伊頓 (ETN) 2009 Q2 法說會逐字稿

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

I'll be your coordinator for today.

At this time all participants are in listen only mode.

We'll be facilitating a question an answer session towards the end of today's conference.

(Operator Instructions) As a reminder this conference is being recorded for replay purposes.

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

Mark Doheny, Director of Investor Relations.

Please proceed, sir.

Thank you, Operator.

Welcome to the Cooper Industries second 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've posted a presentation on our website that we'll refer to throughout this call.

If you'd like to view this 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 are outside the control of the Company and therefore actual results may differ materially from those anticipated by Cooper.

A discussion of these factors maybe 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.

Good morning.

Turning to page two of our exhibits the overall economy did not change much from the first quarter or from the outlook we gave you back in February.

GDP remains negative with the prospects of modest growth in the back half of the year.

Unemployment will cross 10%.

Factory utilization remains extremely weak, and the credit markets have stabilized but consumers still face an uphill battle with home prices collapsing and reducing debt while rebuilding wealth.

Non-residential construction, federal, state and local budgets continue to get squeezed.

Lower commodity prices are beginning to provide some relief but Washington continues to pour cold water on the prospects for investment in growth with confusing and uncompetitive policies with regard to tax, healthcare, labor and the environment.

Despite all these exceptional challenges our teams did an extraordinary job running our Company and delivering terrific results for our shareholders.

If you turn to page three of the exhibits I'll give you some more specifics on the quarter.

Our revenues were down 26% with core down 23%.

Electrical products revenue was down 25% with the core down 22%, and the revenue was sequentially flat from the first quarter.

Our tools revenues were down 35%, core down 30% and our revenues were up 10% sequentially from the first quarter.

We had solid execution on cost management.

Our headcounts now are down 18% year-over-year with SG&A down 20% year-over-year excluding unusual items.

Our operating margins improved 150 basis points from the first quarter, electrical margins came in at 13.6 and tools at 2.1 both excluding restructuring, and overall, we delevered its 27% on revenue which is very good given the steep decline in revenues.

We had exceptional free cash flow of $321 million versus $208 million last year.

Our inventories are now down $202 million or 27% year-over-year.

Our operating working capital is down $368 million or 26% year-over-year, and so overall, we executed and delivered terrific results at a very difficult economic environment.

If you now turn to page four, on end market conditions, the industrial markets or our biggest market at 40% of sales was hit hard again by low capacity utilization at 68%, reduced capital spending, falling industrial production, and delayed energy projects due to weakening demand, uncertainty on national energy policy, and increased EPA regulations.

In commercial construction or 25% of our sales last year, we saw new construction projects fall sharply and delays on existing projects.

Vacancy rates are increasing, rents are falling and unemployment is climbing.

We do not anticipate a recovery in this overall market for the next 12 to 18 months.

Utility markets or 21% of our sales continued with the same trend we've seen now for the last two quarters -- growth in smart grid demand management and reliability products, however, a steep fall off in transformers and other line hardware as utilities sharply curtail capital spending and overall construction remains at depressed levels.

And lastly, residential or retail or 9% of our sales was one of our best performing segments, down only midteens.

With housing starts now at record lows, we expect to begin to see recovery from three years of declines of this segment.

If you'd now please turn to page five of the exhibit segment results, for electrical products segment which is 90% of our sales we saw continued weakness across-the-board in the second quarter.

North American electrical was particularly weak with faster inventory destocking at our distributors, retail sales were down midteens, international excluding foreign exchange was also down midteens, Asia held up particularly well.

We're still seeing growth around demand management, energy efficiency products and alternative energy, which may pick up as more stimulus money is being released.

Our book-to-bill for electrical in the quarter was roughly 100%.

And despite a steep revenue drop and continued inventory liquidation, our teams delivered electrical margins excluding restructuring of 13.6%, up from 12.4% in the first quarter, with exceptional cash flow.

If you'd now please turn to page six of the handout for the tools group, it's hard to imagine a more difficult market environment, with Chrysler and General Motors declaring bankruptcy in the quarter, factory utilization in industrial production at 50 year lows, class A trucks, agriculture and construction equipment sales down 50%, private and commercial aircraft markets in steep decline, and housing starts at 580,000 on an annual run rate.

But despite these tough conditions, we continued to resize the business and improve the balance sheet in the second quarter.

We saw 10% sequential sales growth, generated an operating profit and delivered $13 million of free cash flow.

While we remain guarded about the near term recovery in tools, we are seeing signs that these markets have stabilized and will recover from these depressed levels in the next 6 to 12 months.

Now let me turn the call over to Terry to provide you additional details on the quarter and update you on our outlook for the balance of the year.

Thanks, Kirk.

As Kirk mentioned the second quarter continued to be challenging.

