伊頓 (ETN) 2009 Q4 法說會逐字稿

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

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

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

We will facilitating 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 presentation over to your host for today, Mark Doheny, Director of Investor Relations.

You may proceed.

Thank you, Frances.

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

With me today is Kirk Hachigan, 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'll refer to throughout this call.

If you would like to view this presentation, please go to the Investor Relations section of our website at www.cooperindustries.com.

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 may be found in the company's annual report on Form 10-K and other filings.

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

To the extent that they have been anticipated, reconciliations to 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.

Thank you, Mark.

Good afternoon.

Well, I guess as they say, what difference a year can make.

It was one year ago that we were reporting record revenues of $6.5 billion, record earnings per share of $3.59 and record free cash flow of over $700 million.

And while it's been a very difficult year by any measure, we are very proud of the way our teams have navigated through this very difficult economy.

In fact, on this call last year as we saw further evidence of the dark clouds ahead, we commented about all the hard work that we had done over the last decade, building a world-class portfolio and refining our business processes so we could not only survive such a crisis, but could prosper by adapting to changing market conditions and emerging technologies as we have over the 135 years of our history.

And most importantly, that our conservative capital structure gave us great confidence in our ability to manage Cooper through a very difficult cycle.

The results of this improved portfolio and streamline business systems are shown on page 2 of our handouts.

While the S&P delivered the worst 10 year performance in its history, Cooper shareholders have been rewarded with a 10.8% compound annual growth rate over the last decade.

Cooper's returns also compared favorably to our proxy listed peer companies reported at our proxy.

As we enter 2010, we have positioned the company to new faster growing emerging technologies like smart grid, LED lighting, and RF monitoring and signaling as well as new explosive growth economies like China, South America, and the Middle East, all while strengthening our balance sheet and preserving our strategic options as we move into this new decade.

If you turn to page 3 of the handout, Terry and I will make specific comments on the fourth quarter and the full year 2009.

For the fourth quarter, our total revenues came in down 18% to $1.26 billion.

Electrical products was down 19% to $1.1 billion, down 4% from the third quarter, and tools was down 7% to $154 million, but up 10% from the third quarter.

We continue to have intense cost management, which led to overall operating earnings delevering at only 14.6% on an 18% revenue decline excluding restructuring.

Our operating margins were 13.1%, up 80 basis points from the third quarter.

Electrical products operating margins were 15.5%, up 40 basis points from the third quarter, and tools operating margins came in at a strong 8.3%, up 340 basis points from the third quarter 2009.

Our full year free cash flow was $723 million, excluding a one-time German tax deposit for 170% cash conversion on recurring income excluding unusual items.

That's 14.3% of sales, and a big part of that was working capital improvements from our inventories, which were down $158 million or 25% year-over-year.

If you turn to page 4, our end market conditions, industrial -- our biggest end market at 39% of sales last year has shown steady signs of recovery over the last two quarters.

We see improving trends in MRO and OEM markets despite overall factory utilization still below 70%.

In commercial construction, or 24% of last year sales, we continue to see difficult market conditions into 2010, with vacancy rates climbing, rents falling, and continued restricted lending practices.

We do see increased demand for energy efficient products and expect these sales to remain strong throughout 2010.

In the utility market, or 22% of our sales, we continue to see the same trends we reported in the third quarter with transformers and regulators down significantly, with capacitors and smart grid solutions growing.

Our international markets were solid, essentially flat with last year.

And lastly, residential or retail sales or 10% of our sales last year are flat with the third quarter and down mid-teens with last year, but again beginning to see signs of a modest recovery.

If you turn to page 5 of the handout, for the electrical product results, or 89% of our sales last year, we saw improving trends in the fourth quarter.

North America electrical distribution is improving again, particularly in the MRO side.

OEM sales were up double digits with strong electronic sales.

International sales were flat or down just over 10%, excluding the benefit of foreign exchange.

We continue to see strong demand for energy efficiency products around the world and our book to bill for electrical in the quarter continues to be at 100%.

Lastly again, we saw great cost management, which allowed our margins to expand to 15.5%, their best levels in over a year, while generating exceptional strong cash flow.

If you turn to page 6 of the handout for the tools group, we are finally beginning to see the overall market conditions improve, reporting our best revenue and margins all year.

Revenues were up 10% from the third quarter and down only 7% from last year, and industrial retail sales are improving as global economies begin to revise.

Our margins and cash flow were strong as a result of solid productivity and pricing discipline.

Now let me turn the call over to Terry to provide you additional details on the quarter, full year 2009, and 2010 outlook.

Terry?

Thanks, Kirk.

While to date, the economic recovery that is in progress has not translated into overall revenue growth across all of our portfolio, Cooper's fourth quarter results demonstrate how well we are positioned to deliver very strong earnings growth as our markets do recover.

Our fourth quarter results increase our confidence that the changes we've implemented over the last decade on way the company is managed, the investments we've made in the enterprise business system, investment in new platforms, and execution of our strategic initiatives will allow us to deliver superior returns to our shareholders.

I'll cover the highlights of the fourth quarter in a minute, but first some highlights on free cash flow and balance sheet.

