伊頓 (ETN) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2008 Cooper Industries Limited earnings conference call.

My name is Stacy, and I will be your moderator for today.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr.

Jon Safran, Director of Investor Relations.

Please proceed.

Thank you, Stacy.

Hello and welcome to the Cooper Industries first quarter 2008 earnings conference call.

With me today is Kirk Hachigianm 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 presentation on our web site related to the first quarter results which we will refer to throughout this call.

If you would like to view or download the presentation, please go to the investors center section of our web site, www.cooperindustries.com and click on the hyper link for management presentations.

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 and as a result, actual results may differ materially from those anticipated by Cooper today.

A discussion on these factors may be found on the company's annual report on form 10k 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 most directly comparable GAAP measures are included in the press release.

And now let me turn the call over to Kirk.

Thank you, Jon, and good morning..

As many of you know, 2008 celebrates Cooper's 175th yea anniversary.

And, we head into 2008 extremely well positioned with a great portfolio of world leading businesses, strong product (inaudible) with the first end market exposure and 33,000 talented employees eager to take on the next 175 years.

We have terrific momentum as we've just completed seven years of record financial results.

In 2006, we generated revenue growth of 10% and earnings per share growth of 25%.

In 2007, our revenues were up 14% and earnings per share up 22%.

It should be no surprise today that we posted new record results for the first quarter of 2008 despite significant issues in the global financial markets, severe commodity inflation and a deepening North American housing slump.

If you turn to page two of the presentation for specific highlights in the quarter, our revenues were up 11% with foreign exchange and acquisitions contributing 9%, electrical products were up 12% with acquisitions contributing 7%, foreign exchange 2% and a core growth rate of 3%.

And our tools business was 1% up with foreign exchange contributing 6% so actually a negative 5% core.

We saw continued strong growth in industrial and energy markets, the utility markets were strong and residential continues to be soft.

Overall, a solid performance versus tough comps last year when our core growth rate was up 7%.

We continued with very strong international growth up 28% with total international now representing 37% of our total sales in the quarter.

Earnings per share were $0.81up 14% from the first quarter last year at the higher end of our guidance.

Electrical products return on sale were 16.4% up 40 basis points despite the incremental dilution from the acquisitions which Terry will talk about more in a second.

Our tools return on sale was 9.3% down 260 basis points.

Again, Terry will make more specific comments in a few moments.

Free cash flow was $42 million on track to deliver our eighth consecutive year of free cash flow in excessive recurring income.

We completed two acquisitions in the quarter.

MTL with $190 million of revenue, product line is intrinsically safe controls for harsh, heavy duty environments and perfect fit with our Crouse-Hinds business and [Filtronics], a small bench-top air purification company that a bolt-on acquisition to our weld or soldiering iron product line.

If you turn to page three of the handout, let me talk specifically about market conditions.

We felt the new slide would be appropriate given the uncertainty today.

The industrial our largest end market at 38% os sales, is expected to remain strong overall with oil, gas refining, mining, waste water, international growth still strong offsetting a weaker U.S.

automotive, furniture and other consumer related manufacturing.

Commercial construction are 26% of our sales were solid in the first quarter and we built additional backlog in hospital, education, military and government spending.

We continue to see strength in energy efficiency products and see great global demand that we expect will offset or help offset the U.S.

softness in the back half of the year due to the credit issues, unemployment and higher construction costs.

The utility markets are 22% of our sales were solid in the first half and we expect them to remain solid for all of 2008.

We expect that the residential and light retail type products to decline while reliability energy management international sales will remain strong.

Lastly, the residential or 10% of our sales we expect to flatten out in the back half of the year with housing starts down 37% in March over last year and at lows not seen since 1991, we believe we're beginning to approach a bottom but are not anticipating any recovery til late 2009.

Now, the one question I'm sure is on all of your minds given today's market uncertainty, how is Cooper better positioned and how will we perform versus the last downturn in 2001.

I tell you Cooper today is a much more competitive company.

We have 27 less factories than we did in 2001 on a comparable basis.

38% of our costs of goods sold is from low-cost countries.

And we've built a strong productivity program dating back to 2003, 58% of our headcount is outside the U.S.

and we've built a strong productivity program dating back to 2003.

We have better service rates and loyalty programs.

Our new product pipeline and vitality index is as strong as it's been in years and we have a better mix.

60% of the portfolio today is industrial utility versus below 45% in 2000.

We have much more international exposure.

In 2000, we were 27%.

Again as I mentioned in the first quarter was 37% international in the first quarter.

We have more technology, faster growing platforms.

Energy efficiency in the retrofit markets, speciality connectors, mass notification and safety, demand management network automation and global infrastructure.

The oil gas and metals investments expected to remain strong.

Today oil's at $117 a barrel versus $17 a barrel in 2001.

We're seeing increased investment in the U.S.

in the steel, aluminum, copper industries with the weak dollar access to raw materials and lower energy costs and close proximity to the U.S.

market is fueling increased capital spending in in these markets.

We're less dependent on telecom.

We see a growing presence in data centers, electronics and military.

We have SG&A actions in place as we continue to fund faster growing end market and international markets.

We've built a great management team.

Talented leaders who've delivered on their commitments over the past five years.

If you would now turn to page four of the presentation this is exactly how the first quarter played out.