However, we executed and delivered solid results.

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

On slide seven, as Kirk noted, we had record free cash flow.

In the second quarter, free cash flow increased 10.5% to $184 million compared to the $166 million in the second quarter of 2008, a 206% conversion of net income to free cash flow.

Our free cash flow in the first half of 2009 of $321 million and 170% conversion ratio of net income is a record first half of the year performance and is evidence of our ability to quickly adjust our business to the current business environment, even if it takes a toll on the short-term earnings performance.

Our balance sheet remains in great shape with net debt to total capitalization at 21.3% on June 30, 2009, compared to 26.8% on December 31, 2008.

Turning to slide eight.

Our net debt at June 30, 2009, was $749 million compared to $952 million at December 31.

This was after returning to shareholders $22.5 million in common stock purchases net of proceeds and $84 million in dividends in the first half of 20009.

As you can see on slide eight, at June 30, we had no commercial paper outstanding.

In November 2009 both our $500 million credit facility and $275 million notes are maturing.

We are in process of establishing a new credit facility to replace our current facility that matures in November and expect the new facility to be in place in the next few weeks.

Due to the significant increase in the cost of a credit facility, we're replacing our $500 million facility with a three year, $300 million facility which along with our projected free cash flow will be more than adequate to maintain our flexibility.

We continue to operate with adequate cash reserves to retire the $275 million in debt that matures in November of this year.

In this current economic environment we are very pleased with having our debt and capital structure in great shape and we are well positioned to utilize our balance sheet as a strategic asset.

Turning to slide nine.

Our operations did an outstanding job executing on operating working capital.

We executed exactly like we told you we would back at the beginning of the economic downturn, rapidly adjusting our working capital to current business conditions.

During the quarter, we continued to take extended shutdowns on factories and reduced work weeks at many of our facilities and as a result, we reduced inventory a further $63 million from March 31, 2009.

Our inventory was $547 million at June 30, 2009, compared to $750 million on June 30, 2008, a 27% decrease and outstanding performance by our operations team.

Our inventory turns were 6.1 compared to 6.2 turns last year.

For receivables, our days outstanding at June 30, 2009, were equal to the prior year but up 1 day from the first quarter.

We lost a day with an airport lighting project in the UAE where we have experienced continuous delays in bureaucracy of payment of a $7 million receivable.

Receivables declined $329 million from June 30, 2008, a 27% decline.

Similar to the inventory an outstanding performance by our businesses in a difficult credit environment.

As you can tell from our results we're aggressively monitoring credit and collections and continue to make progress in collecting receivables within the terms granted to our customers.

Our payables declined $164 million or 29% from June 30, 2008, driven by the inventory reduction and our capturing discounts offered by suppliers.

With the rapid decline in revenue our operating working capital turns declined to 4.6 turns compared to 5.1 turns in the first half of 2008.

From June 30, 2008, to June 30, 2009, our operating working capital has declined 26%.

Our aggressive actions on right sizing our operating working capital in the first half of 2009 will provide some relief in the second half of the year on margin; however, our focus on continuing to improve our operating working capital will not diminish and we expect inventories to continue to decline as the year progresses.

On slide 10, our capital expenditures were $27 million in the second quarter of 2009 compared to $34 million in the second quarter of 2008.

Year-to-date, capital expenditures were $56 million compared to $58 million last year.

A number of our major projects are nearing completion and the favorable delta with the prior year will accelerate as the year progresses.

Capital expenditures are now forecast to be in the $100 million to $110 million for the year, down $10 million from our earlier forecast.

In the second quarter of 2009, we purchased a nominal number of shares.

Year-to-date, we purchased 1.3 million shares of common stock, spending $26 million against proceeds from issuances of 3.5 million for the 1.1 million we issued during the first half of 2009.

Our outstanding average diluted shares for the second quarter decreased by 8.5 million shares from a year ago or 4.8%.

Under our existing Board authorizations we can purchase an additional 12.8 million shares.

Our balance sheet is in great shape and we demonstrated in the first half of the year we consistently generate very strong cash flow.

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

Turning to the results for the second quarter on slide 11.

There's a couple items that impacted our results in both the second quarter of 2009 and the second quarter of 2008.

In the second quarter, we recorded a pre-tax charge of $10.4 million or $0.05 per share in restructuring.

We continue to take actions to adjust our cost structure for current economic conditions.

In addition, we have in place an extensive process for evaluation of our fixed real estate footprint.

Currently a total of nine factories and warehouses have been approved for closure with five of these substantially completed by the end of the second quarter.

We expect to realize $50 million of benefits in the last six months of 2009 from the restructuring actions completed in the fourth quarter of 2008 and the first half of 2009.