Turning to slide 7.

In 2009, free cash flow was $633 million compared to $761 million in 2008, 149% conversion of recurring income to free cash flow.

Excluding a $90 million discretionary tax deposit we made in late December, free cash flow would have been $723 million in 2009, or 14% of revenue.

The $90 million tax deposit would probably have been made in 2010 to preserve our ability to appeal a German tax assessment.

While we believe ultimately we will prevail, from a financial earnings perspective there would be no net impact no matter how this is resolved, and the cash flow impact is a matter of the year the deposit and the foreign tax credits are recognized.

Our free cash flow in the fourth quarter of 2009 was $64 million as we made the $90 million tax deposit and purchased a warehouse and a factory for $14.5 million.

Our balance sheet remains in great shape, with net debt to total capitalization at 15.7% on December 31 compared to 26.8% on December 31, 2008.

Turning to slide 8.

Our net debt at December 31, 2009, was $553 million compared to $952 million a year ago.

In November 2009, we paid off $275 million of notes, and at December 31, 2009, we had no commercial paper outstanding.

With an underleveraged debt position and $382 million in cash on the balance sheet, we have tremendous liquidity.

We are very pleased with having our debt and capital structure in great shape and been well positioned to utilize our balance sheet as a strategic asset to acquire businesses and to return capital to our shareholders.

Turning to slide 9.

Our operations had another outstanding quarter of executing on operating working capital.

We reduced inventory a further $22 million from September 30.

Our inventory was $484 million at December 31, 2009 compared to $642 million on December 31, 2008, a 24.6% decrease -- an outstanding performance by all of our operations teams.

Our inventory turns were 6.8, equal to the record 2008 results in a year where revenues declined 22%.

For receivables, our days sales outstanding at December 31 decreased three days compared to the prior year and decreased four days from the third quarter.

Receivables declined $214 million from December 31, 2008, a 21% decline.

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

And as with the prior quarter, you can tell from our results that we are aggressively monitoring credit and collection and continue to make progress on collecting receivables within the terms granted to our customers.

Our payables declined $108 million or 22% from a year ago, driven by the inventory reductions and our capturing discounts offered by our suppliers.

From December 31, 2008, to December 31, 2009, our operating working capital declined 22.7%, reflecting our resizing of the balance sheet for the reduction in revenue experienced this year.

We rapidly executed in resizing the balance sheet in the first half of 2009 and then incrementally improved from there.

On slide 10, our capital expenditures were $55.9 million in the fourth quarter of 2009 compared to $41.5 million in the fourth quarter of 2008.

Full year capital expenditures were $127 million compared to $137 million last year.

I mentioned on last quarter's conference call that we are in the process of capitalizing on the weak commercial real estate market, and we are close to purchasing a couple of facilities, which could increase our capital expenditures if completed before year end.

We completed the purchases of two facilities in the fourth quarter, which resulted in our exceeding our forecast of $100 million to $110 million in capital expenditures for the year.

We have consistently emphasized that during the economic downturn that we have not cannibalized our core and continue to invest in technology, new products, and our international infrastructure.

A new factory in Saudi Arabia, a world-class LED technology center, and record new product introductions demonstrate our continued strong investment in the future.

In the fourth quarter of 2009, we purchased 295,000 shares.

For the full year, we purchased 1.557 million shares of our common stock at an average price of $24.75, spending $38.5 million against proceeds from issuance of $20 million for the 2 million shares we issued during the year.

In the prior year, 2008, we purchased 14.4 million shares at an average price of $35.89.

Our outstanding average diluted shares for the fourth quarter increased by 1.4 million shares from a year ago, but increased 1.1 million from the third quarter, driven by auction exercises and the inclusion of additional shares resulting from the increase in the stock price.

Under existing Board of Directors authorization, we purchased an additional 12.5 million shares plus the estimated shares issued for stock option exercise and other programs each year.

In the fourth quarter, we did complete one acquisition, Pauluhn, a great addition to our hazardous electrical products portfolio.

As I said earlier, our balance sheet continues to be in great shape and we consistently generate very strong cash flow, providing Cooper tremendous flexibility to fund organic and acquisition growth, pay a competitive dividend, and purchase our common stock.

Turning to the results for the fourth quarter and slide 11.

A couple of items impact our results, both fourth quarter of 2009 and fourth quarter of 2008.

In the fourth quarter this year, in 2009, we recorded a pre-tax charge of $4.2 million or $0.02 per share.

This was offset by a discrete tax benefit in the fourth quarter of $3.2 million or $0.02 a share.

In the prior year fourth quarter, we recognized restructuring and impairment of $44.8 million or $0.19 per share.

So excluding the restructuring impairment and discreet tax benefit, for the fourth quarter of 2009 and 2008, we reported $0.76 per share compared to $0.84 per share in the fourth quarter of 2008.

You'll note that excluding the discrete tax benefit that our expected tax rate was 14.3% for the fourth quarter compared to 18.2% for the first nine months of 2009.

We continue to realize additional benefits from our legal structure and lower state income tax, realizing an effective rate of 17.1% for the year.