For electrical products segment which is 87% of our sales, we saw strong industrial demand began particularly in oil, gas and energy sectors, very strong international sales up over 30%.

Firm commercial construction spending, particularly in new projects, and energy demand retrofits, a firm utility demand especially on seeing eye products, reliability products and international infrastructure.

Our total orders exceeded shipments in electrical by roughly 10% and we had solid productivity and pricing discipline which drove our electrical margins up 40 basis points to 16.4%.

In summary, electrical product segments grew at 12%.

We leveraged 20% on incremental revenues including acquisitions.

We improved our margins by 40 basis points.

All of that despite a loss of a distribution center from a tornado, continuing weakness in retail and a depressed residential market.

If you now turn to page five of the presentation.

For the tools group.

We saw solid growth in private, commercial and military aerospace demand and good growth in the Weller product line around the world.

Overall; however, the business was negatively impacted by soft retail demand and our decision to exit the automated systems business and focus on the higher margin tightening technology stations.

Tools margins were negatively impacted by the stranded costs up against difficult comps in the first quarter of 2007.

For the full year, we still expect very strong cash flow from our tools division.

Now let me turn the call over to Terry to give you more details on the quarter and update our guidance for the full year of 2008.

Terry?

Thanks, Kirk.

As Kirk mentioned, we had an outstanding start for the year, more challenging economic environment.

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

On slide 6 as Kirk noted our free cash flow for the first quarter of 2008 was $42 million compared to $52 million in the first quarter of 2007.

As is typical in the first quarter, annual customer and employee incentives are paid which results in the first quarter being the lowest free cash flow generating quarter of the year.

Cooper's strategic initiatives continue to drive performance and we anticipate delivering the eighth year in a row where free cash flow exceeds recurring income.

Our balance sheet remains in great shape with our debt to total capitalization net of cash investments of 31% on March 31, 2008 compared to 24.8% on December 31.

During the quarter, we took advantage of what we believe was an attractive buying opportunity and purchased 6.3 million shares for $266 million.

In the short term, this drove the increase in our debt to total capitalization up to 31%.

The stock buybacks of course reduce equity, driving up the reported net debt to total capitalization.

Importantly, our debt to EBITDA at December 31, 2007 was less than one to one and today is only approximately 1.1 to one.

Our debt and capital structure continue to remain in great shape and provide us outstanding flexibility to capitalize on opportunities.

Turning to slide seven.

Our inventory turns in the first quarter of 2008 were flat at 5.9 turns with last year.

The dollar investment inventories impacted by the increased material costs compared to a year ago as well as the MTL acquisition completed during the quarter in the 13 acquisitions completed in 2007.

MTL and a number of the acquisitions had low inventory turns which we believe provide significant opportunities for improvement.

We are achieving great results from our manufacturing excellent programs and should continue to see improvement as 2008 progresses.

On receivables, day sales outstanding in the first quarter of 2008 increased two days to 67 days compared to the first quarter of 2007.

The MTL acquisition we closed in February drove one day of the increase in DSOs.

Improvement we are making on DSOs are also offset by the impact of the strong international growth where commercial terms tend to be longer.

We also improved our payables performance in the first quarter of 2008 and are continuing to move suppliers to terms closer to the terms our customers demand.

Our operating working capital declined 5 turns compared to 5.1 turns in the first quarter 2007.

Overall, acquisitions are distorting our underlying performance, but aside from this, not as good as a performance in the first quarter of 2008 as we would like.

As the year progresses and we integrate the acquisitions completed over the last year, you'll see improvements in our metrics.

On slide eight, Our capital expenditures increased $1.5 million in the first quarter of 2008 to $23.6 million.

For the year, we continue to expect capital expenditures of 120 to $130 million.

During the quarter, we completed the MTL acquisition, a very small international acquisition in our tools segment that complements our global soldering solutions business.

During the quarter, our board of directors approved a 19% increase in our dividend to $1 per share, reflective of the strong financial results and expectations of continuing strong growth in earnings and cash flow.

In the first quarter, we purchased 6.3 million shares of our common stock spending $266 million against proceeds from issuances of $6 million.

We issued 831,000 shares for stock option exercises, matches to our 401k and other stock programs.

As a result, our outstanding shares decreased by approximately 5.4 million shares.

Under existing board of directors authorization, we can purchase up to an additional 11 million shares.

During the quarter, we also issued $300 million of seven-year note and effective interest rate of 5.56%.

This debt issuance enhanced our liquidity in a period where the credit markets are in turmoil and at a favorable long-term rate.

Our balance sheet is in great shape and we consistently generate very strong cash flow.

As a result, we have tremendous flexibility to fund both organic and acquisition growth, pay a competitive dividend and purchase our common stock.

Turning to the results for the first quarter in slide nine.

First there are two items that increased our results in the first quarter of 2008, currency gains and discreet tax items.

To be transparent, we note that these items are in a press release.

We always have currency gains and losses in a quarter but they're typically not very significant.

As we financed the MTL acquisition and put in place a U.K.

tax restructuring, we are unable to treat cross currency loans as cash flow hedges for accounting purposes.

As a result in the first quarter of 2008, we recognize $5 million in pretax currency gains.

Now that the MTL acquisition and the U.K.

tax restructuring have been finalized, we'll be able to structure the cross-currency loans in a matter that eliminates the P& L fluctuation.