We are anticipating incurring an additional $0.05 per share of charges in the third quarter.

For the year total restructuring charges have been increased from $0.12 to $0.15 per share to $0.15 to $0.18 per share.

Our effective tax rate for the first six months of 2009 was 18.9% exclusive of the first quarter discrete tax item.

The second quarter effective tax rate of 17.8% includes the adjustments to bring the year-to-date effective tax rate to 18.9%.

This added about $0.01 to earnings per share for the quarter.

In the second quarter of 2008 we recognize a currency loss of $5.4 million or $0.02 per share and a restructuring charge in our tools operation of $7.6 million or $0.03 per share.

Excluding these items of both the second quarter of 2009 and 2008, we reported a $0.58 per share for the second quarter of 2009 and $0.97 per share for the second quarter of 2008.

Turning to slide 12 on unusual items in the first half of 2009.

In the first half of 2009, from continuing operations, we recognized $19.2 million of restructuring charges or $0.09 per share and a discrete tax benefit of $0.05 per share.

In the prior year first half we recognized $7.6 million or $0.03 per share in restructuring charges offset by a tax item for $0.02 per share.

Excluding these items first half 2009 earnings per share of $1.05 compared to $1.78 in the prior year first half, a decline of 41%.

Turning to slide 13 on revenue and earnings per share.

As Kirk mentioned today we reported a revenue decline of 26% with electrical revenues declining 25% and unprecedented revenue declining tools of 35%.

Top line was hurt by the significant depreciation of the euro, pound sterling and other currencies against the dollar which subtracted 3.5% from revenue.

Acquisitions net of a small divestiture contributed a very nominal amount of revenue in the quarter.

Core revenues declined 22.9% with electrical core revenues down 22% and tools 29.5%.

Our electrical product segment in the second quarter did not experience the normal seasonal uptick from the depressed revenue levels experienced in the first quarter.

I'll discuss this in a few minutes.

Our customers and end-users continued destocking inventory and the reorder quantities have tended to be more frequent smaller quantities.

We're starting to see some activity on projects that were delayed due to the higher commodity costs and credit conditions which could be beneficial later in the year, and of course, China is improving.

Price realization was slightly over 1% leaving a volume decline of over 24%.

U.S.

was the weakest market with core revenues down 26% and with Western Europe core revenues down 21%.

In total, international core revenues declined 18% and what we consider developing countries reported core revenues down 17%.

Our book-to-bill has been hovering at 100% for several months now indicating that we have seen some stabilization albeit at a much lower revenue level.

As I covered earlier we reported $0.58 per share in earnings per share exclusive of the restructuring.

A very good execution by our businesses in managing price, material economics and realizing the benefits of the cost actions we have taken.

Turning to slide 14.

Gross margins declined to 30.3% from 33.1% in last year's second quarter but improved 70 basis points from the first quarter of 2009.

While we had great execution on productivity, the lower volume and factory production curtailments negatively impact margins year-over-year.

Sequentially from the first quarter, the right sizing actions we took in the fourth quarter of 2008 and the first quarter of 2009 contributed to the sequential improvement in gross margin.

Our overall price realization was approximately 1% of revenue in the quarter, down from approximately 2% in the first quarter.

Contributions from price increases implemented in 2008 that carried over into 2009 will diminish as the year progresses; however, year-over-year there's been significant declines in certain metals and energy costs where the benefit is beginning to flow through.

We manage and measure our businesses on price versus material economics and while price realization declined from the first quarter it was offset by material cost declines.

We expect this trend to continue as the year progresses.

As a normal practice we do hedge commodities through derivatives and supply agreements, and with the rapid decline in costs of copper and aluminum at the end of 2008, we entered the year with over $30 million negative on our derivatives.

Due to reduced volumes we did have to accelerate $900,000 loss into the second quarter of 2009 on these commodity hedges and, at the end of the second quarter, have close to $10 million of losses to absorb.

Selling, general and administrative expense for the quarter as a percent of sales was 19.6% compared to 18.1% in the prior year second quarter and declined 80 basis points from the first quarter of 2009.

SG&A has declined $60 million year-over-year excluding unusual items and as a percentage of sales with the actions we've taken should move closer to the prior year percentage as the year progresses.

General corporate expense in the segment income statement decreased from $21.9 million in last year's second quarter to $21 million.

The GAAP financials do reflect $27.1 million last year but I'll remind you this included a currency loss of $5.4 million.

In the second quarter of 2009, general corporate expense is slightly higher than our expected run rate driven by currency losses.

For the remainder of the year we expect general corporate and other to be slightly below $20 million per quarter absent legal and other charges.

Turning to slide 15.

Solid execution on stepping into the current market conditions increased the decline in operating earnings of 48% and the decline in our operating margins of 10.7% from the 15% in the second quarter of 2008.