The lower tax rate add approximately $0.03 per share in the fourth quarter.

Now aside from the $0.03 earning per share from the lower tax rate, our operations did an outstanding job on the inventory reduction in the fourth quarter, which resulted in inventory valuation income.

For the year, we recognized LIFO income of $18.8 million, partially offset by $14.7 million in other inventory valuation expenses.

Now for the first nine months of the year, LIFO and other inventory valuation adjustments were a net expense.

In the fourth quarter, we are expecting close to zero impact, but due to the inventory reductions at tools and in certain electrical businesses, we ended up with $0.03 per share benefit.

We offset $0.02 of this $0.03 per share of net inventory valuation gain with reserves on government contract disputes and other items.

The bottom line is that we have a net of $0.04 per share of items that improved fourth quarter reported results, and absent these items, we reported normalized earnings per share of $0.72 per share.

So by any measure a strong fourth quarter, and we remain still a very weak top line.

I will not get into all the details of the fourth quarter of 2008 adjustments, but will remind everybody that the results include a lower tax rate adjustment and an adjustment to stock and other compensation and other items that increase per share by $0.09.

Turning to slide 12 on 2009 full year unusual items.

2009 we recognized $29.9 million of restructuring charges or $0.14 per share, partially offset by discrete tax benefit of $0.08 per share.

In 2008, we recognized $52.4 million or $0.21 per share in restructuring charges and impairment and discrete tax benefit of $0.13 per share.

So excluding these items, 2009 earnings per share was $2.52 compared to $3.59 in 2008, a decline of 29.8% on a revenue decline of 22%, a very good execution on deleverage in the worst economic recession in over 50 years.

Turning to slide 13 on revenues and earnings per share.

Today we reported a revenue decline of 17.5%, with electrical revenues declining 18.8% and tools revenues declining 7%.

Currency translation increased revenues 2% and acquisitions contributed 0.3% to revenue in the quarter.

Looking at revenue from a product line perspective, we are seeing improvement in product lines that declined early in the cycle, specifically electronics and MRO types of product lines.

Overall, pretty much what we expected on the top line, except for tools, where the power tools side of the business was stronger in December.

Quarter revenues declined 19.8%, with electrical core revenues down 20.6% and tools 13.2%.

Inventory destocking by our customers and end users appears to be substantially complete.

More frequent, smaller quantity orders continue to be the norm.

Activity on projects that were delayed due to higher commodity costs and credit conditions continue to show activity.

Continental Europe is mixed but improving in most countries, and developing markets are improving, especially China and Latin America.

The US continues to be the weakest market.

In total, international core revenues declined 12% as both China and Canada grew and most developing markets continue to improve.

Our book to bill continues to be right around 100%, indicating that we have stabilized, albeit at a much slower revenue.

As I covered earlier, we reported $0.76 in continued earnings per share exclusive of restructuring and the discrete tax benefit.

Normalized earnings per share -- that is, excluding tax rate adjustments and other adjustments in the fourth quarter, declined $0.03 from the prior year to $0.72 per share.

We had excellent execution by our businesses in managing price material economics and realizing the benefit of the cost actions we've taken.

Turning to slide 14.

Gross margins increased to 33.4% from 31.2% last year fourth quarter -- a strong 220 basis point improvement.

Both periods were impacted by inventory and other items, and excluding these items in both periods, the improvement was approximately 160 basis points.

Sequentially from the third quarter of 2009, gross margins improved 150 basis points, with about half of the improvement from inventory and other items.

Great execution on productivity and continued execution on price and material economics drove the sequential improvement from the third quarter of 2009.

As expected, we had consistent execution on price versus material economics.

The results were very close to forecast, with price decline slightly below 2%, more than offset by material cost reductions.

As I said last quarter, we are very disciplined on price versus material economics and successfully managed and measured our businesses for over six years on this critical component of profitability.

While each product line or family has unique characteristics and dynamics that require different strategy, it's clearly in our DNA to effectively manage price and material economics, and we've been extremely successful and see no reason why 2010 will be an exception.

Selling, general and administrative expense for the quarter as a percentage of sales was 20.2% compared to 17.8% in the prior year fourth quarter, an increase of 70 basis points from the third quarter of 2009.

The prior year SG&A percent was impacted by the stock compensation and other adjustments and would have been around 18.5% absent these items.

In the fourth quarter of 2009, the reserves on government contract disputes and other items increased SG&A as a percentage of sales by approximately 40 basis points.

So excluding these items in both years, SG&A as a percentage of sales increased approximately 140 basis points on normalized basis from the prior year and sequentially from the third quarter approximately 40 basis points, driven by lower revenues and modest increased spending.

General corporate expense on the segment income statement increased from $11.9 million in last year's fourth quarter to $19.2 million.

Prior year includes stock comp and other adjustments, and absent these items, general corporate was close to flat with the prior year.

Turning to slide 15.

Fourth quarter operating earnings declined 15% from the fourth quarter of 2008 on a normalized basis.

On a sequential basis from the third quarter, operating earnings increased 2% on a normalized basis and very nice improvement on a sequential revenue decline of 2%.