We also realized discreet tax items that we were required to reflect in the first quarter effective tax rate versus flowing through the years estimated effective tax rate.

For transparency rather than claiming a lower tax rate in the first quarter, we laid out what we believe would have been our tax rate in the first quarter on a normal recurring basis.

These tax items reduced our first quarter effective tax rate to 26.1% versus a rate we would have reported for the quarter of 28.3%.

At this point, we expect our normal effective tax rate to be 28 to 28.5% in the second quarter based on our current forecast of earnings, tax planning initiatives being implemented could reduce the rate to 28% or slightly lower by the fourth quarter.

These two items combined increased our reported earnings per share by $0.05.

During the 2008 and 2007 first quarter, we did not recognize any Belden income.

At this point, based on the information Belden has provided us it doesn't look like we'll receive any payments until the third or fourth quarter.

Excluding the currency gains and discreet tax item, first quarter 2008 earnings per share were $0.81 compared to $0.71 in the prior year first quarter, an increase of 14%.

Included in the $0.81and the 14% increase are several items that impacted the results and comparability.

During the quarter, we downsized certain tools operations incurring $1 million in severance and our lighting business was impacted by a tornado destroying the primary distribution center that serves the retail market.

Our lighting team did an outstanding job recovering with an estimated revenue loss of only 5 to $10 million and estimated $1 million plus impact to their earnings.

I also want to remind everybody that in the first quarter last year, the customer orders in advance of and the clean out of open orders prior to the Go Live of our final North American division transition onto our global enterprise business system adds significant revenue and over $0.01 per share earnings in the first quarter 2007 results.

Turning to slide ten.

Today we report a revenue increase of 10.9% aided by currency translation which contributed close to 3% revenue growth in the quarter, and by acquisitions which contributed slightly over 6%.

Growth in businesses serving energy markets and international infrastructure had another tremendous quarter.

We had a slow start in the year in power systems and our lighting business was impacted by the storm loss of its primary retail warehouse and weak overall residential markets.

That being said, our orders were very strong in the first quarter with orders exceeding shipments in all of our divisions except for wiring devices which was very close to flat.

And the progression of sales by month was what I would characterize as normal versus the prior year where we had a stronger than usual January and very strong March.

I do want to point out that revenue growth was impacted by certain naturally occurring and unusual items.

There were one to two less shipping days depending on the Cooper business unit.

In 2008, they impacted revenues by over $10 million.

The loss of the distribution center impacted sales by 5 to $10 million and shipments ahead of the enterprise business system Go Live (inaudible) with last year add revenues to the prior year first quarter.

We look at the underlying trends and our order book in April.

We are encouraged that we will see solid performance as we move through the second quarter.

Exclusive of the currency gains and tax benefits, we reported $0.81in earnings per share versus our forecast of $0.78 to $0.82 cents.

Also, as I mentioned, we had severance and tools and the impact of the loss of the lighting warehouse that impacted earnings by at least $0.01 per share.

Plus across the company, we're investing in businesses and geographies with strong growth prospects and businesses and product lines in the current environment have slowed or are slowing we're taking out costs.

Throughout the year, aside from the specific actions in the tool segment, we will be absorbing higher severance and other costs in the prior year.

The bottom line is that we feel very good about the first strong start to the year.

As we discussed in October 2007 outlook meeting, reducing our share account will be nice contributed to our earnings per share growth in 2008.

Simply taking the reported lower share count 4% of our earnings per share growth was from stock buybacks.

Of course everyone realizes that we had to finance the share buybacks with reduced net income.

With the finance cost factored in, earnings per share increased approximately 2% as a result of the share buybacks.

On slide 11, both our balance sheet and income statement were significantly impacted by the incremental impact of acquisitions.

As I mentioned earlier, acquisitions contributed over 6% to our revenue growth.

With the revaluation of inventory and amortization of intangibles, the incremental revenue from acquisitions contributed mid-single digit return on sales with a lower cost of goods sold in the base business and significantly higher selling administrative costs.

The reported overall cost of sales as a percentage of revenue improved 170 basis points resulting in gross margins, increasing to 33.9% from 32.2% in last year's first quarter.

The incremental impact of acquisitions accounted for 20 basis points of the improvement.

Gross margins excluding the incremental impact from acquisitions improved 60 basis points from the fourth quarter of 2007 reflecting our continued aggressive pricing actions, realization of the benefits from our strategic initiatives, favorable sales mix and higher growth rate in our international sales where we have higher gross margins offset by higher selling and administrative costs than in the U.S.

In the first quarter, steel, copper, electrical grade steel, transformer oil and certain other metals have increased significantly.

As I have said before, our operating practice is always to look ahead, drive pricing to offset material inflation as it incurs and not play catch up.

We have and continue to implement and announce price increase across our businesses.

Overall, we've been very successful in achieving price to stay at least even with material cost inflation and the first quarter was again no exception.

And importantly, we expect to continue to achieve price at least equal to material cost inflation over the balance of the year.

Excluding currency gains, selling general and administrative expense for the quarter as a percentage of sales was19.8% compared to 18.3% in the prior year first quarter.

The incremental impact of acquisitions added 50 basis points to selling general and administrative expenses as a percentage of sales.

As we saw, starting in the fourth quarter, growth platforms we're building out tend to have much higher selling administrative costs than our base businesses.

The higher growth rate of international revenues where most case selling and administrative costs are higher in the U.S.

also increase the reported selling administrative costs as a percentage of sales.

