伊頓 (ETN) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2009 Cooper Industries Limited earnings conference call.

My name is Keysha, and I will be your operator for today.

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

We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

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

Mark Doheny, Director of Investor Relations.

Please proceed, sir.

Thank you, Keysha.

Welcome to the Cooper Industries first quarter 2009 earnings conference call.

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

We have posted a presentation on our website that we will refer to throughout this call.

If you would like to view the presentation, please go to the Investor Center section of our website, www.cooperindustries.com, and click on the hyperlink for management presentations.

As a reminder, 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 of which are outside of the control of the company and therefore actual results may differ materially from those anticipated by Cooper.

A discussion of these factors may be found in the company's annual report on Form 10-K and other recent SEC filings.

In addition, comments made here may include non-GAAP financial measures.

To the extent they have been anticipated, reconciliations of those measures to the most directly comparable GAAP measures are included in the press release and the web presentation.

Now let me turn the call over to Kirk.

Thanks, Mark.

Good afternoon.

As many you know, back in November of 2008, we reduced our fourth quarter guidance as all of our internal controls guided us to significantly lower revenue with accelerated deterioration in most of our end markets.

And while we completed the fourth quarter of last year with earnings of $0.84, which were up 1% over the prior year, and for the full year record cash flow of $761 million, we dramatically changed our near-term tactical direction to focus on three main objectives.

First, resizing the company for 20% lower revenue, because we believed at the time that we were seeing permanent demand destruction and it may take years to recover.

Second, delever the balance sheet quickly despite the impact on margins and earnings per share.

And third, to continue to invest in customer loyalty, technology innovation, improving our global penetration, and keeping active in the M&A markets.

With regard to these three objectives, we did an outstanding job executing in the first quarter and have positioned our company to continue to be profitable, generate substantial cash flow, and successfully navigate this new world.

Now let me provide some more detailed comments specifically on the first quarter 2009.

If you turn to page 2 of the exhibits, our total revenue for the quarter was down 19% with our core growth down 16%.

For electrical products we were down 17% with core down 15%, and tools was down 32% with core down 25%.

Again as I mentioned we did a solid job on resizing our cost structure with our headcount down 17% year-over-year, SG&A down 19% year-over-year, and our overall de-leveraging on operating earnings at 31% on incremental revenue.

We quickly delevered our balance sheet.

Our inventory is down $132 million year-over-year, and our operating working capital down 20% year-over-year.

We delivered record cash flow of $137 million, nearly 11% of sales versus $42 million last year, despite operating earnings being down over $100 million year-over-year.

And as anticipated, electrical margins declined to 12.4%, and tools margins were negative at 3.1%.

We continue to invest in the future, new products, new technologies, international growth specifically focused on South America, Middle East, and Asia, and we completed one acquisition in the LED technology area.

And we continue to explore a very, very interesting pipeline of new opportunities.

In summary, we accelerated the cost out, the working capital reductions, and we improved our overall competitive position in a very challenging economy.

Turning to page 4, comments on the end markets.

Industrial, our biggest end market for 40% of our sales last year, was down hard in the first quarter driven by record low manufacturing activity with factory utilization at 67% and the ISM index at 36%.

We also saw a decline in energy investment around the world as a result of lower oil, gas, and commodity prices.

The good news is some of these indexes are stabilizing and automotive/truck outputs are extremely low levels and beginning to bottom.

In commercial construction, or 25% of our sales last year, we saw sales declines accelerate as vacancy rates climbed above 15%, credit markets remain difficult, and unemployment crossed 8%, driven largely by the banking, retailing, and other service industries.

As we met with distributors and contractors, we see commercial construction markets continuing to be extremely difficult for the next 12 to 18 months.

In the utility market or 21% of our 2008 sales, we had strong growth in smart grid demand management products, but also saw substantial weakness in transformers and other utility products that sharply reduced inventory and capital budgets by the utilities, some of which we noted of course back in November 2008.

Overall, our book-to-bill ratio in utility flattened out to 1, and we believe the back half of the year now is moving more toward normal demand patterns as we progress to the back half of this year.

Lastly on residential retail, or 9% of our sales last year, we were off sharply in tools, lighting, and wiring devices.

Annual housing starts have declined to below 500,000, and while the housing affordability index is nearing all-time highs, we still anticipate a tough 2009 with a very modest recovery in 2010.

Turning to page 5 of the handout for segment results for the electrical products group, which, again, last year was 88% of sales and in the first quarter 90% of sales.

Every channel in every market was down somewhere between 15% and 20%.

Electronics orders in Asia were actually up.

Currency cost us 3.7% in growth, and international was down low double digits excluding foreign exchange.

Our book-to-bill ratio improved from 88% in the fourth quarter to 100% in the first quarter of this year.

And of course we took additional cost action, slowed production rates and liquidated higher-cost inventory, which generated strong cash flow, but drove our margins down to 12.4% versus 16.4% last year.

If you turn to page 6 of the handout for the tools group, we saw a very difficult quarter with sales around 32%, 25% from the core.

We saw weakness across all markets and geographies including automotive, industrial, and retail.

The aerospace, military, and Weller product line showed more modest weakness.

Our order rates in the quarter were equal to sales and our margins were negatively impacted of course again by lower volumes and factory shutdowns.

Now let me turn the call over to Terry to provide you additional details on the quarter and update you on our second quarter and full year guidance.

Thanks, Kirk.

As Kirk mentioned, the first quarter was challenging, with our customers rapidly adjusting inventory levels, uncertainty across the globe over the economic outlook, and tight credit conditions driving project delays and deferral of maintenance.

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

On Slide 7, as Kirk noted, we had record first quarter free cash flow.