Exclusive of restructuring, our operating margin was 13.1% in the fourth quarter of 2009 and 12.8% on a normalized basis, a solid sequential improvement from the 12.3% in the third quarter of 2009.

Operating margin improved 20 basis points on a normalized basis from the fourth quarter of 2008.

Continuing to slide 16.

Our net interest expense decreased $5.9 million from a year ago.

Lower debt balances more than offset a slightly higher interest rate and lower interest earnings.

As I went through earlier, our effective income tax rate for the fourth quarter was 14.3%, which includes the adjustment to bring the rate to 17.1% for the year.

Our fourth quarter continuing income, excluding these restructuring and discrete tax benefits, decreased 5% on a normalized basis on the 18% revenue decline.

Turning to the segments in slide 17.

For the quarter, our electrical product segment revenues declined 18.8%, with core revenue decline of 20.6%.

Currency translation contributed 1.5% to revenue, and acquisitions 0.3%.

Price realization was close to 2 points negative in the fourth quarter and very close to what we expected.

Demand for electrical products is starting to show some life in many regions of the world.

Developing markets continue to hold up better than developed economies and have been the first to recover.

Global electrical distribution sales declined approximately 16% from the fourth quarter of 2008.

As Kirk mentioned MRO activity is picking up and later cycle product lines have stabilized.

The retail channel continues to be soft, with revenues decline in the electrical segment mid teens from the fourth quarter of 2008.

Utility demand continues to be very soft, with sales declining greater than the overall segment decline.

We currently are not seeing utility stepping up spending in the US.

International has picked up and our energy automation businesses continue to have double digit growth and the pricing environment is stable.

On the US utility side, with the increase in economic activity, we anticipate over the next year to see higher order rates as the infrastructure requirements have not changed from the double digit revenue growth we experienced prior to the US credit markets freezing up last year.

Overall, the electrical product segment earnings decreased 12% on a normalized basis in the fourth quarter of 2009 compared to the fourth quarter of 2008.

Return on sales on normalized basis increased 110 basis points to 15.4% from 14.3% in the fourth quarter of 2008.

We deleveraged at 11%, a very solid performance in an environment where revenues declined 19% and on a normalized basis deleveraged slightly less than 11%.

On slide 18, our electrical products revenues declined 3.8% from the third quarter of 2009, reflecting normal seasonality.

Sequentially, return on sales improved 40 basis points from the third quarter of 2009, 30 basis points on normalized basis, driven by realization of benefits from the cost actions taken in the fourth quarter of 2008 and throughout 2009, solid performances on managing price and material economics, and stabilization of our factory performance.

If you look at the last economic downturn, electrical return on sales bottomed in 2002 at 12% on single digit declines in revenue and took four years to get back to 15%.

In 2009, electrical revenues declined 22% and took us only two quarters to get our electrical margins back to 15% ,with return on sales now over 15% in both the third and fourth quarter and a very solid 14.1% for the year.

And this is with operating capital down, operating working capital down greater than the decline in sales.

Cooper is a different company than it was seven years ago, and we are very well positioned to deliver outstanding earnings leverage as the market recovers.

Turning to the tool segment on slide 19.

In our tools business, sales decreased 7% from the fourth quarter of 2008, with currency translation increasing revenues 6.2%.

The hand tool side of this business has stabilized with retail sales declining low single digits, and the industrial side of the business has improved with aerospace and automotive showing some signs of life.

Tools operating earnings declined 30%, exclusive of restructuring on normalized basis from the fourth quarter of 2008.

Return on sales declined 230 basis points on a reported and normalized basis.

On slide 20, tools sequential revenue increased 10.3% from the third quarter of 2009.

It was nice to see the business stabilize and underlying volume increase, and tools earnings continue to recover with a reported return on sales in the fourth quarter of 8.3% compared to 4.9% in the third quarter.

On a normalized basis, return on sales of 7.2% is a 230 basis point improvement from the third quarter of 2009.

It's a nice recovery from where we started the year in tools business and we are very well positioned to leverage a revenue recovery.

Turning to slide 21.

While the fourth quarter continues to be difficult on the revenue side, with revenues declining 17.5%, we continue to aggressively manage our cost structure and operating working capital.

If you normalize for acquisitions in both years from one year ago, operating working capital is down 23% and inventory 25%.

Our SG&A is down 16%, cost of sales 21%, and our headcount 10% from one year ago.

From before the economic recession and credit crisis hit us -- that is from September 30, 2008 to December 31, 2009, operating capital is down 32% and headcount 16%, a very dramatic adjustment that was extremely well executed by our businesses without damaging our new product development, our sales organization, and international growth initiatives.

We are continuing to closely manage our cost structure and are very well positioned to leverage a recovery.

Turning to slide 22 on restructuring actions.

Cumulative fourth quarter and full year 2009 restructuring totaled $65.6 million.

In the fourth quarter, we recognized $28.7 million in benefits from the restructuring.

With actions completed to date, we have approximately $25 million in incremental benefits that will be recognized in 2010.

To date we've closed eight manufacturing and warehouse facilities and have approved closure of two additional facilities.