As I said earlier, we're aggressively investing in businesses and international market where we have strong growth.

From a segment reporting perspective for the first quarter of 2008, we reported $18.3 million in general corporate and other expense compared to $21.6 million in the comparable quarter of 2007.

General corporate expense includes the $5 million in currency exchange gains.

Excluding the currency gains, general corporate increased $1.8 million from primarily from higher compensation and legal expenses.

Turning to slide 12.

Solid execution on cost initiatives while continuing to invest in our company-wide growth initiatives and great execution across our businesses and price realization drove a 12% increase in operating income and our operating margin of 20 basis points to 14.1% exclusive of the currency gain.

Turning to slide 13, our net interest expense, our tax rate and net income.

Our net interest expense was up $2 million compared to the 2007 first quarter.

Our net debt has increased $583 million from a year ago as we financed acquisitions and purchased common stock and earnings on cash investments have of course declined with the reduction of interest rates in the U.S.

Our effective tax rate for the first quarter was 26.1% versus a 27.1% for the first quarter 2007.

But, as I said excluding discreet tax items in the first quarter, our tax rate would have been 28.3%.

Increase in the tax rate is primarily from the incremental income being taxed at the statutory U.S.

Federal and State tax rate.

The tax benefits from our international and state tax plans to date were offset by an increase in the China income tax.

Despite the higher interest expense and higher tax rate in the quarter, our net income increased 16%, 11% revenue increase and 10% excluding the currency gains and the discrete tax items.

Turning to the segments.

On slide 14.

For the quarter, our electrical products segment revenues increased 12.5% excluding currency translation and incremental revenue from acquisitions, revenues grew approximately 3%.

Price realization represented over half of the growth.

As I mentioned earlier, fewer shipping days, the loss of the distribution center and the shipments in the prior year ahead of the Bussmann Go Live on our enterprise business system all reduced the reported core growth.

With the very strong first quarter 2007 core growth of 9%, electrical segment was up against very tough comparables.

The businesses serving the energy markets continue to excel with core revenues up double digits against tough comparables as did our international operations.

Our lighting business had a weak performance in the retail channel with retail channel revenues down double digits impacted by the loss of our warehouse.

The decline in retail channel was more than offset by sales increases and the commercial industrial market.

Our power systems business was flat with the prior year excluding the incremental impact of acquisitions up against some very tough comparables in the first quarter 2007 where revenues increased close to 30% exclusive of acquisitions.

We also did not ship several orders before yeara end-- before quarter end which impacted our results.

Orders strongly exceeded sales and comparables get easier as the year progresses and the long-term growth drivers remain intact.

So we remain positive for the year on the utility side.

Revenue growth for electrical products was strong international.

Developing country revenue growth was 29% with Asia Pacific, Eastern Europe, and the Middle East having the strongest growth.

Electrical distribution revenues were up low double digits with very strong growth outside North American and mid-single digit growth in North America.

Our softest channel was the retail channel where revenues declined double digits in electrical segments.

As I said, revenues were impacted by the loss of the lighting retail warehouse and continued weakness in this channel.

Overall, electrical product segment earnings increased 16% and return on sales increased 40 basis points to 16.4% from 16% in the first quarter of 2007.

We had terrific performance in electrical with return on sales excluding the incremental impact from acquisitions at 17.3%.

The sales mix in the quarter was positive with sales in lower margin power systems, lighting and other products that serve the residential market or the residential infrastructure market are sold through the retail channel offset by higher margin products sold into energy infrastructure and industrial markets.

This is why absent significant global or U.S.

economic downturn we remain confident that we can deliver a solid double digit earning increase in these tougher economic times.

Turning to the tools segment on slide 15.

In our tools business, sales increased 1% but declined 5% excluding currency translation.

We had solid revenue and earnings growth in aerospace and international power tools sales.

Our international assembly systems sales declined as we have exited the transfer line side of this business over the past year.

U.S.

industrial sales were weak against tough comparables in the prior year and weakness in the motor vehicle end markets.

Retail sales were down high single digits as a result of customer inventory reductions and softness in the residential markets.

Tools operating earnings decreased 21% on a sales increase of 1%.

Our reported tools operating margin as a percentage of sales decreased 260 basis points to 9.3%.

The results were impacted by $1 million in severance incurred in consolidating headquarter functions and other areas.

Typically, the first quarter of the year is the weakest quarter for the tools segment.

However, this was not the case in 2007, if you recall, where earnings were up 26% over the first quarter of 2006.

The tools segment is also being negatively impacted by the exit from the large assembly system transfer line business over the past year or so.

We've been negotiating with the labor union to downsize the facility and expect to complete the negotiations in the second quarter.

While this year we had more of a normal trend and not a great quarter by tools, we expect improved performance as the year progresses.

Before turning the call back to Kirk for his final comments, I'll provide comments on our forecast for the second quarter and year.

Turning to slide 16.

In the second quarter, we're forecasting revenues to increase 12 to 15% with electrical up 13 to 16% and tools up 2% to 7%.

Acquisitions are forecast to contribute close to 7% to the revenue growth and currency translation close to 1% leaving a forecasted 4% to 6% core revenue growth.

Earnings per share are forecasted to be in the range of $0.86 to $0.90 per share an increase of 10 to 15% from the $0.78 we reported in the second quarter of last year, exclusive of unusual items.