Free cash flow increased over 220% to $137 million compared to $42 million in the first quarter of 2008.

In the first quarter before income taxes, we received in cash $22.9 million of a total of $30.9 million in insurance settlements on our discontinued operations.

Offsetting this was the payment of $18 million in restructuring payments.

Our free cash flow in the first quarter of $137 million is evidence of our ability to adjust our businesses to the new economic reality even if it does take a toll on the short-term earnings performance.

Our balance sheet remains in great shape with our debt to total capitalization net of cash at 25.5% on March 31st, 2009, compared to 26.8% at the end of last year.

Turning to slide 8, our net debt at March 31st, 2009 was $900 million, compared to $952 million at December 31st.

This was after returning to shareholders $23.5 million in common stock purchases net of proceeds and $42 million in dividends in the first quarter.

Now you can see in Slide 8, our debt maturities are very well positioned with fixed interest rates below 6%, and at March 31st, we had no commercial paper outstanding.

As we said before in November 2009, both our $500 million credit facility and $270 million in notes are maturing.

We have had active discussions with our bank on renewing the credit facility, and we remain committed to replacing this facility in the near term.

However, with the significant increase in the cost of the credit facility, we are evaluating the size of the facility we need to have in place to maintain our flexibility.

As for the debt maturity, we continue to operate with adequate cash reserves to retire the $275 million in debt that matures in November of this year.

The long-term debt markets are favorable.

We could end up refinancing this debt later this year.

Bottom line is that we have more than adequate liquidity without any reliance on the credit markets.

Our debt and capital structure remain in great shape, and our balance sheet is clearly a strategic asset in the current economic environment.

Turning to Slide 9, we're very pleased with the performance in operating working capital.

Typically we build inventory in the first quarter to meet seasonality demands.

With limited exceptions this year, we adjusted inventory for the current order intake -- a swing of $85 million in free cash flow from inventory management between the first quarter of 2009 and the first quarter of 2008.

Our inventory at March 31st was $610 million compared to $742 million at March 31st, 2008, an 18% decrease.

Our operations proactively have brought inventory levels down in a very challenging environment.

During the quarter we took extended shutdowns on factories, and implemented reduced work weeks at many of our facilities.

Our inventory turns were 5.7 compared to 5.9 in the first quarter of 2008.

For receivables, our days sales outstanding at March 31st decreased by three days to 64 days compared to the first quarter of 2008.

Receivables declined $239 million from March 31st, 2008, a 21% decline.

As you can tell from our results, we are aggressively monitoring credit and collections in today's economic environment, and we're continuing to make progress on collecting receivables within the terms.

Our payables declined $106 million or 19% from March 31st, 2008, driven by the inventory reductions.

With the rapid decline in revenues, our operating working capital returns declined to 4.5 turns compared to 5 turns.

From March 31st, 2008 to March 31st, 2009, our operating working capital declined 20%, demonstrating our ability to quickly resize our balance sheet to the rapid decline in economic conditions.

We have rapidly adjusted our operating capital, positioning us very well for the remainder of the year.

Turning to Slide 10, our capital expenditures were $28.7 million in the first quarter of 2009 compared to $23.6 million in the first quarter of 2008.

Capital expenditures in 2009 included expenditures of $8 million on our enterprise business system data center in-sourcing, which is a majority of the capital for this project.

Other major projects in process include a new MTL factory that was committed before we acquired MTL, a new China facility for our Bussmann fuse business, and a new Saudi facility.

Capital expenditures are forecast to remain in the $110 million to $120 million for the year.

During the first quarter, we completed the acquisition of Illumination Management Solution, a leader in specialized optics and systems designed for LED fixtures, significantly enhancing our capabilities as a market leader in the energy efficient solid state lighting solutions.

In the first quarter, we purchased 1.3 million shares of our common stock, spending $25.9 against proceeds from the issuances of $2.4 million.

Our outstanding average diluted shares have decreased by 11.1 million from a year ago or 6.2%.

On our existing Board of Directors authorizations, we can purchase an addition 12.8 million shares.

Our balance sheet is in great shape, and we consistently generate very strong cash flow, and as a result we have tremendous flexibility to fund organic and acquisition growth, pay a competitive dividend, and purchase our common stock.

Now turning to the results for the first quarter in Slide 11.

A couple of items that impacted our results in both the first quarter of 2009, and the first quarter of 2008.

First I'll cover restructuring.

In the first quarter we recorded a charge of $8.8 million or $0.04 per share after tax and restructuring.

As the quarter progressed and economic conditions for certain businesses deteriorated, we took additional actions.

In total, an additional 649 positions are being eliminated.

In addition, we are in the process of permanently reducing our fixed-cost structure.

A total of eight factories and warehouses have been approved for closure, with four of these substantially completed by the end of the first quarter.

We expect to realize $57 million in benefits in the last nine months of 2009 from the restructuring actions completed in the fourth quarter of 2008 and the first quarter of 2009.

We anticipate incurring an additional $0.05 per share of charges in the second quarter, which includes an early retirement program in Europe for our tools group.

For the year, total restructuring charges are currently anticipated to be between $0.12 and $0.15 per share.

In the first quarter of 2009, we also recognized $8.4 million or $0.05 per share of discrete tax benefits.

These items combined increased our reported earnings per share for the quarter by $0.01.

In the prior year we recognized $5.1 million or $0.02 per share from discrete currency items, and $4.6 million or $0.03 per share from discrete tax items.

Excluding these items, first quarter 2009 earnings per share was $0.47, compared to $0.81 in the prior-year first quarter, a decline of 42%.

Turning to Slide 12 on revenues and earnings per share.