Turning to slide 23, and a summary for the 2009 full year.

I have to admit I'm very happy to have 2009 behind us.

It was not an enjoyable year, with a lot of tough actions across our business to adjust to the worst economic decline since the Great Depression.

For the year, revenues decreased 22.3%, with electrical products down 21.6% and our tools business revenue declined 27.2%.

The results in core revenue declined 21%, with electrical down 20.4% and tools at negative 24.4%.

While the impact of the economic crisis was unpredictable, we continued throughout the year to provide our assessment of revenue and earnings for the next quarter and year.

While we were far from perfect on forecasting, we believe it was very important and more important than ever to provide the information.

It's interesting to note that if you go back to a year ago, we forecast revenues to decline 10% to 15% and earnings per share excluding unusual items of $2.45 to $2.80.

As I look back on the year, I have to applaud our operations for quickly adjusting to a much worse environment while delivering the commitment we provided a year ago on earnings for the year.

Excluding the unusual items, earnings per share from continuing operations declined 30% on a 22% revenue decline, not an easy metric to achieve.

Free cash flow conversion was 149% of recurring income, our ninth year in a row that free cash flow exceeded earnings.

Now turning to slide 24 on our 2010 outlook.

For the first quarter of 2010, we are forecasting revenues to be in the range of a decline of 3% to an increase of 2%.

The forecast includes a positive impact from currency translation and acquisition of over 4%.

In other words, year-over-year, core revenues declined in the low to middle single digits.

Sequentially from the fourth quarter, we expect electrical revenues to be down low single digits to up a couple of percentage points and tools revenues to be down mid to high single digits.

Tools fourth quarter is traditionally the strongest quarter, with the first quarter by far the weakest quarter.

We anticipate an additional $0.01 to $0.02 restructuring in the first quarter, and excluding this charge are forecasting earnings per share of $0.65 to $0.70.

For the year, we are forecasting $2.70 to $2.90 per share exclusive of unusual items.

We are forecasting a revenue range of down 1% to up 4% for the year, with currency translation contributing over 2% to revenue in 2010, and we expect free cash flow to exceed recurring income for the 10th year in a row.

From the preliminary thoughts we provided in the fourth quarter of last year, there's been not much change in our thoughts on the market.

A couple of items on the assumptions built into the forecast.

Pension and OPEB expense will be a positive of a couple cents in 2010.

Material costs have continued to escalate and we are being a little more conservative on price versus material economics in 2010.

Our tax rate is expected to be between 19% and 21%, and importantly as we said before, if we achieve volume above our forecast, we expect to leverage that volume into significant earnings growth.

We'll provide further details on our 2010 forecast at our outlook meeting on February 23 in New York City.

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

Thank you, Terry.

As we end one decade and begin a new, we feel extremely confident in what it takes to be successful in a faster changing, more complex world.

We've strengthened our global competitiveness with a relentless focus on productivity, exiting 2009 with 15% plus electrical margins and facing no headwinds into 2010 from furloughs, 401(k) cuts, or pension funding, and our balance sheet has also strengthened, with a debt to total capital below 16% due to our aggressive reductions of working capital in 2009.

While 2009 was incredibly challenging from an operational perspective, we did not lose our focus on the future and continue to invest in emerging new technologies around energy efficiency, green, and customer productivity, exiting 2009 with a record vitality index of new product introductions.

We also continue to expand our global commercial footprint to improve our penetration in China, the Middle East, and South America, where auto sales, steel, chemical, and oil and gas industries are flourishing.

We believe the diversity of our end market balance in our portfolio continues to be a real asset, especially after such a steep downward decline we have just experienced.

Our industrial and residential end markets are beginning to grow again.

Utility will follow.

Then nonresidential construction in 2011, providing a solid core growth for the next four to five years.

And as we all are well aware, cash flow is the life blood of any company, and for nine straight years, our cash flow has exceeded recurring income, with the last five years being north of 10% of sales.

So in 2005, 2006, 2007, and 2008, while we were experiencing solid growth, and in 2009 when our sales fell sharply, our business model was able to produce healthy and stable cash flow.

And lastly, we understand the expectations of our owners to communicate in a clear and transparent manner the performance of the company and conditions of our end markets, and to produce long term steady returns by investing in the core of our company while returning excess cash to the owners -- avoiding excess leverage, giant buybacks at the market peaks, and acquiring into industries where we have little or no expertise.

While none of this is easy and the world economies seem more susceptible to violent gyrations as experienced with dot-com, housing, and energy booms and busts, we feel confident we have the right leadership teams, cultures and values, and business model to continue to guide this 176 year old company to great prosperity.

With that, I'll turn it back to Mark for your questions.

Thank you, Kirk.

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

Francis, first question please.

Thank you.

Your first question comes from Jeff Sprague from Citigroup.

You may proceed.

Thank you.

Good morning or good afternoon, however it applies.

Kirk, just to start, and maybe it goes to Terry, but this whole idea of leverage on revenue growth, and I think it's probably for 2010 greatly intertwined and the whole price cost dynamic, but 2009 is interesting to watch.

Every quarter for the year, your sales are within a $30 million band.