$0.86 to $0.90 earnings per share includes $0.02 to $0.03 per share charge in the tool segment.

For the full year we continue to forecast a top line growth of 10 to 13%.

Acquisitions add slightly over 6% to the revenue growth and currency translation approximately 1%.

We are forecasting earnings per share of 351 to 365, inclusive of the currency gains and tax items in the second quarter tools charged.

Let me turn the call back to Kirk for his final comments.

Thank you, Terry.

In summary, we feel extremely well positioned to deliver another year of double digit earnings growth despite the challenging economy.

Our portfolio is much more diverse and has a broader exposure to key global market segments that will provide and offset to a weakening U.S.

economy.

We've also made significant investments to gain a much larger share of the developing and globaling infrastructure spending which we expect that trend to continue.

Our order rate was strong in the first quarter and we continue to find good opportunities for organic growth across our diverse business portfolio.

We completed 15 acquisitions over the last 15 months for $650 million in the integration process is on track.

These acquired companies with $500 million of revenue today will provide us additional access to attractive higher growth, better margin opportunities in the future.

And while we've been feverishly integrating these properties, the market uncertainty made our stock valuation very attractive giving long-term Cooper shareholders the opportunity to purchase our shares at a very attractive multiple.

And so, we purchased over 6 million shares continuing to be disciplined and opportunistic with our cash deployment.

In summary, we expect our 175th year anniversary to be another record year and feel good about the start to this historic anniversary.

Now let me turn the call back over to Jon to answer your questions.

Thanks Kirk.

At this point I'd like to open up the call for questions.

I just would like to remind our listeners to please enter the queue under your own name.

Out of respect for others waiting to ask a question we will not take questions from people who enter the call queues using someone else's name.

Operator, first question please.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Bob Cornell with Lehman Brothers.

Please proceed.

Hey, everybody.

Hey, Bob.

Good looking quarter.

You mentioned intriguingly the comments about the strong April order book.

Could you flesh out that comment, please, Kirk?

As we kind of rap through the year as Terry mentioned, we're up against some difficult comps and as you can imagine, we keep tabs on things pretty close.

So the intake rate in April is at or ahead of where we thought it would be.

I think Terry did a nice job walking you guys through and giving you the much visibility you could business by business and where we stood.

We're very positive about the order rate and as you know, Bob, when we look out at least one quarter, we have very good visibility.

So the combination of the order rate and the way April started out, we feel pretty good about the second quarter certainly, and as we mentioned, while we're somewhat conservative, still feel pretty good about the remainder of the year.

I'm sure a lot of people on the call are going to wonder about the nonres market and you previously talked about inquiry levels and order rates and visibility.

What would be an update there?

If I buried my head in the sand and didn't read any of the journals or watch the TV, I would tell you that the first quarter we built backlog at the lighting business, we continue to see a good order pattern and quotation pattern.

We're focused on where the growth is the institutional segment, the hospitals government utility energy international.

We continue to build out our portfolio on the spec side of the business.

The energy retrofit market is booming.

Lighting is roughly 40% of the electric bill.

80% of the buildings have systems or lighting products that are older than 1990.

And, the lighting controls in the payback on these energy efficiency products are really upwards of 40%.

We've got a whole launch of new product families in this area coming up the light there.

And, the second quarter because of the backlog looks good.

But I think you can't be naive and not think that the layoffs in the financial institutions, the higher commercial loan crisis and the construction costs aren't going to have an impact.

Certainly the A.B.I.

number in the last month wasn't overly attractive.

So, we're anticipating a tightening in the back half but we don't see it yet.

Again, if I looked at some of the other reports that came out in the last couple days as some of the big commercial people on elevators and HVAC and security and systems controls, I would believe that maybe we're being conservative but I think it's the prudent stance to take at this point.

I just one final comment.

All of a sudden, people are talking about the energy retro fit.

Honeywell's been (inaudible) that business for years, as has Johnson Controls.

Why is the energy retro fit business all of a sudden such a hot item?

Because utility rates have gone up and nearly doubled because of the price of oil and coal.

And then there's this government energy bill which gives people more incentive to want to do it and this whole green impact.

Everybody's doing sustainability reports now.

We have now, I think, relamped the majority of our facilities.

You can cut your electric bill by half and again, you can get a pay back in one to two years on that investment.

So there's a lot of things that are pushing the interest in that space right now, Bob.

Thanks, Kirk.

Thank you.

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

Please proceed.

Good afternoon.

Hey, Nicole.

I guess, just to start.

When we think about kind of the strength of the international portfolio, I think you said electrical was up over 30%.

Could you just give us some context when you think about region.

As you think about your industrial and commercial portfolios, I think both decided strong international slower North American industrial, could you give us some sense of the magnitude of the difference and where you're seeing the strength in Europe and you expect that to moderate like you're seeing in North America in the second half of '08?

We just came back.

We had the whole team over in Asia for about a week.

I was in Vietnam and some of the guys were up in Korea and Japan.

While there's higher inflation and currency strength, I think the overall fundamental G.D.P.

growth across Asia is in tact.

So again we're a relatively small player on relatively small numbers in the grand scheme of things.

So continue to see great strength there.

Middle East because of the oil and gas and commercial construction very, very strong.

Grant and I were in South America, we were down in Costa Rica and Peru.