The global economy began rapidly deteriorating in November of last year, and market conditions in the first quarter of 2009 for the most part replicated what we experienced in late 2008.

While we experienced incremental sales improvement each month of the quarter, we did not experience as dramatic of an increase in March as occurs in a typical year.

Our customers and end users across the board were destocking inventory and reorder quantities have tended to be more frequent, smaller quantities.

Across the globe, we experienced project delays as end users reevaluated project costs and struggled with access to credit.

That being said, we are starting to see higher quoting activity and orders in some of our businesses and in developing countries.

Beginning in October of last year, our directive across the company has been to rapidly adjust our cost structure and working capital current market conditions.

While sales declined 19%, as I said earlier, operating working capital declined 20%.

It's always tough to sacrifice earnings, but we run the company looking at the future, not one, two, or three quarters of short-term result, and feel we have positioned the company well for current market conditions.

So today, we're [pulling] a revenue decline of 19% with electrical declines declining 17%, and an unprecedented revenue decline in tools of 31.5%.

Top line was hurt by the significant depreciation of the euro, the pound sterling, and other currencies against the dollar, which subtracted 4.2% of revenue.

Acquisitions contributed 1.9% to revenue in the quarter.

Core revenues declined 16.4%, with electrical core down 15.4%, and tools 24.5%.

Price realization was slightly over 2%, leaving a volume decline of over 18%.

The US market was the weakest market with core revenues down close to 18%.

International core revenues declined 13%.

As Kirk said, our book-to-bill was very close to 100% in the quarter, with no division below 95%, indicating what we believe is a start to some stabilization, albeit a much lower revenue level.

As I covered earlier, we reported $0.47 in earnings per share exclusive of the restructuring of discrete tax items.

In the first quarter, the lower share count provided $0.03 earnings per share.

Turning to slide 13.

As I mentioned earlier, acquisitions contributed over 1.9% to revenues.

The incremental revenues from acquisitions contributed slightly below 10% return on sales, with higher selling and administrative costs as a percentage of sale.

Gross margins declined to 29.6% from 33.9% in last year's first quarter.

While we had great execution on productivity, the lower volume factory production curtailments and increased commodity costs negatively impacted margins.

As I said, our overall price realization was approximately 2% of revenue in the quarter as we continued to drive price realization to cover the significant inflation incurred on certain commodities in 2008.

Most types of steel and energy related have reversed the significant year-over-year inflation we incurred in the first nine months of 2008.

However, certain businesses will continue to face a challenging pricing environment until the high-input costs from earlier in the year work through the manufacturing and sales cycle, which for the most part will be achieved over the next couple of months.

As a normal practice, we hedge commodities through derivative and supply agreements.

With the rapid decline in the cost of copper and aluminum at the end of 2008, our mark-to-market were over $30 million negative at the end of the year.

Due to reduced volumes, we had to accelerate a $2.5 million loss into the first quarter of 2009 on these commodity hedges, and at the end of the first quarter have around $20 million of losses to absorb.

Both lighting and power systems due to their backlog and hedged material positions will continue to have challenges that negatively impact margins into the second quarter of 2009.

Selling, general, and administrative expense for the quarter as a percentage of sales was 20.4% compared to 19.3% in the prior-year first quarter.

However, excluding the currency gains in the prior year first quarter, our SG&A cost would have been about 19.8%, an increase of 60 basis points.

SG&A has declined $50 million year-over-year, excluding the currency gain last year, and as a percent of sales with the actions we have taken, should move closer to the prior-year percentage as the year progresses.

General corporate expense in the segment income statement shows an increase from $18.3 million to $21.1 million.

However, general corporate expense for the first quarter of 2008 was impacted favorably by the currency gains, and so the first quarter of 2009 corporate expense actually declined $2.3 million.

With that actions we have taken, we expect general corporate expense to be below $20 million per quarter for the remainder of the year, absent legal or other charges.

Turning to Slide 14, solid execution on stepping in to the current market conditions increased the decline in operating earnings of 47%, and decline in our operating margins to 9.2% from the 14.1% in the first quarter of 2008, exclusive of 2008 currency gains.

Turning to Slide 15.

Our net interest expense increased $300,000, and while net debt balances have declined slightly, interest earnings have declined more dramatically.

Our effective income tax rate for the first quarter excluding the discrete tax item was 20.1% versus 28.3% for the first quarter of 2008.

The decline in the effective rate is driven by the decline in earnings providing a tax benefit of 36% on the decline in earnings.

At the lower end of our guidance for the year, you expect to be around a 20% effective tax rate, and at the higher end of our guidance, around the 22% effective tax rate.

Our first quarter continuing income excluding the restructuring currency gain in the prior year decreased 45% on the 19% revenue decline.

Turning to the segments in Slide 16.

For the quarter, electrical product segment revenues declined 17% with core revenue decline of 15.4%.

Currency translation reduced revenues 3.7%, and acquisitions contributed 2.1%.

Price realization in the electrical segment was approximately 2% in the first quarter, primarily from carryover of pricing actions in prior quarters.

Demand for electrical products weakened in all regions of the world.

Developing markets held up better than developed economies, but no region in the world was immune to the decline in economic conditions.

Global electrical distribution sales declined approximately 15% from the first quarter of 2008 as customers destocked inventories and the end markets contracted.

The retail channel was very weak with revenues declining in the electrical segment close to 20%.

Our weakest channel was other distribution and OEM, where sales declined over 20%.

Sales mix was negatively impacted by double-digit declines in certain higher margin industrial product lines served through electrical distribution.

Utility sales declined low double digits.

However, margins contracted as the result of higher material costs, pricing pressures on transformers, and significant production curtailment in transformers and maintenance product lines.