Turning to slide 16, our net interest expense decreased $2 million driven by lower debt balances, more than offsetting lower interest earnings.

Our effective income tax rate for the second quarter was 17.8% versus 29% for the second quarter of 2008.

The decline in the effective rate was driven by the declining earnings providing a tax benefit of 36% on the decline in earnings plus the impact in the second quarter of 2009 of adjusting the first quarter 2009 effective tax rate.

At the lower end of our guidance for the year, we'd expect to be around a 19% effective tax rate for the year and at the higher end of our guidance around a 21% effective tax rate.

Our second quarter continuing income excluding the restructuring and the currency gain in the prior year decreased 43% on the 26% revenue decline.

Turning to the segments in slide 17.

For the quarter, our electrical products segment revenues declined 25.1% with core revenue decline of 22%.

Currency translation reduced revenues 3.2% and acquisitions contributed 0.1%.

In this segment, price realization was approximately 1% in the second quarter primarily from carryover of pricing actions in prior quarters.

From a year ago, demand for electrical products weakened in all regions of the world.

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

Global electrical distribution sales declined approximately 28% from the second quarter of 2008 as customers continued to destock inventory and the end markets contracted.

The retail channel was weak with revenues declining in the electrical segment 15% from the second quarter of 2008.

In the second quarter, OEM sales recovered from a very weak first quarter with sales declining in the low single digits.

Utility sales declined in the high teens; however, while pricing pressures on transformers and significant production curtailments in maintenance, excuse me, did have a negative impact on margins, margins improved from the first quarter of 2009 driven by the cost actions taken in the fourth quarter of 2008 and the first quarter of 2009.

At this point, we believe the inventory destocking is at or very near the end.

Clearly OEM inventory reached bottom in the first several months of 2009, and based on the frequency and size of orders in the distribution channel, there's very little excess inventory of our products on distributor shelves.

On the utility side, the lack of pick up in activity from the low volumes experienced in the first quarter is disappointing, but at some point over the next six months we should begin to see a higher order rate.

We have seen limited activity from the U.S.

stimulus and in fact have overall experienced a negative impact in our lighting and energy automation business as orders and shipments have been delayed while the end customers evaluate obtaining stimulus funds.

In China on the other hand we're seeing orders and opportunities driven by their government stimulus.

Overall, electrical product segment earnings decreased 41% and return on sales decreased 360 basis points to 13.6% from 17.2% in the second quarter of 2008.

We deleveraged at 28%, a very solid performance in an environment where revenues declined 25%.

On slide 18, our electrical products revenues were flat with the first quarter.

Sequential return on sales improved 120 basis points from the first quarter of 2009 driven by realization of the cost actions taken in the fourth quarter of 2008 and first half of 2009 and solid performance on managing price and material economics.

Turning to the tools segment on slide 19.

In our tools business sales decreased 35.3% from the second quarter of 2008 with currency translation reducing revenues 5.8%.

The tough global motor vehicle end market, Industrial customers destocking inventories and end customers curtailing productions continued to drive unprecedented revenue declines.

The hand tool side of this business has begun to stabilize with retail sales declining 18% compared to the second quarter of 2008; however, the Industrial power tool business remains depressed.

Tools operated at a $2.9 million profit for the quarter exclusive of restructuring compared to the $3.9 million loss in the first quarter of 2009.

On slide 20, on a positive note, tools sequential revenues increased 10% from the first quarter to the second quarter of 2009.

As I mentioned, hand tool orders have stabilized from a very weak first quarter and we experienced some of the normal seasonality in other product lines, and as I said tools earnings recovered from a loss in the first quarter to a $2.9 million profit in the second quarter.

Turning to slide 21.

While the second quarter was difficult on the revenue side with revenues declining 26%, we continued to aggressively take actions to right size our business.

If you normalize for acquisitions in both periods and the consolidation of a joint venture, the results demonstrate how quickly we have right sized the business.

From one year ago, operating working capital is down 26%.

Our SG&A is down 20%, cost of sales 23%, and our total headcount 18%.

As we've said from the beginning of the downturn we're going to run the Company for cash and adjust the business to current economic conditions even if we have to sacrifice some short-term earnings.

While we have further actions in place to reduce our cost structure, we've had very solid performance by our teams across the globe both on cash generation and adjusting the business to avoid a drag on future periods.

Turning to slide 22 on restructuring actions.

Cumulative fourth quarter 2008 and first half 2009 restructuring totaled $54.9 million.

In the first quarter of 2009 we recognized $13.6 million in benefits with $19.7 million recognized in the second quarter.

We will recognize an additional $50 million in benefit in the second half of 2009.

With the action completed to date we have approximately $10 million in sequential benefits that will be recognized in 2010.