But I would tell you South America continues to be strong as well.

We really didn't see anything that would give us any reason to believe that we're going to slow or see anything different in the back half of international.

The activity-- the project activity, we continue to localize manufacturing and bring out more products.

We continue to invest in our sales organizations out there.

I think that's going to continue at strength.

In the U.S., the Crouse business oil and gas was terrific.

I mean, the Gulf Coast was strong.

A lot of new construction and investments as I mentioned the steel industry, copper,-- we were out at Kenicott Mines out in Utah-- still a lot of activity.

You can imagine these facilities are being run now hard now on three shifts with commodity prices.

The softness is in the U.S.

automotive space.

The softness is in the furniture market and those kinds of spaces.

Overall, industrial, our industrial space continues to be very strong in our outlook for the year continues to be very strong.

Terry, do you have anything to add?

No, I think that's right.

You asked about Europe, Nicole.

Europe started out the year very strong.

A lot of our Europe business exports to the Middle East and other areas of the country, which are the world that are booming.

So right now, the outlook across Europe, et cetera, is going to be much stronger growth than clearly the U.S.

for the year.

Kirk, you indicated the orders versus ship spread is I think greater than 10%.

What does that historically track the range?

And then I guess to follow up to your answer to Bob, Kirk, how far in advance would you see a slow down in the commercial side based on what you're seeing with A.B.I.?

The book to bill was the best it's been in about five, six quarters, Nicole.

So that's very strong for us.

A lot of times normally we see 3, 4% because-- but I would say it was particularly strong.

Again, the best in almost a year and a half as we went back and looked at the book to bill overall for the last few.

To answer your question on the lead time.

I think we had a pretty firm for the second and the third quarter now looks okay.

As you get out to the fourth quarter, it's a little trickier because, again, a lot of that business hasn't even been quoted yet or begun to be placed.

So on the project side, we're seeing slowness in the stock business as you'd imagine related to light retail and housing.

But the project business has been especially strong and again, we would begin to see that slowing down in the fourth quarter sometime at the end of the second quarter would be my guess.

Again, we'll talk about it on all the calls.

But our anticipation is it will slow.

Super.

Thank you.

Thank you, Nicole.

Your next question comes from the line of [Jeff Sprague] with Citi Investment Research.

Please proceed.

Thanks, hello everybody.

Hey, Jeff.

I don't mean to nit-pick this orders versus shipment, but it is a very interesting, intriguing point, And, just a further follow-up to where Nicole was.

You said the book to bill was strong but I guess the bill was abnormally depressed a little bit on these items.

Just if you look at the year over year growth rate in orders, could you tell us what that was?

Growth rate orders?

I don't have it in front of me.

Yeah, Jeff.

I don't have that handy, but last year in the first quarter, I know we were up nicely over the prior year.

Also, the first quarter last year if you remember, we raised guidance in the first quarter because of the strength of the first quarter and the bookings we had going into the second quarter.

So while I don't have that information right in front of me, I would suspect being up the way we are right now over a quarter like the first quarter of last year is very positive.

We could pull it out, Jeff.

I don't want to spend time on the call here going through that but we could pull it up.

I'll follow up with Jon on that, no problem.

Can you give us a little more color, Kirk, on what you're seeing in the utility space?

Clearly, there's some pressure on the D side of the equation with resi weakness but how about some of the more project related piece of your business?

What's going on there?

Yeah, overall, as Terry said on the phone, a little bit deceiving because of the core growth last year was sort of high 20 -- I think it was 28% was the growth rate of the business so you saw it taper off in the first quarter.

Again, built backlog had a good order intake rate in the first quarter.

Soft softness as you'd expect on the distribution type products, no inclement weather in the quarter, nothing unusual there, but the seeing eye business continues to be strong, the international business continues to be very strong and the reliability, the Cannon E.A.S.

type products continue to be strong.

As we talk to customers there continue to be a lot of interest in capital budgets or holding.

So no reason to believe that the utilities and end users are cutting capital plans and, the age grit and all that comes into play.

We expect it to continue to be strong and certainly be close to our double digit growth number by the end of the year, which means we're going to catch up on some of the softness we had on the year-over-year basis in the first quarter.

Right.

Pricing continues to be favorable as well, as you can imagine with core steel and copper and all the other sort of things that we're aggressively going out and trying to recapture some of that in the marketplace.

I'd say the price environment still continues to be strong there as well.

I guess that's going to be a question as we look over the course of the year.

Do you see, your volumes are still net-net pretty decent but are you seeing any signs that people are pushing back on price given that, the volume momentum in general is softening a little bit in some of these channels?

You know, to date, Jeff and we just talked to all our division presidents, we're really not seeing that.

And we've come out with price increases across the globe, Europe, North America and every one of our businesses.

Some earlier in the quarter, some will happen again here in April and May because of what's happening in steel prices.

To date, no real pushback on it.

Can you actually give us the growth number for Europe in the quarter ex-currency, ex yields?

It was up mid -- a little better than mid-single digits.

All right.

Thank you.

Between 5 and 10%, Jeff.

Okay.

Thanks.

Without acquisition, without FX.

Thanks.

Your next question comes from the line of Christopher Glynn with Oppenheimer.

Please proceed.

Thanks.

I just want to again dive back into the retro fit a little bit.

I think the majority of your retro fit exposure being lighting and probably kind of a new business model, a different sales model.