You did $1.250 billion plus or minus all year long, and the margins marched steadily upward.

I guess we understand what the restructuring variances are, but I wonder if you can put a little more color on the operating leverage question, and maybe it's even a two-part answer, like the leverage in the early days of growth versus where it settles out maybe several quarters down the road.

So let me start, and I will turn it over to Terry.

I think, Jeff, what you saw in the fourth quarter really of 2008 was a very steep decline in November, December.

So as we said then, we shut off the production rates at the factories and started taking down the inventory and the working capital.

So we didn't get to significant restructuring until -- we started early, but we didn't get into it in the big time until the first quarter.

So your absorption rates, your inventory is coming down, plus the steepness of the market fall really did impact the margins then quickly.

As you streamline through the year then, you start getting to more normalized run rates.

You get the benefit of the reduction, the restructuring reduction, and some of the plant closings and such and start getting more efficiency.

And by the fourth quarter, obviously, you can see electrical I'll talk to, on $1.1 billion to $1.2 billion, what kind of a margin you can run.

Now our approach to 2010 was not let the businesses build a V-shape recovery into any of their budgets.

So conservative would say that you continue to run under the cost structure you have.

So I would say as you get some volume, 30% incremental leverage in the early days will certainly be well within our grasp.

But as we've said, we want to continue to invest.

We will continue to invest in international expansion and new products.

So over time, some of that will continue to reinvest in the core, but I think -- again facing no headwind on one time, furloughs, or 401s.

So we don't have anything coming back that will pollute those numbers as you run into the first and second quarters of 2010.

So that would be my take.

Terry, do you have anything else?

The only thing I would add is clearly until we see the actual revenue volume growth sustainably picking up at least from our vantage point, we won't be adding the cost in.

We will clearly leverage up much better in the very early end of the cycle versus when it normalizes out later in the year into the next couple of years.

Terry, would you elaborate on what you are seeing on cost?

I'm sure you have a variety of contracts that are protecting you a bit, but at what point in the year do you think you are seeing year-over-year raw material cost increases?

When I look at the 2010 forecast, which we've been updating here, on the revenue side as far as price, pretty modest price increase built into our forecast.

But net on the material cost, there is year-over-year, not a huge amount of material cost offset with price, and pretty consistent quarter to quarter to quarter.

So I really at this point don't see a damage to the margins, if you will, from price material economics.

If I can just squeeze one more, Kirk or Terry, obviously a great job on the working capital.

I would suppose nominal dollars obviously would have to go as the company grows, but do you think you can maintain or even improve on these coverage ratios -- sorry, on the turnover ratios and working capital as the revenues begin to turn?

Absolutely.

We have a long ways to go on our view on the whole supply chain side.

So inventory clearly -- now, on receivables, you will build receivables, because it's much tougher to take your DSOs down, and of course payables will grow.

But I think you will see a fairly modest build in operating working capital if we start growing revenues in the 5% to 10%.

If it gets over 10%, clearly it's tougher.

We still have a few businesses that made good progress on turns, but start with a 4 in front of the number.

So certainly some improvement.

The ones that turned well are turning pretty well, but there are a couple that turned below what we would consider good numbers.

Thanks a lot.

I'll pass it on.

Thanks, Jeff.

Your next question is from the line of Robert Cornell with Barclays Capital.

You may proceed.

Hi everybody.

There were some comments made about projects in the quarter on the non-res side, and maybe you can expand that by talking what you see in terms of the non-res segment this year and flush out that project comment with regard to inquiries and funnel?

And also pricing on those projects.

The company yesterday talked about pricing on projects, whether you are seeing any of that?

So non-res in the aggregate, and then projects?

Non-res will still be tough.

I don't care how you cut it.

We are still looking at a negative double digit decline, and I think the market is somewhere around 14% to 15% down most likely.

We think we can do a little bit better than that because of some new products and energy efficiency products and things like that, but that's where we are budgeting.

If you are looking at vacancies of offices, and you drive around the country and talk to some of our lighting agents and architects, even the funding and the availability of capital, banks want to do 50% to equity types of loans on small projects -- it's very difficult.

So I think anything much better than that is going to be tough in this year.

We are trying to follow a disciplined approach on the pricing.

We have taken some price increases in several of our businesses heading into the fourth quarter.

Lighting is one of those businesses.

There's been increased copper, steel prices.

So I think overall I wouldn't suggest that we are seeing more pressure on price for large projects that you would expect than what we have seen over the last 12 months.

This has been down for some time.

The relief you're going to get on construction will come from housing.

Some of the big box guys are forecasting now same-store sales up a couple percent next year.

We are coming off such a low start that you'll see some growth there.

I don't know if stimulus money ever turns into real construction projects, which would be helpful as well.

We think that will be a soft spot.

We've anticipated what is going to be, but I don't think anything worse than we've seen in the fourth quarter already or the momentum we have going into 2010.

You mentioned that you saw building inquiry on the small to medium size projects.

Is that still the case?

Is that real?

We are not seeing anything deteriorating anything more quickly, and our fourth quarter came spot on where we think the market was and where we thought it would come in.