The actions we will be taking in the second half of 2009 will of course increase this carryover benefits beyond the $10 million.

Turning to slide 23.

Before I turn the call back to Kirk I'll comment on our forecast.

Before addressing our overall outlook for the third quarter and the year some comments on what is built into our forecast.

We are anticipating weaker commercial construction activity as the year progresses especially in the U.S.

offset somewhat by energy efficiency retrofits.

Pricing conditions will clearly get tougher as the year progresses.

In the first half we enjoyed fairly significant pricing carryover from 2008.

Actions we have taken to reduce leakage on discounts and authorized deductions will help.

Overall, however, we expect to have negative pricing as the year progresses.

Based on current copper and aluminum prices, hedge materials will be around $5 million less of a drag on the second half of 2009 compared to what we experienced in the first half of the year.

We also will see more of a positive than a negative in factory production absorption in the second half of the year.

While we intend to take down inventory further the magnitude of the inventory reduction will moderate.

As I said we believe inventory destocking by our channel partners and end-users is complete or very close to complete.

Order rates have stabilized and some businesses like electronics have improved, as have some countries for example, China.

Most higher cost material has now flowed through production in inventory and based on current commodity costs we'll see progressively higher benefit as the year progresses.

Material economics will offset all or substantially all of the price decline as the year progresses.

And we'll see a benefit of course from the restructuring in the second half of the year.

Bottom line is that we expect the markets to continue to be challenging in the second half of the year but expect to realize higher earnings per share than the first half of the year.

Turning to slide 24 and our 2009 outlook.

The third quarter of 2008 was very strong which creates some tough comparables.

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

For the third quarter we're forecasting revenues to decline 22% to 27%.

This forecast includes 2.5% to 3% currency translation decline and a very nominal contribution from acquisitions.

In other words, a core revenue decline of 19% to 24% compared to the 23% we experienced in the second quarter of 2009.

As I said earlier we anticipate an additional $0.05 per share of restructuring in the third quarter and excluding this charge our forecast earnings per share are $0.60 to $0.70.

With the severity of the global economic slowdown experienced the first half of 2009 and our actions to continue to run the business to match order intake we're taking a conservative stance on the remainder of the year.

For the year, we're now forecasting $2.30 to $2.50 exclusive of the unusual items, a reduction of $0.10 per share from the top end of our previous guidance.

We're forecasting revenues to decline 20% to 23% for the year and restructuring charges of $0.15 to $0.18 per share.

And with our record free cash flow in the first half of the year, we expect to easily exceed $500 million in free cash flow for the year.

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

Thank you, Terry.

On page 25, in summary, while the quarter presented many challenges and obstacles, it also demonstrated the quality and resilience of this 175 year old Company and our people.

Our teams responded quickly and aggressively to the crisis.

The work we've done to the portfolio over the past several years via new products innovation and globalization now allow us to find new markets, new customers around the world and to attack new emerging trends.

Our culture and initiatives improve our ability to execute in an expanding economy and also declining.

Our teams are well aligned and focused, and of course, cash continues to be king.

Working capital down 26% year-over-year, $450 million of cash on hand, allows us to pay down debt, protect the dividend and continue to fund growth including our new LED design center, core growth in smart grid technology, new production capacity around the world, and bolt on acquisitions which are part of our long term growth strategy.

Net-net-net as we continue into these uncharted waters, Cooper has never been better positioned from a cost, cash, or growth perspective.

I'll now turn the call back to Mark to take your questions.

Thanks, Kirk.

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

Operator?

First question, please?

Thank you.

(Operator Instructions) Your first question is from the line of Bob Cornell with Barclays Capital.

Please proceed.

Hi, guys.

A couple of questions.

Would you characterize this quarter or some part of this quarter as the trough in the cycle?

That's the $1 million question.

It feels like it, Bob.

I mean when you look at all of the numbers, the book-to-bill, the sequential performance, obviously looked at everybody else's earnings, you're seeing good news about automotive production rates now after the catastrophe of the second quarter, industrial production, factory utilization, it all feels like that although this is like nothing we've ever seen.

And so I think the way we've set the Company up, the inventory levels, the working capital, the headcount, the cost structure, we're poised to grind it out at these levels for the prolonged future, we're certainly able to leverage up extremely attractive if we got any volume or any revenue that picks up through the businesses, so I like where we are.

We've done some tough stuff.

Our people have executed and done a terrific job across-the-board liquidating inventory and taking some tough actions but I don't know if I have any hard economic data yet, Bob, that suggests we're out of the woods here.

Of course you mentioned on the commercial side the issues around delays, no new projects and vacancies.

So would you expand on that whole point, please, and then also just -- well, first of all, expand on that point and I've got a companion question.

Sure.