Where are you with kind of putting the infrastructure in place around that to go after that market?

We've been working on a new product pipeline, Chris, for about the last 12 months.

We have ten new product families that have been launched in the last 12 months, and we've built a vertical market team.

The gentleman who runs this business really reports directly to the division president.

Then on top of all that, we have been out of course aggressively training the lighting agents and our sales people on the field on how to sell the economics of this.

Because, again, you're talking to people who don't necessarily wake up and say I need to go relamp my distribution center or my warehouse.

But when you go in and show them the economics which is basically a spread sheet and you plug in your utility costs and what would it cost to the capital expenditure it gives them a payback very, very quickly and shows them the economics of all this.

Then they get the benefits of any utility rebate that could be in that marketplace and additionally, we get the savings and the credits for the green initiative as well.

How easy or difficult is it to track the volumes and the quotations going into that market as distinct from, the traditionally normal project and refurbishment?

And as a follow on to that, do you have any figures around what the quotation activity levels are at relative to, say, a year ago?

Well, the business has nearly doubled in the last 12 months off of a slow number, but it's getting to be approaching that $100 million plus business this year.

And it is hard to separate because again when the order is actually placed, it's placed through the normal order entry of the business.

So it is a little bit difficult to say exactly what was sold on a retro fit versus what was sold on a remodeling job.

We can't track it in that specifically back to the origin of the order or the end user.

But the large retailer, the national accounts great traction is you'd imagine the U.P.Ss of the world, the Federal Expresses, Prologics, people who own large amounts of distribution centers.

So there's a ton of traction out there in this area.

Okay.

Just a couple housecleaning.

The corporate expense is quite low just wondering if there's anything of interest there.

Then finally in the segment income statement, does the currency benefit go in the electrical segment?

General corporate expense includes the $5 million currency gain.

So if you add that back up, we were up less than $2 million in general corporate over the prior year and it goes into SG&A, not in the segments.

Great.

Thanks very much.

Thanks, Chris.

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

Please proceed.

Hi, everybody.

Most of my questions have been answered but I am curious on the net debt to cap chart hitting 31% in 1-Q.

We always think of 35% being somewhat normalized, I guess for most industrial companies.

Terry, do you have a view of where kind of optimal capital structure is for you guys and heading into-- if you believe Dodge and A.B.I-- heading into what could be a tough back of '08 and '09.

Does that change your view on how you think about debt levels?

Well, we've bought back a substantial amount of stock in the last 18 months, which is really pulled our equity number down.

So if you look at our net-- just look at net debt to cap, it shows we've gone up slightly from where we were two, three years ago.

But if you look at our EBITDA coverage ratio, we're still only a little bit over 1.1 to 1 today.

And that'll improve through the year absent some significant acquisitions, et cetera.

So today's world based on what we've done with equity with the share buybacks.

We could easily go above 35% and be in great shape in all of our metrics.

So, quite frankly, as things slow down, we generate more cash out of the working capital side of it.

So when I project out of our plan over the next two, three years even with some softening this year on it, not concerned at all.

Okay.

Guys, maybe just more asking your opinion than anything else, how do you reconcile this dreadfully bad A.B.I.

and Dodge data that we're getting and certainly spooking the heck out of the marketplace as it relates to anybody that's got commercial construction exposure?

How do you reconcile that with maybe some of your sales guys or division heads have been doing this a long time?

I guess my question is one to get your opinion on the quality of this data and if you kind of believe it or if it's maybe not capturing some of maybe a broader subset that maybe you're selling to and also just if you do believe the data, what do you do about it?

Can you plan -- can you preplan some-- take out some shifts or cut down some, take out a couple factories in anticipation or do you kind of wait until it hits you and then feel like you're going to have enough time to be able to make some moves if indeed you believe the data because it sounds like -- sounds like your internal sales force is telling you something that maybe the data is telling us something different.

Not just the sales force, Scott.

You've got to look at the order rate, right?

So you can't panic too soon because you become self-fulfilling.

So let me try to answer your question.

First of all, the A.B.I.

has got residential in it and several other components in it, light retail.

There's nothing surprising that residential got worse in the month of February, March, and light commercial.

We've been talking Starbuck's and Dunkin' Donuts new sites for awhile and there's not been a lot of activity there.

The second piece is the large project business on the institutional side, even within the A.B.I.

showed good growth or strong stabilization there.

That's where we're seeing a good project business and the business holding up quite well.

The other piece is at 44% of our 38% -- excuse me, 32% of our 26% commercial is international.

So Dubai, the European economies are holding up pretty good.

So I think if you even went back to 2001 and you looked at the last downturn from peak to trough on lighting, and if you looked at the [Jen lights and QTs] and the others, it was something like 5%.

So I think between the international exposure, the segments that are still strong, the energy efficiency piece, which is stated to be something like $100 billion opportunity that's out there, the international piece I talked about, the lighting controls and some of these other nice slivers that we can do reasonably well there.

We've driven productivity, we've outsourced a lot more.

We have reconfigured our footprint and then I think what you're not taking into consideration is where we're going to be on industrial and utility and these other spaces which has been part of our plan.

And not be solely focused on construction as a company again like we were in 2001.

So when you look at the company in 2001 and 2008, again that's why we're confident that we can continue to grow this even in this environment when housing is soft and nonres is going to get soft in some segments.