Overall, electrical product segment earnings decreased 37% and return on sales decreased 400 basis points to 12.4% from 16.4% in the first quarter of 2008.

Turning to the tools segment on Slide 17.

In our tools business, sales decreased 31.5% from the first quarter of 2008 with currency translation reducing revenues 7.2%.

We had another rough quarter on the top line for tools.

The tough global motor vehicle end market, industrial customers destocking inventory, and end customers curtailing production drove unprecedented revenue declines.

Retail sales were very weak as retailers continued to reduce inventories due to lower consumer demand.

Tools operated at a $3.9 million loss for the quarter as we -- in this business curtailed production and managed inventory level.

Turning to Slide 18, as Kirk mentioned back in October of last year, we began to take actions to rightsize our businesses for what at that time we anticipated would be a slowdown of activity as a consequence of credit conditions.

While we would be the first to admit that we initially underestimated the severity and magnitude of the downturn, we have rapidly adjusted as the months progress.

If you normalize for acquisitions in both periods and the consolidation of a joint venture, the results demonstrate how quickly we have rightsized the business over the past five months and year.

As I previously mentioned from one year ago, operating working capital is down 20%, our SG&A is down 19%, cost of sales 15%, and our total headcount 17% from one year ago.

As we said from the beginning of this downturn, we are going to run the company for cash and adjust the businesses to current economic conditions, even if we sacrifice short-term earnings.

While we have further actions in place to reduce our cost structure, to date we have had a very solid performance by our teams across the globe on cash generation and adjusting the businesses.

Turning to Slide 19 on restructuring actions.

Cumulative fourth quarter 2008 and first quarter 2009 restructuring totaled $44.5 million.

In addition to the $14 million benefit we recognized in the first quarter of 2009, we will recognize an additional $18 million to $20 million in benefits in each of the three remaining cores.

To date, we have closed or are close to completing the closure of four manufacturing and warehouse facilities, and have approved closure of four additional facilities.

Before turning the call back to Kirk, I'm comment on our forecast.

Turning to Slide 20.

Historically, it has been our policy to provide guidance for the current quarter and the year.

However, while historically the economy has been much easier to predict, we do think it is even more important in the current economic environment to give the outside investment community our assessment, and the best information we have at the time the forecasts are completed.

Obviously, we spent a significant amount of time with our divisions, with our end-user customers, and our channel partners developing our forecast.

While our ability to predict this economy and its impact on our businesses is certainly more volatile, we will continue with our practice of updating full-year guidance and providing quarterly guidance.

Of course, we will update the quarterly guidance should there be a significant earnings variation from our forecast.

Before addressing our overall outlook for the second quarter and year, some comments on what is built in to our forecast.

We believe the worst of the inventory destocking by our channel partners and end users will be completed in the second quarter.

Some businesses, like electronics, turned late in the first quarter and in some of our industrial and commercial businesses, we started to see more normal activity in March.

Offsetting this is weaker commercial construction activity as the year progresses, especially in the United States.

Pricing conditions will clearly get tougher as the year progresses.

In the first half, we are enjoying fairly significant pricing carryover from 2008.

Now, of course, we'll be realizing lower commodity costs also as the year progresses.

Actions we have taken to reduce leakage on discounts and authorized deductions will help, but as the year progresses, we could experience a slight deficit on price versus material economics.

And as the year progresses, the hedges roll-off and we'll see a benefit, and of course restructuring benefits will add to the results in each quarter.

The bottom line is that we are not forecasting a recovery in 2009.

Our revenues over the second through fourth quarters are forecast to be relatively flat with the first quarter except for modest normal seasonality.

Turning to Slide 21 on our 2009 outlook.

We are running our businesses based on the current order rates.

In other words as I said, we are not forecasting improvement in market conditions in the second quarter.

Both the second and third quarter of 2008 were very strong, which created some tough comparables.

In addition the dollar has weakened since 2008, creating additional currency translation, and we have a very nominal contributions from acquisitions in 2009.

For the second quarter, we are forecasting revenues to decline 21 to 26%.

The forecast includes a 5% currency translation decline, and a very, very nominal contribution from acquisition.

In other words, a core revenue decline of 16% to 21%, compared to the 16% we experienced in the first quarter of 2009.

As I said earlier, we anticipate an additional $0.05 per share of restructuring in the second quarter, and excluding this charge are forecasting earnings per share of $0.50 to $0.60.

With the severity of the global economic slowdown experienced in the first quarter, and our actions to continue to run the businesses, the match order intake, we're taking a more conservative stance for the remainder of the year, and reducing our January EPS guidance of $2.45 to $2.80.

For the year, we're now forecasting revenues to decline 17% to 21%, with earnings per share of $2.30 to $2.60, exclusive of unusual items and exclusive of restructuring charges of $0.12 to $0.15 per share.

Now I'll turn the call back to Kirk for a wrap-up.

Kirk?

Thank you, Terry.

If you refer to page 22, in summary, we have moved aggressively to resize the cost structure and delever our balance sheet, which will position us well in the back half of 2009.

We still expect to generate earnings per share of $2.30 to $2.60 and over $3 a share of free cash flow or $500 million.

And our balance sheet and capital structure preserve our ability to continue to invest in our future.

And while it's highly unusual for us to be talking about 2010 guidance in April, we believe we've position the company for terrific results in the year ahead.

Stability over time in the credit markets; stimulus programs around the world; a bottoming auto, truck, and housing markets; restructuring benefits; commodity deflation; and lower inventory should offset lower overall economic activity, particularly in the non-residential area in a more difficult and challenging pricing environment.

Now let me turn the call back to Mark for your questions.

Thanks, Kirk.