I go out and see our customers, of course.

I was out in Seattle, I was out in San Francisco.

From small town retail space to condos, townhouses, lodging, any of the markets, large, historically pretty attractive markets you see overbuilds, you see property values plunging and so I think you've got a real mess to work yourself through for the next couple of years.

Now, with that said there's the energy efficiency stuff going on which is still growing for us.

We've got the controls, the international.

Our new product vitality index is strong.

I think residential has bottomed on the construction side so I think that will come back.

Healthcare/education is still holding up.

Our order rates in lighting in particular have stabilized so we're not seeing them decay any worse.

And we think from a cost perspective you're going to see some pricing deterioration but material purchase price variance to offset some of that.

So -- and the Stimulus Bill ought help probably more in '10 and '11.

So you've got a lot of negatives, you've got some positives, net-net we think 2010 still looks negative somewhere in the 10% to 15% range.

Let me ask Terry one question.

A couple points came out, you had the $10 million commodity hedge you had to work through.

You talked about material cost benefit and also talked about pricing being negative.

Could you put that puzzle together for us in one package?

Sure.

Well, we saw in the first quarter as I said roughly 2% price realization dropping to 1% in the second quarter.

Likely that will slide toward the negative in the third and fourth quarter.

But on the other hand we had to work through a lot of higher priced inventory through the system in the first half of the year.

That's done.

Is that what you meant in the hedge product you mean?

No.

Across-the-board on steel contracts, all of the costs that were input costs that were going into the system.

We still have some hedge to work through but it will be $5 million more favorable in the second half than the first half.

So when we look out at what we have in place on contracts and our projections on material costs through the end of the year, clearly we're going to see deflation on the commodity costs in Q3 and Q4 and be able to maintain close to that same parity that we've maintained in the first half of the year.

Got it.

Okay, thanks, both of you.

Thanks, Bob.

Your next question is from the line of Jeff Sprague with Citi.

Thank you, good morning.

Good morning, Jeff.

Or good afternoon I guess.

Kirk, you said you're prepared to grind it out as is, but I think if we kind of stay at this pace of activity, is there more restructuring in the pipeline that you would need or want to go after?

Yes.

We've got a plan for this year and we have a rough cut model for next year.

And the plan would be, Jeff, right -- if we don't see these green chutes manifest themselves sometime in the back half of the year we're prepared to execute the plan in 2010.

And just on the price question, Terry, to your answer it's a lot about the year-over-year comps, but have you actually started to see sequential price decline in electrical products already?

Overall yes, because as material costs have come down especially in product lines that have a lot of steel content to them, as you bid and quote those projects the price does come down on them which does drive your sequential price realization down.

On basic MRO type items I'd have to say no.

They're priced pretty well.

Yes, I don't think we see the pricing competitiveness you'd expect with these kind of volume drop offs, Jeff, I think is what you're getting to, is how much aggressive or more aggressive has the market got.

I think by and large the competition is generally behaving well.

And so I would say that if you take out what Terry mentioned as the material deflation component of steel and copper and aluminum I think actually probably a little bit ahead of where we thought we would be at this point.

Is your cash adequately domiciled where you can use it to perhaps step up M&A activity or do some more share repurchase?

We keep moving more and more cash back to where we can, but yes, I'd say overall, we're in pretty good shape right now.

And what's the thought on share repurchase?

Are you just hunkering down until you see a little more signs of life or should we expect share repurchase to pick up in the back half?

Well, we've got a Board meeting next week.

That's one of the, actually it's a week and a half out, that's one of the topics, Jeff.

We bought back about $1.3 million in the first quarter, the stock was a bit weaker, we bought back a significant amount last year.

We've shown the willingness to do that.

The M&A markets are attractive.

We've got this piece of debt due in November.

While it's only at 5.5% rate, interest rate, at this point we're probably looking at paying that chunk of the debt off as well, so a couple of different things but we'll keep our options open.

Okay.

Great.

Thank you.

Good luck.

Thanks, Jeff.

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

Yes, a couple of questions kind of getting into your thoughts on the stimulus opportunities and those moneys, looking at the opportunity of lighting retrofit versus power systems, ultimately if you're getting any better ability to track what the opportunity might be?

The answer is yes.

I would say for the first six months of this year, negligible spend or consequences to either of those businesses.

They are picking up the pace.

There's been a lot of hearings and discussion going on.

In fact the President of Cooper Power Systems is testifying in front of Congress this week.

And so they are lining up better to release more money on the utility side.

And I think the bulk of the money, we think it's between $4 billion and $5 billion for relamping with energy efficient types of products in federal buildings and schools and hospitals and such will primarily be spent late this year but primarily into next year.