We've got the international piece, we've a great industrial piece, we've got a great utility piece that we think we can offset some of this and still grow the earnings of the company double digit.

That's pretty clear.

The other question I wanted to get at is-- last question is energy efficiency.

This has certainly gained more momentum in the last couple quarters.

It's very hard to quantify.

I think your comments really reflect that.

There's a lot of chatter on cap and trade and some things going on in Washington that could impact.

How does your sales force go to market if-- I guess my question is if we are getting a new environment, we're going to have cap and trade in '09, it may actually benefit companies to wait until legislation is passed before they upgrade or retro fit.

How do you kind of get the sales force out there selling this and getting people to change early?

Is it purely on realtime energy savings?

It's realtime energy savings.

The utility costs continue to go up, and I think most or all companies have an incentive now to demonstrate some area of energy efficiency or green initiative to their customers or their employees that they're doing the right things.

It's also, Scott, of course a better, whiter light so versus that old orangey hue that you had in your manufacturing centers, or distribution centers, you're putting in a nice-- if you go to the old Home Depots and the Lowes, they used to use HID and all those applications.

Now all the new is fluorescent.

So I don't think we're seeing a reluctance and need more government intervention to speed it along, although that continues to be the trend.

The utility companies in different states have incentives as well for people to do this as well.

Okay.

Good that's helpful.

Thanks, guys.

Thanks, Scott.

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

Please proceed.

Thank you.

If we can go over-- back to the utility sector and comments if we could.

Your comments are a lot more bullish on the outlook than some of the distributors are talking about.

I know there's a big difference in mix.

If you list ton the distributors, they are talking about down low double digits with some of the distributor products that they focus on.

I know that's only about 10% of your mix.

Are you seeing the same slowdown that they're talking about on the utility space?

Exactly.

If you peeled it out and I already got a call one of our competitors came out with some numbers the last couple days.

We've already looked at it.

If you look at that segment of our space which is the residential distribution business, it's down almost about the same kind of numbers.

The margins are up, the pricing is better, but it's down.

If you look at the international, Deane, if you look at the three phase padamount, if you look at the reliability products, on some product lines we're sold out.

Order rate's very, very strong.

Good visibility is probably one of our best visibility businesses as far as looking out six months and so that's why we feel confident with the comments that we made.

It's a different business than a lot of those people who rely strictly on distribution.

Good.

That's very helpful.

Then for Terry this is the second time we heard about the tornado.

Is this going to carry through for the balance of the year or when does this get resolved and will there be insurance recoveries?

Our facility was totally insured.

There was about $25 million of inventory -- well, I guess it was more than that.

Probably more than $30 plus million of inventory in the warehouse.

We lost most of that.

That's part of the reason why you see our inventory turns up because we had to -- we hadn't written that inventory off but it's all, 100%, covered by insurance.

So most of our costs was just getting out of the facility.

Of course we had to deploy teams et cetera to get moved into a temporary facility.

We've done that.

We've still got a little bit of recovery to do, but by mid-May we're back in business full steam.

Okay.

Just to clarify on the restructuring that you did in tool, Was that in your previous guidance?

Was there anything discretionary there?

There was a small, very small piece of that that was in our guidance.

We took more actions there, Deane, ended up doing it much broader, and that's why we set it out.

It did distort their numbers a little bit.

Any update, Terry, on the asbestos front?

The judge is through getting briefs and testimony on Plan A ,we're waiting for her ruling on it.

She is not doing that very fast.

The Plaintiffs bar has asked for a stay or injunction, which I believe there's a hearing set on June 2.

Okay.

I know those delays are outside of your control, but the earliest it would be early June?

That's when the next hearing's set.

So next time we would hear something.

But Deane, at the end of the day, I guess we're probably going to grow a little bit impatient with the waiting process as well.

As you know Plan B has been approved.

The overall program gets more and more expensive the longer we wait.

So if we can't get the judge to give us some indication one way or another, of course, we retain the option to force Plan B and just move on with this thing because it does give us the ability then to set up our shop and get on with life and just manage the liability and manage our insurance as we move forward.

So I would tell you by the time we get on this call again we ought to be further along in our decision or closer to an end to this whole thing, one way or the other.

How quickly for Plan B do you get that receivable?

Is it $138 million?

Yes.

10 days roughly.

Once we give our notification the money is in an escrow, we pick up the $138 million.

Again, we sort of restaff ourselves and manage as we have for the last four or five years.

We can look at other insurance options and other things, but at some point, we've discussed this with the board, we just need to move on.

Some of these things can sit in bankruptcy because of her docket for years and that is not a path we're going to take.

From a net liability standpoint, I don't see a big difference between A & B.

I know you would like to get final resolution on this.

If you really look at the math, we were paying a premium to get at A, but as we've said, the terms and conditions of A don't change if we sit out there for a year or two.

So as we manage more of this liability over time, we're not really chipping away at the offer so therefore the offer gets more expensive over time.

So at some point, this thing just becomes a white elephant and we ought to just get on with life.

That's kind of where we're getting to.

Okay.

Thank you.

Thanks, Deane.

With no further questions in the queue, I'd like to turn the call back over to Jon Safran for closing remarks.

Okay.

Thank you, everyone, for joining us today.

This concludes the call.

Thank you for your participation in today's conference.

This does conclude your presentation.

You may now disconnect and have a good day.