It's not been a drag to us.

It's not been a business that caused surprise every quarter.

It's been predictable and steady in the way the guys have managed.

Margins have been very good.

Cash flow has been very good.

We built this new LED center down there.

We are getting a lot of play on the technology side.

So it's a good time to invest in the core of that business with new product development.

This LED transition is going to be a huge tailwind for the next 10 years.

So converting all your products over to this technology is going to be -- and it's a good time to be doing it now.

So we are putting in more engineering and more resources.

The vitality of that business is probably one of the highest in total Cooper right now.

What is the Cooper [factory] capacity right now?

Do you have a feel for that?

Some of our businesses -- it's tough.

Terry was talking about the MRO or the OEM business.

Some of our businesses are struggling to keep up with some of the increased demand that we saw in the fourth quarter.

So it's a wide mix.

The tools business, for example, is modestly seeing things pick up, but nowhere near where the volumes were a year ago.

Same on the commercial side.

And then we are seeing our European businesses and some strength in our Bussmann businesses and a couple of our other businesses.

I'd say it's mix, but we have plenty of ability to serve the market.

There's not an issue on capacity other than maybe Bussmann electronics and some of those key markets that we have seen some tremendous growth out of.

One of the questions, it looks like on your first quarter guidance, looking at the margins for both electrical and tools comparable to fourth quarter levels.

I mean is that right?

Seasonally, you would expect the first quarter to be lighter than that.

What is the thinking there?

I'll take that one, Bob.

The first quarter on electrical side, at this point we are thinking will stay up pretty good at least close to the 15%, and that's driven -- we have carryover benefits from the restructuring actions we took, and the revenues as I've said are pretty close to the same as the fourth quarter.

The tools, on the other side of the coin, is a strong typical fourth quarter, much weaker first quarter.

It's a lot less volume running through in the first quarter, which their margins will come down or likely come down in the first quarter.

Okay.

Thanks very much guys.

I'll pass the baton.

Thank you.

Your next question comes from the line of Rich Kwas from Wells Fargo.

You may proceed.

Hi guys.

How are you?

We are good.

Following up on the pricing with utility specifically, what are you seeing there?

Are you seeing incremental pricing pressure from that end, and from which products?

As we talked about earlier, earlier in the year a lot of pressure especially on the transformer side of that business.

From the last three to six months of the year, much less pressure on that side of it.

Pretty stable pricing at this point, albeit at a much lower profitability than it was a year to 1.5 years ago.

So is it fair to say the caution regarding pricing/materials -- is just concern about material economics, you get some spike, or how much of that is related to some of the platforms, lighting, maybe something like that, the price that you are getting more challenging?

I would say we have seen a lot of base materials inflate primarily because of the China demand and some of the global economics around copper and aluminum and steel.

I's probably going to be harder to pull the traditional price in an economy in North America at least where you have excess capacity and still very weak demand.

So until you start seeing some absorption and some demand picking up on some of these key end markets, we are more cautious that we'd be able to just match the equation between inflation and pricing and keep that at parity.

Historically, we've been able to go in and get a little bit of an extra kiss on that.

And so as we start the year, we are a little more conservative in our ability to pull that through, given the weak demand or the weak overall economy you are still seeing primarily in North America.

That is helpful.

Kirk, in terms of the utility business overall, it seemed like a couple of quarters ago you were more bullish about utility for 2010.

Last quarter, you said 2010 would be flattish in terms of your business, and you reiterated that here today.

What are you seeing as the drivers either way for 2010?

What can move the needle up or down on the utility side?

You caught my comments spot on.

The steepness on which it fell off -- starting back in November of last year, they basically shut everything off.

They weren't ordering anything, and I couldn't imagine how you can shut it off so fast.

And they were chewing up inventory and they had problems with access to the capital market.

By mid year, I thought for sure we would begin to see a recovery of the basic demand and needs of the H grid and the utilities, but they've been able to push that on even longer than I had anticipated at the core products.

So if you look at the demand patterns and the order patterns, they flattened out.

But they cannot in my estimation hold at these reduced levels much longer.

So their inventories are down, capital markets have loosened up.

I understand that energy demand because of industrial factory utilization being down and construction being down that there's a negative demand of energy right now, but eventually they are going to have to come back to an equilibrium or normal demand pattern, and I think that's probably going not going to be until the back half of 2010.

So the way we forecasted that business, and you will see Mike who runs the power business at our outlook meeting, probably stays very negative comps through the first half and begins to pick up on the order rate in the back half, which almost makes for a flat revenue year, and then a pretty good demand cycle which as you get out into 2011, 2012 and 2013.

So that will be a turning point midway.

I'll move my prediction out to midway through 2010, admitting I was wrong there.

But I think you get back to better demand patterns by mid-year this year.

Great.

Thanks so much.

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

You may proceed.

Good morning or good afternoon, guys.

The one thing you mentioned, Terry, the supply chain -- and can you guys talk a little bit about the healthier supply chain coming off this steep of a downturn?

And if we do have a sharper pick up in demand and let's say an inventory recovery at the same time, there's some real demand out there, is the supply chain healthy enough to respond?