So we've got a database of over 300 different projects that we're tracking, we're able to get into very granular detail and work with our partner distributors on identifying and speccing our products around those projects, but I think the bulk of the benefit begins to show up in '10.

Kirk, did you say $4 billion to $5 billion for relamping or overall building efficiency?

I think it's primarily on the relamping side but let me check that number.

That was the number I was given but I think it's on the lamp side over the course of the $787 billion.

Yes.

And that includes outside lighting and federal buildings and things like that, really kind of an industry spend, $4.5 billion, but Mark why don't you check that number.

I'll definitely check that.

Yes, because I think that's about half the industry size so that would pretty much obliterate the impact of the construction cycle.

But again it's over multiple years over a long program as well.

And then any thoughts on the extent to which stimulus can, is really just alternative funding to different activities or actually incremental activity?

I'm sorry, I missed the question.

Can you ask it again, Chris?

Say it again.

Yes, just some concerns around if the stimulus money comes out in the end as really alternative funding to activity that would have taken place under a different banner?

Cannibalization, I don't see that happening.

I mean, I think the rest of our business is, federal buildings and such guys, we said this before that about 80% of the lighting systems out there are over 20 years old and so generally they're the slowest to adopt occupancy censors and sort of new technology.

On the utility side, the utilities have been adopters of smart grid technology and sensing technology and network automation and such.

But I don't see there being any conflicts or sort of cannibalization of one versus the other.

I don't think that's an issue.

That sounds good.

Thanks a lot.

Thanks, Chris.

Your next question is from the line of Deane Dray with FBR Capital Markets.

Thank you, hi everyone.

Kirk, I'd be interested hearing more about your assumptions on the utility side.

A lot of reports about cutting of CapEx plans there.

Is that leading to some of the issues with price competition and what few orders for transformers and how do you expect that to play out?

Yes, as I sort of said, I think -- and Terry said in his comments, a little bit disappointed I think in the second quarter that we have not seen the order rates bounce back up.

And so I think maybe we were a little naive in the first quarter to think that the inventory burn in the utilities and some of the cuts in capital, Deane, were getting toward the end.

And I would say we saw no material pick up in order rates in the second quarter.

Now, again, on the EAS business, on the reliability business, the capacitor business, very strong growth, but now on the other side, the components and the traditional apparatus type of products, still depressed.

Commercial construction, housing construction, and overall capital plans as you said by the utilities are still low.

Now as the year progresses we expect to see that begin to pick up, and I think we're still holding out hope for 2010 to have a positive growth on our utilities side.

I still think in our conversations that they will take them down this year, reset their inventory levels on the yard and such but I'm still holding out hope that there will be a positive spend on T&D for 2010.

How much of that would have to be stimulus related?

Well, not much.

I mean, I think just there's no stimulus on the utility side at all because the whole AMI and automation side has got its own sort of legs.

And I think just to support the aged infrastructure and the grid, Deane, they are going to have to come back off these depressed levels.

And I'd add to that, Deane, that it's very, very easy for utilities to take down their inventories yard.

Consider a transformer in some degree as an MRO type item for the utility, and they can take that inventory down dramatically if they have cash needs, but you can only do that for so long.

And the underlying demand is still out there and the same dynamics are true in the industry as existed a year or two years ago.

So ultimately, it comes back.

And we're still seeing a lot of activity trying to get wind and solar and these alternative energies onto the grid, and you need a lot of investment on the distribution and transmission type products to bring all that capacity online, so we're seeing a lot of activity still on that side of the business.

And then lastly could you give us an update on the move to Ireland, timing, approvals, and expected effect or minus the effect on the tax rate?

The shareholder vote and the meeting will be at the end of August, so it will be shortly after that that the transaction is actually consummated.

We don't anticipate any change in our effective tax rate from doing that, although I'll tell you it does open up some new opportunities as we move forward to bring the rate down further.

What would be the opportunity?

Can you size that?

We have opportunity for example, on the financial side of it of probably bringing the rate down 100 to 200 basis points.

Over what time period?

It will take a couple years to do.

Got it.

Thank you.

Thanks, Deane.

Your next question is from the line of Terry Darling with Goldman Sachs.

Kirk, wonder if you could maybe recalibrate your previous comments on 2010 framework overall?

You're still looking for growth in utility but it looks like maybe the commercial outlook has gotten a little more cautious, maybe pricing is a little more cautious, but sounds like restructuring is going to go up a bit.

So maybe you could just revisit that?

I had a feeling that was going to come up, Terry.

This is why you hate to forecast, right?

Resi I'd say has a plus in front of it, as we said utility has a plus in front of it, international has a plus in front of it, electronics has a plus in front of it, energy spending capital around the world I think has a plus in front of it and I think stimulus could almost put two pluses in front of it.

