

At this moment, it's announced prices to date.

We had several price increases that went into effect in June and that were announced during the quarter.

So the problem we have today is just the volatility of the metals market and oil prices, and so of course we take a great in-depth look at those and each of our businesses and product line managers do that routinely to stay ahead of the curve.

Great.

And then just in terms of the guidance regarding the change in the pension status, that $3 million, is that spread evenly over the second half?

Yes, it is.

Is -- that is included in your guidance?

Yes.

Okay, and then last question goes back to Slide 6, and this is the net debt to total cap and as I recall earlier in the year at the analyst meeting, you actually extended that Slide out to show where it would imply crossing these year out level out in a year and a half or so, if I had the date right.

What's the expectation?

How much lower do you think that goes?

Or is that dependent upon the acquisition activities?

What we did at the outlook, Deane, was without acquisitions and share buybacks greater than issuances, and of course as we go through the year, we've done I believe 80 some million in acquisitions this year and a significant amount of stock buybacks, so that always changes that equation.

I mean, our targeted range for net debt to capital is in the 30 to 40 to 45% range, so we won't keep managing that as we move forward.

Of course right now, our preference in the environment we're in today is to keep a lot of flexibility, especially on the acquisition side.

So we'll probably end up at the lower end of those ranges.

And the asbestos settlement will cost us some cash, Deane, upfront cash, depending on if it's settlement A or settlement B; right?

Understood.

And then just clarification on the organic growth out of that 7%.

How much of that that was priced approximately?

Price was slightly positive in the 1% range, net across the globe.

Great.

Thank you.

Thanks, Deane.

Our next question comes from the line of Jeffrey Sprague of Citigroup.

Please proceed.

Thanks, good afternoon, good morning.

Could we just follow-up on price, Terry?

I guess actually 1% price sounds low given kind of all of the price increases we've seen in the marketplace.

Can you maybe give us a little bit more elaboration on what's going on there and maybe the difference in pricing across the channels?

Yes.

They are significant, even between our businesses, Jeff, for example, our Bussmann business on the electronics side because of the nature of that business, tends to have fairly significant negative pricing each quarter and it's really replaced by new products coming in.

So we look across our total portfolio and that clearly influences some of our businesses, but overall in pricing, the one we've struggled with the most is as we've said in the past has been both Bussmann because of copper prices and lighting because of the significant increase in ballast certain other commodities.

As you know lighting a ballast contains significant copper, et cetera.

So staying ahead of those cost things and getting the price into the market has been a challenge.

Overall, we have pluses and minuses.

Some businesses with very good price realization, such as Power Systems.

Some like our Bussmann business which is probably slightly negative at this point.

And then this incremental price that you're going after to reflect the fact that some hedges are rolling off, et cetera, How big a magnitude are we talking there?

Net/net most of those private price realization and especially on the Bussmann and the lighting side should be in the low single digits, low to mid single digits.

Okay.

And then I guess Kirk, just kind of circling around to kind of picking your spots and products in the safety stock issue, you and I have talked before and you've certainly said on these forums things like lighting you're going to pick your spots and walk away where it makes sense, but now we've got this chain thing at Home Depot which probably wasn't a great value-added product either, but when you look at the portfolio, what percent of sales would you say are kind of in this category where maybe it just doesn't make sense to play and you're kind of pruning and kind of pulling back in different places?

Yes, I mean it's a nice time to do it, Jeff, too, right when capacity is up or capacity utilization is up in the other areas and you have the same demand.

You have the luxury of picking and choosing where you want to sell the product, and so one of the hallmarks of this company has been its high specification content and it's value-added features, whether they're brand or they are technology performance features, and so we are being very careful with that, and I tell you as we look at acquisitions obviously we're focused on only making acquisitions in those areas where we have a relationship with the end users, where there's real technology, where there's a heavy specification content to it and that is one of those screams that we've talked about as we go forward.

When you look at the Tools business, obviously there's a chunk of it there, the chain business and some of the hand tool business, although our hand tool business is fairly heavily branded, with some of the best brands in the industry, Crescent, Mickelson, Fio, things like that, so we play the merchandising game there, and lighting I think we've got a pretty good package overall.

Metalex, the fluorescent package is probably the toughest to differentiate yourself on, but as you know Halo is one of the best brands in the industry with features and benefits and we continue to innovate around that platform of businesses.

Businesses like Crouse-Hinds, businesses like Bussmann, businesses like B-Line are all heavy speced, preferred types of number one, number two in their class.

So it's a small percent of the overall portfolio and again, I think in a growing economy, you have the benefit of picking and choosing maybe a little bit more than you would in normal times.

And then the issue of higher safety stocks around inventory, is that a function of now that you're measuring yourself more closely and maybe making a stronger committment to the customer that you've got to build some inventory to follow through on that?

Is that something we should expect that kind of winds back down as you get the systems better?

Yes, it's interesting.

Terry and I were just out at six different facilities and really, the great thing about SAP what it's going to do for us is it's going to give us the intelligence, Jeff, to make the right decision, right?

Because you want to have more inventory of your A items and less inventory of your B or C items and as it turns out it's all about mix.

And unfortunately, in a lot of cases we have a lot of inventory of sort of C items, things that we don't need so we don't need to keep safety stock or inventory of that.

I think the net equation is you're still going to see inventories turns go up and I think you're going to see a better working capital profile of the Company as we go forward.

The issue is now using the intelligent systems that we have to make better decisions on what to keep more of.

We can afford to keep more A items and still reduce the B and and C, cutting our cycle time loose using lean and still doing a better job overall with customer service rates.

So I think that the working capital numbers should continue to get better on inventory, not worse.

And then just finally, I mean it sounds like the answer is no from what you said, but is there any hints that any of the -- outside of retail, and any of the short cycle parts of your industrial businesses of just slowing anywhere, a little unease about paying the higher price or any dynamic like that that's visible?

No.

Again I was just out in the NorthWest, I was in Portland and Seattle last week as well and I asked that question.

Your logic would tell you that commercial construction, non-residential with the higher commodity prices and higher interest rates would be pinched, but everything I've seen and heard, the Dodge reports, our sales forces are seeing continued momentum building in that space.

Industrial, no issue at all and utility, no issue at all.

Again, six of the businesses plus the two that were flat had orders greater than sales.

So it gives us reason to be optimistic frankly.

Okay, thanks a lot.

Thank you, Jeff.

[OPERATOR INSTRUCTIONS]

Okay.

I think I'll take it back over.

Thank you for joining us today.

As we conclude this call let me remind our listeners that we will be presenting at the Credit Suisse First Boston presentation group meeting on August 3.

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 on a busy day today.

Thank you for your participation.

Ladies and gentlemen, you may now disconnect.

Have a wonderful day.