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

Keysha, first question, please?

(Operator instructions).

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

Good afternoon.

Hi, Nicole.

I guess when we think about just the business trends -- I think you guys gave us a lot of color by business, how do we think about where the US troughs?

And how much does your international business lag the US?

And I guess along the same line, have tool margins troughed?

And how do we think about the electrical decrementals given the end market color that you gave us?

I mean can we think tools continue to lose money and so we actually see a break in revenue?

Let me start on the question.

I'll have Terry finish it.

I of course want to point out, we do note that this is probably your last conference call with us -- so we want to wish you much success as you move forward to start.

Thank you very much.

No problem.

But I think the way -- hard to predict a lot of the issues with regard to the US, but as I think about the output rates of the automotive, and the average life of cars on the highway, same with the class 8 trucks, and the same almost with the housing, you have got to believe that we're closer to a bottom than anything else.

Although trying to predict that bottom is obviously very difficult.

We are seeing stability our industrial businesses, and as Terry said, as you think about the first quarter order rates, and if you look at your book-to-bill, both in electrical and in tools in North America, they flattened out since the fourth quarter.

So there's reason to believe that the liquidity and the capital markets, the spread on the LIBOR rates, that things are beginning to bottom out.

The stock market I think essentially helps people feel that the wealth destruction has at least slowed down, if not come back a little bit.

The internationals are down, but not as bad.

Western Europe you have to detach from the developing economies, but I think we talked about a low double-digit negative growth rate, excluding FX on the international side, which is obviously a bit better.

We still think that we have got opportunity -- for example, Southeast Asia was up.

We still think we have opportunity in China.

We're seeing better economic activity there.

The Middle East numbers were good.

Mexico, South America got hit a little bit hard with the economy, but we still think there's good potential, and some of that is a timing issue, and we're still looking at additional investments in those markets.

Terry, do you have anything else to comment on?

On the tools side -- tools, of course, with the big revenue hit they have taken in the last two quarters, it's very difficult.

Typically the first quarter is the weakest quarter of the year for them.

Right now, we are forecasting in the second quarter that they should be at least close to a break-even, that they should be at least close to a break-even, and then based on the activities, or the restructuring, et cetera, should pick up to a profitable business in the third and fourth quarter.

And you have to help me out, Nicole, you asked a lot of questions --

If you think about our business, Nicole, we have been focusing on a little bit more as of late.

The cycles of our business, we're almost one-third, one-third, one-third.

Early cycle, mid cycle, late cycle.

As you know, we don't carry a huge backlog per se, and different businesses have different parts of it.

But we see the economy in all of three of its stages, and I think right now, you saw the early cycle take a hit early on on our order patterns, and we restructured and responded very quickly to that.

We're beginning to see some of the slowness now in some of the later businesses.

But again, have good confidence on the utility side, the industrial side flattening out.

Commercial construction is going to be the wild card.

You are seeing vacancy rates, you're seeing a lot of the issues around that non-resi spot.

We think that's going to be slow for a while.

Thanks, very helpful.

Thanks for the call.

Good luck.

Your next question comes from the line of Bob Cornell with Barclays Capital.

You may proceed.

Thanks.

Electrical margins came in at reasonable levels in the first quarter, better than I was thinking actually.

It is reasonable to seem these margins are the low of the year for electrical?

Well, I would like to s assume that, boy.

We did what we could to tank them, Bob.

I told you back in February, I told you back in November, we're going to focus on the balance sheet, and of course, you know what happens.

But, no, I think they came in reasonably well.

The mix was pretty good overall.

Terry?

Bob, they should incrementally improve each quarter of the year.

For the year we would expect to be somewhere in the 13% to 14% range.

We've taken a lot of cost out over the last three or four years.

We talked about that at outlook as well, Bob.

If you look at the productivity per employee, the square footage in all of those different pieces, there has still been a lot of good work done on that, and I think you saw that reflect through.

Did you flush all of your unabsorbed overhead that was period cost in the first quarter?

Do you have any sort of FIFO-based inventory fall into the second quarter as well?

Well, we're about 50/50 LIFO/FIFO, and of course, the LIFO businesses, it all flushes through currently, including material price in the quarter.

And then we are fairly conservative on what we would capitalize into inventory on variances at the factory level.

So we have very, very little carryover on factory variance going into the second quarter and beyond.

Yes, would you just go a little bit more detail into the commodity hedges?

You have a $28 million loss carryforward -- how is that going to manifest itself and help me understand that a little bit better?

Most of that is on copper and aluminum on it.

And most of it will fall off in the second, third, fourth -- little bit into the fourth quarter.

And of course it depends upon what commodity costs do also, but they are hedged out on those -- typically our practice is to hedge out, the closer you are, 100% production and down.

That's why we ended up taking a hit in the first quarter for what is actually, accelerated a loss of $2.5 million.

Volumes is down, we had to accelerate that, and we had 100% hedged or close to 100% hedged.

Little falloff on the second, third, fourth quarter, mostly second and third.

Hits -- the businesses, they had a lot of copper, transformers, Bussmann, lighting.

Okay.

One final question.

Do you have an idea of what your capacity utilization level is?

I know you have a lot of different businesses, but what sort of level are you guys running at in your factories?

It's hard to pick an exact number, Bob.

If you looked at last year overall, our volumes were still up on the full year despite the fourth quarter.

And I think the work we have done on lean and on the productivity side has opened up a lot of square footage.

As Terry pointed out, we're coming back and we're going to take a look at the physical footprint in this downturn, because again you see the first quarter volumes drop, and our expectation is that the rest of this year doesn't get much different from what you saw on run rate in the first quarter.