As you said I think non-resi though goes from minus 10 to maybe minus 15, so maybe a little bit worse than the last time I put my shoe in my mouth.

And I think the wildcard that I'm getting a little bit more maybe comfortable with is industrial, overall factory utilization and capital spend on the traditional Industrial side.

And because it's come down so hard so fast, I'm hopeful that that has a plus sign in front of it as well.

So even with 25% of our business, our non-resi going down may be now 15 and 10, and I think we can do some things to offset that between energy efficiency and all these other pieces, the international.

I still feel comfortable that we can hold revenue flat in 2010.

I'm certainly approaching the back half flat to up in 2010 of course which gives you great opportunity on the EPS side.

Okay.

So I'm sticking to it, Terry.

How's that?

That's helpful.

And then, Terry, just trying to think about the price/cost balance as you move into 2010, I guess the impression I've gathered from your comments is that you've got some contracts in place this year that mean that as price comes down your raw match comes down the back half this year but maybe those contracts run off.

We're seeing spot prices move up.

Do we, particularly maybe in the first half before you get demand back to push pricing back up, do we need to think about a negative price/cost balance in the first half of next year?

I'll be highly disappointed if we end up there.

As we've said in the past we manage every business down to the small units on price/material.

And I've got to tell you in the last five years we've been very, very successful at managing that with the input costs versus price.

So I think there will be some more challenges initially if commodity costs do go up substantially, but I'm very comfortable we can manage through that.

Okay, and then lastly, I may have done some math here wrong but if I try to back into what the range on revenue forecast for the fourth quarter looks like on a year-over-year basis relative to what the forecast is for the third quarter, it looks pretty consistent in electrical products but the range on tools looks like it comes down at the midpoint, which would imply it gets a lot less negative, potentially, at midpoint anyway.

Which markets would you expect to potentially drive that change?

I think on the tool side you're looking at some abnormal comparables with the prior year.

In 2008, that market just totally collapsed on it, which typically that's the strongest time of year for the tools business.

So the comparables are a little skewed there.

Volume-wise going third to fourth not much real change.

A little uptick but not much on the tool side.

Thanks much.

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

Please proceed.

Good morning or afternoon depending on where you are I guess.

A quick question on -- you talked about material hedging impact, $5 million less second half, first half.

Can you give us some quantification of what the impact for the year in round numbers of the material hedging program in 2009 and whether that disappears in 2010?

Yes, we entered the year with underwater about $30 million on the hedging side of it plus of course you had a bunch of contracts on steel, et cetera which made that number a lot higher.

Going into 2010, not much although we are hedging now and have been into 2010 at these lower commodity costs.

So hopefully, we'll make the right call on hedging at the bottom and we'll avoid some of the pressure as we go into 2010.

But that $30 million plus big number, [plus you feel that] we could get a swing of that magnitude next year on the input cost side?

Yes.

So (multiple speakers) pressure to offset maybe some of the pricing potential weakness (inaudible).

Everything else being equal that's absolutely right.

That helps margin.

You talked about tax rate this year being 19%, maybe 20%, 21%, something like that.

Does the tax rate begin to climb back?

I mean if we get to profitability, the only thing holding the tax rate down from below 20% to the low 20s of where it was before is the volume level.

There's nothing happening that wouldn't take the tax rate back up at a higher profitability in this country?

As profitability goes up especially in the United States, it's really at a 36% rate on the incremental earnings.

And are you profitable in the U.S.

at this point by the way?

I'm not sure what our exact projection is right now.

I haven't gotten with our tax guys.

Sort of close one way or the other?

Could be.

At this point.

So getting this rate in the low 20s next year is the most logical assumption one would have?

If there is no volume increase, the tax rate will probably go up next year just from the fact that we'll have carryover benefits from the actions we've taken.

So even on a flat revenue scenario in '10, I would expect earnings to be up.

And the tax rate, even with a bit higher tax rate.

Interest charges should come down despite the fact that you're going to pay more money for the credit lines as you said you were doing because you're paying down the debt?

Is that a fair assumption for next year?

That's absolutely right.

When we look at the operating margin, tools has been nothing to 2.1%.

are we expecting margins in the tool business to go back to the mid to upper single digit numbers in the second half of the year based on the actions and a little bit of the volumes that we talked about in comparisons?

(multiple speakers)

We're expecting it to progressively increase into that mid-range single digit.

But it's fair to say that it's going to be hard to show much movement in electrical margins given the pricing pressure that we're seeing and the way volume is unfolding at this point?

No.

I would tell you electrical margins will increase each quarter as we progress through the year also.

Whether volume does or not?

Right.

Thank you.

As there are no further questions in queue at this time I'd like to turn the call back over to Mark Doheny for closing remarks.

Great.

Thanks for joining us today.

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

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.