So we'll end up with underutilized facilities across the board.

The key is to keep yourself adjusted in such a way that when the word does come back, you can serve the market.

So we're going to be protective of that.

But we've got some work to do around the edges, and we can certainly do some consolidation and restructuring.

But we're not in a bad spot, but we'll continue to trim up.

Okay.

And, Bob, and we don't measure utilization of our factories in what you read as statistics throughout.

It's how many shifts we're running in the factory, how many days we're shut down versus open.

But we have a good balance.

We like the big plants that we have in the US and being able to serve the market locally.

This is not as big of a deal, Bob, as it was back in 2001 when we did this the last time.

We hadn't restructured back then for many years.

We got caught.

I think for the last five years, we have been doing this along the way, and I think this is going to be a little bit more around the edges and repositioning ourselves in this downturn.

Okay.

Got it.

Thank you.

Thanks, Bob.

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

Go ahead, please.

Thank you, good day everyone.

Hi, Jeff.

Kirk, a couple things -- first on utility, can you elaborate a little more more on what you see in the pipeline for the second half, and the scope and type of projects that are materializing?

If you look at where we did reasonably well, again, it's the reliability products, the switch gear products, we talked about the smart grid types of products, the capacitor product lines, those kind of areas either were not off this bad or actually performed relatively well.

The pole hardware business for us is sort of an underground play, and the transformer businesses, Jeff, where they keep inventory, and because of the access to capital issues that we heard about in the fourth quarter, destocking their inventory levels.

But we think we're working through that now as we go forward.

So, you know, the new construction on the housing stuff has bled through the channel, and that has been down for sometime.

The commercial construction piece is probably down as well, and has been down, but I think what we went through in the first quarter was this inventory readjustment, and then readjusting their capital budgets based on liquidity and access to capital.

I think the order rates will flatten out now in the second quarter.

The book-to-bill was back to 1 as I mentioned from below 1 in the fourth quarter.

And the run rate patterns as we think about the rest of the year should get a little bit better.

I will point out, Jeff, just so there's no misinterpretation.

The midpoint of our forecast on the utility side, we have revenues being pretty constant with the first quarter actuals.

Yes, so we're not banking on a big recovery here.

But it sounds like you do see some new project work in the pipeline.

Is that a fair statement?

We have seen demand patterns -- once you take down the inventory on the loss and such, I think you see demand patterns get back to something more nominal.

But we probably don't expect things to get much better than the first quarter, yes.

I think on a year over year, it's going to look ugly, but on a sequential basis shouldn't decline from where we are.

And then your comment on energy projects, is that deferrals, are you seeing outright cancellations?

What is the general tone of activity there?

You are seeing some cancellations, but I would say the cancellations are not that huge of an issue, a tremendous amount of deferral around the globe.

So and some of those, of course, are deferred.

They may end up getting canceled, but we really haven't seen a tremendous amount of cancellation.

On the gas side it has been very, very weak and starting to see regional weakness around the world.

Middle East is much more volatile than it has been.

You have a good month and a bad month.

But, yes, there's clearly been some destruction of demand there as well.

Is there substantial renegotiation of price going on as these projects defer or delay?

We're so small -- I mean, relatively small on a big refinery or turnaround.

We could be $7 million to $30 million depending on if it's a turnaround or a big project, but it ends up being relatively small in the grand scheme of things, but I would say yes.

Primarily what they are doing is looking at steal and aluminum prices, and figuring they can get back a significant price discount from where you are pricing this stuff a year ago, yes.

And then just finally for me, just -- I know your guidance excludes restructuring and one offs, but Terry, relative to the $0.12 to $0.15 of restructuring, what kind of visibilities on offsets do you have?

Or do you have any visibility?

Will this come as they may, or are they mapped out?

They will come as they may.

We are always -- every year -- every quarter we have to evaluate the tax thing, which we are getting more and more current on our tax audits every quarter on it.

And then we have a couple of items that may come through as gains on the discontinued.

But other than that, it will come as it comes.

All right.

Thank you.

Thanks, Jeff.

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

Please proceed.

Okay.

Thanks.

Guys, hi.

Hi, Scott.

Just wanted to talk a little bit about your -- M&A outlook and your cash position.

Looks like you got about $320 million in cash, which you have to keep some aside for this $275 million that's coming due, and Terry, you made some comments about your revolver cost going up, and maybe that being a bit of an issue.

I mean, what does this mean for your 2009 M&A plans?

And even into 2010?

Well, I think the answer is that we're seeing better properties, more attractively priced than we have probably seen in the last 12 to 18 months.

Now the question will be -- is where are sellers' expectations?

Because we're not quite far enough down the path with negotiated purchase prices on a lot of these properties.

A couple of these are international, a couple of them are domestic.

We're seeing more interest in sellers than we have probably seen in the last 12 months of good strategic properties that make a lot of sense for us.

So that's that piece of it, that stays very interesting to us.

Sure.

I think that how many we can get closed and what the impact will be on 2009 will probably be nominal, because by the time you get them all sorted through and priced and closed, you're talking third and fourth quarter.

But it seems to be a better opportunity now than it has been in a long time.

There's strategic sellers or industry sellers, and then private equity -- things are starting to pop out of private equity as well.

Coming from a lot of different areas.

And on the capital side, we'll generate over $300 million of free cash flow on the remainder of the year on it, and the debt markets for us as an A-rated company are open now.

So we can go out and issue $300 million of new debt that's probably somewhere between 5% and 6% -- the spreads bounce around day-to-day, but less than 6%.

So on the credit facility, the only reason we're looking at our capital needs is the short-term -- how big of facility do we need?

The cost of those facilities is 4X what it used to be, and we feel if we needed extra capital, we could rapidly go out and do a 365 facility and increase if we needed it for an acquisition.

And we got ahead of the share buyback early in the first quarter too.

As Terry mentioned, we bought 1.3 million shares -- and less than $21 a share was our average purchase price in the first quarter.

If stock drops like that, we'll still step in and buy the stock as well.

Yes, that makes sense.

Hey, guys maybe you can help me out at least on this whole smart grid thing.

I think you talked about it at your investor day.

We're seeing a lot of headlines.

GE has been talking about their offering.

What do you -- how do you view the competitive dynamics there?

Is there specific technologies that could win out?

Is there enough room for everybody?

Does it need to consolidate?

I guess there's a lot of questions there, but just start off by talking a little bit about how what you are offering and how that compares to competitors?

Well, everybody, it's probably one of the most overused words in the industry today.

Everybody has a smart grid solution these days.

You've got to think about it at multiple different levels.

I think we'll try to do a good job at EPG trying to lay this out.

If you think about IBM and Google wanting to get into the space, they're enablers.

They will give you a website and they're going to give you some tools at a certain level.

And there's different people who play at different levels as you go down like a funnel We tend to partner with a lot of people with our technology to help enable a lot of the advanced meter reading, and then we have a whole other set of products designed specifically for the utilities on the automation and substation automation, capacitor bank automation, the self-healing grid, and then manipulating and processing a lot of this important data.

So we'll try to lay out the different pieces, but we tend to work and partner with a lot of these different companies that you hear about.

I have been frustrated that we don't get as much press in our space.

Our business is growing.

We have very current and practical technology on a lot of the solutions, and I think we could probably do a better job getting out there publicly and advertising what it is we're doing, and who we're partnering with, and what jobs we're winning.

Because we continue to be successful out there and we continue to win a lot of these big important jobs.

Okay.

Yes, looking forward to the work at EPG.

Thanks, guys.

Thank you.

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

Please proceed.

Thanks.

On the non-res side, Kirk, sounds like that I think that's the one market you are not willing to say maybe hitting a run rate yet.

Just in terms of what the destocking impact might have been there, and what the flotation pipeline is telling you -- what is the variability on the degree of increasing severity of declines there that you could see?

Well, Chris, my issue is not at all on inventory levels or destocking.

Mine is much more fundamental, which is the amount of decay in the financial industry, the retail industry -- Starbucks, Bed Bath & Beyond, Linens 'n Things.

Go to Nordstrom's, across the board the savings rating going from negative 3% of spending economy, to people now going to 6% spending rate.

People wanting to delever themselves personally.

That ramification is office vacancy rates, the amount of vacations take, and their spending habits.

And when you go out and talk to contractors, and begin to look at the pipeline of what they have definitive funding on for 2010, forget the ABI volatility and what goes on there, but that's what scares the hell out of me.

I think there's still going to be renovation.

There still a large amount of excitement around energy efficiency.

There's still going to be spending around the stimulus package and government and office.

There was a great article in the Wall Street Journal about street lighting and LED technology in the street lighting.

So there will be money out there and spending out there, and our business is still holding up relatively well, but when I look at those macro indicators 12 to 18 months out, that's what probably makes me the most nervous about that space.

I think distribution is restocked and destocked over the last four months.

It's really the fundamental demand destruction that I'm worried about as you head into the back half 2009 and into 2010.

Sounds lovely -- thank you very much.

Wish I could be more positive.

Sure.

Your next question comes from the line of Alex Rygiel with FBR.

Please proceed.

Two questions.

First, given your comments that electrical margins could end the year in the 13% to 14% range, it appears that you permanently increased your EBIT margin by about 100 to 200 basis points from cycle to cycle.

How much of this improvement do you think is from product mix versus hard cost-cutting decisions and asset rationalization?

The last downturn, Terry, we got hit hard on the industrial side, so the [kraus] and the mix on that side was pretty tough.

I looked at the numbers on the productivity side.

I could quote you sales per employee and sales per square foot.

And I know what we've driven in productivity.

So my answer would be leaning more toward fundamental productivity versus mix.

Yes, I think we have taken out permanently over the last several years a lot of the cost structure, and the inefficiency.

I would say the mix side of it isn't really impacting us tremendously.

That's great.

And secondly, as it relates to smart grid, talk of stimulus, all of that is very positive, but are you seeing any concerns or delays of smart grid equipment due to concerns about open architecture and security?

Yes, I think the issue still fundamentally is where do they want to standardize, and what is going to be the protocol coast-to-coast.

I think they're still struggling with that.

NIMA had a meeting out on the West Coast trying to get everybody to begin to try to standardize on specifications and standards, and I think that's where they are pushing before they are going to start spending and rolling out.

So I think you are absolutely right.

But I think, again, the involvement of the IBMs and the Googles and people like that will help solidify some of that, and accelerate the penetration of the adoption of some of the technology as well.

As these big guys get more involved and come up with broader solutions, I think it will be good for our business overall.

Perfect.

Thank you.

Thank you

Your next question comes from line of Jason Feldman with UBS.

Please go ahead.

Gist following up on that last question regarding the smart grid, have the delays been primarily related to standards issues, or has some of it also been concerns about how and when the stimulus money is going to be dispersed?

Are some guys worried that they might not get it [if they commit] to a project now?

Have you seen any of that?

That's a tough read, Jason.

I'm sure some of that is debate is going on out there, but don't have a clearance to that.

Okay.

We'll track that back for you.

We'll get ahold of the guys down at Power Systems and try to get your more clarity on that one.

Okay.

Regarding raw materials, you mentioned that most grades of steel and things like that have moderated.

Have you seen much moderation in electrical-grade steal?

Is that still a substantial headwind for transformers?

And there are other specific areas where commodity costs are particularly troublesome?

When you look at it sequentially across the board from fourth quarter to first quarter, you saw just about every grade, every type of ferrous, non-ferrous metals, and plastics, et cetera coming down.

It is year-over-year where you will still see the significant impact, which will moderate as the year goes on.

So for every electrical grade on down, you're seeing moderation now.

And then last one, any chance in your thoughts on whether it makes sense to consider redomiciling to Switzerland or Ireland, given the political environment and changes over the past couple of months?

I think we have moved our tax residence to Ireland in the fourth quarter of last year.

We have a Board meeting over the weekend and Monday with our shareholder meeting on Monday, so yes, that will be a topic at hand that the Board will decide on.

Okay.

Thanks very much.

Your next question comes from the line of Eli Lustgarten with Longbow Securities.

Please proceed.

Good afternoon, even if you are in the Midwest at this point, I guess.

How are you, Eli?

I'm fine.

Hope you guys are doing well.

Clarification questions.

You went down electrical 15.4% down in organic basic currency, and I guess you are down 16% to 21% in the second quarter, and similar numbers for the year.

Is that more continuing the same rate and -- versus no seasonality pickup, or is there changes going on within the various sectors?

Is that just more deterioration of the commercial business?

How can we enter the difference in organic change in the second quarter of the year versus the first quarter?

Eli, the biggest change is if you look at what happened last year in 2008, pretty significant growth in the second and third quarter.

So we are -- middle of our range, what we're looking at is revenues a little bit of seasonality pickup in the second and the third quarter.

But that's about it.

No real changes in any of the various parts of the business in utility, commercial, or industrial?

You don't really have anything deteriorating more from where we are in the first quarter?

Between businesses there's a little bit of variation, just simply because of -- like a business like a Bussmann on the electrical fuse which is very heavy MRO day-to-day shipment.

Hit harder on destocking in the first quarter.

You may see a little more pickup as the year progresses.

But they are nominal changes.

I mean, I think that's the upside to the plan, though, Eli that you are hitting on.

Our guys have been obviously gunshy now coming out and trying to forecast, and so I would tell you that what we have baked in to this is a very conservative posture without much is a very conservative posture without much recovery because of the recovery of destocking.

But as you saw an uptick in demand, industrial production, factory utilization, or any good news in the macro economy, I would tell you it would be upside to this plan, and of course, given our cost structure and where our inventory levels are, you would hit the gas pedal pretty good in the last half of the year.

And this scenario, do you have the European decline being somewhat less than the domestic decline to throughout the next couple of quarters -- ?

I would say developing.

International including developing.

I think Europe is not any better as we go forward in our estimates.

Some markets, Eli, in Europe, are turned worse than the US.

We're not big in Spain or Ireland.

We're a little heavier in France, Germany, and the UK, so we'll see.

And what we have seen in Europe in our product lines is in the local markets, some of them have deteriorated now to be as bad if not worse than the US, but some of the export markets out of Europe have actually picked up because of what has happened with the euro and the pound.

You have a breakdown between the European and the electric -- and the rest of the world declines in the -- as far as the electrical business?

We have it, but we don't talk that level of granularity, but first quarter it was relatively consistent.

Most of us expecting the European market will deteriorate -- remain in freefall, continue weaker.

And I assume you have not in the kind of numbers you're talking about, the things said -- the coming out last night that GM is going to idle nine plants over the summer -- excuse me, plans for nine weeks over the summer, that has been -- is that sort of a wild card in this whole forecast, is that a fair -- ?

I would have to say with the auto guys, they haven't been buying anything for a long time now.

I'm not sure them being shut down is going to move the revenue line a lot.

But having improving margins, the decrementals are going to improve over the quarter, despite the lower volumes that are coming, because of your cost improvement that you are looking at?

The cost improvement of the reduced inventory levels and such as you go through the course of the year, correct, and you get the restructuring benefit in the back half, of course.

One final question.

Looking out to 2010, since you were brave enough to make any comments, is your thought process that the decline in non-res construction is going on in commercial construction, accelerating or similar to this year versus any upturn?

How have you been thinking through the process.

I'm glad I got the question, now I can go out on a limb.

Terry wasn't going to let me talk about it, but now that you've asked, I have to answer the question.

We were trying to think about 2010 as being a flat revenue year, okay.

And maybe we're optimistic in many that, but if we can get to a flat revenue line, which would be non-resi going down, and then some resi coming back, industrial production coming back a bit and utility coming back a bit.

But net-net, a flat revenue for Cooper Industries, we think we substantial earning power.

You've got less share count as you look at that year versus the 2006.

You look at your SG&A, you look at a lot of your comps.

There's no reason not to believe that we can't get some significant earnings power with electrical margins getting back to the 14% plus and tools getting back to a double-digit kind of margin.

Okay.

But you are assuming the non-res decline is at least this big next year as this year as part of that?

Yes, I think you have got to assume that non-resi would be the one segment we are still expecting to decline in 2010.

We'll have a better look at it by the time we get to the fourth quarter, of course, and what kind of rate it falls off as this year goes on.

So far, knock on wood, not too bad, but the worst may be still to come on the non-resi side.

I'm glad I'm playing straight man for you, and good point.

As we wrap up the call, I would like to remind everyone that Cooper will once again will participating in this year's annual Electrical Products Group Conference in Longboat Key, Florida in mid-May.

Specifically, Kirk and senior management will be presenting the morning of May 20th, and we look forward to giving the investment community an update on the business at that time.

With that, thanks for joining us today.

Please feel free to contact me with any follow-up questions you may have.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.