I'd say with the exception of a couple product lines, I think we are in very good shape and of course we watch that very closely, but one of our strengths clearly is we have hundreds of thousands of SKUs and different product lines.

The exception is in areas like electronics, where you have very specialized material, and that's been a struggle ramping back up.

But as we've gone through our businesses, there are a couple of other instances where we can see some struggle as we start growing 10% to 15% to 20%, but other than that we should be in very good shape.

That's exactly right.

Your basic copper, steel, aluminum, those kind of things will be all right.

But when you get into the specialty materials, in the electronics industry, you look at the numbers of Apple and Intel and those kind of guys, that's exactly where you see it.

Okay.

Moving to cash rate investment, you had about 4% of M&A in your 2010 outlook.

Talk to us about the deal pipeline or the prospect of having bigger numbers than that or anything that you could -- anything even substantially larger that could be better of a needle mover.

First thing is we'll go to our board.

We look at the dividend generally every February.

We'll go to the board with a proposal on the dividend this February.

I think we have some room to go there to take the dividend up this year.

So we'll propose something for the board.

They'll make the decision.

I think the buyback -- if you think about being on the front end of a nice four to five year growth period on core growth, we know what we can do to earnings per share when you lever that up.

I think the stock is very attractive at these levels, so we'll continue to be in the market buying back the stock.

And I think we've got a significant amount of cash on the balance sheet to continue to reinvest in these technologies.

I'm particularly focused on expanding into new geographic markets and we use acquisition as you know to do that.

That would include South America, continuing to look at things in Europe around our safety platform.

There are some interesting pieces around that Bussmann business, electronics, there is the instrumentation business around Crouse, there is the Interconnect business -- all these new platforms that we've been talking about, it's certainly a very good time to be out there exploring all of those, and Tom is very active in all those pieces.

Scott, just to clarify, in the first quarter, the 4% is primarily translation, because all we build into our forecast is acquisitions that actually have been completed to date.

So that is like 30 bips in the first quarter.

That's all I have.

Thanks.

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

You may proceed.

Thanks.

Kirk, I wonder if you can continue down -- if we focus on the electrical product and the flattish topline outlook, you've gone into some detail on utility flattish for the year.

I figure you have a nice trend in energy automation to continue to grow that, but why don't you take us through the other pieces -- distribution, MRO, retail, take us through where your assumptions are for those pieces?

We'll get into this in more detail in outlook, but industrial certainly grows.

MRO factory utilization improves from here.

We saw some good progress in the fourth quarter.

Bussmann electrical is a typical indicator of early cycle MRO type of business.

The tools business on the industrial side of course picked up.

So that will grow.

Retail will grow.

The OEM electronics will grow.

Utility flattish.

I think that's an upside to the plan that we have.

I think there is an opportunity to do better than that.

And then non-res down double digit, and we'll have Neil Schrimscher, who runs the lighting business, at our outlook meeting as well.

So he'll give you more details there.

And international grows across the board as well.

Europe was pretty good for us in 2009 overall, much better than the European market, and I think we can do more on the developing economies as well in 2010.

So they will be up double digit.

It strikes me that there is a favorable mix implication for margins in that context.

Can you chat about that as well?

I think the answer is if you look at Bussmann, Crouse-Hinds, those kinds of businesses -- they are better.

They are lighting project business.

Non-res commercial construction businesses, yes.

Generally pretty tough.

Our transformer business, which is down to some of our lowest margins in the utility business, and so that's why I think you are seeing -- the $2.70 to $2.90 gives you pretty good EPS growth as we go into 2010, and a chunk of that is mix, of course.

I guess I'm still a little confused on the price raw material messages, as I try to tie together what happened in the fourth quarter and what your guidance going forward.

It may be easier to talk about the electrical product business in this context, and maybe that's where my confusion is.

I thought I heard you say that price was off 2 points in the fourth quarter, but that the price raw material spread got better, more favorable for you sequentially.

Yet I thought in the guidance you are assuming 2 points in positive price, and on the raw material side no inflation net year-over-year, yet you are seeing some inflation in the spot market.

So I'm still confused as to what is baked into the guidance from the standpoint of the price raw material spread here.

Can you put those pieces together?

If you look at the price material spread in the fourth quarter, very, very consistent to quarter 1, quarter 2, and quarter 3 during the year.

Even though price was down 2% -- but remember we are always talking year over year on that, and the same with material cost.

It's very consistent in 2009.

2010, what you've seen in the last three months is a number of the commodities move up in cost.

Aluminum, nickel, copper has moved up during the year.

So we know going into 2010 that we have more inflation coming, versus in 2009 year over year, there's a lot of deflation in the material cost.

So going into 2010, as Kirk talked about earlier we know pricing environment in some markets will be tougher in some products.

So taking a pretty conservative stand, but that being said, we still expect to have enough price in 2010 to offset material economics.

The spread will not be as great as it was in 2009, but we'll still manage that very well.

I got the pieces of the puzzle.

Just trying to put them together.

If you have negative 2% price in the fourth quarter and you have a flattish top line, I'm thinking electrical products here, how do you swing that to a positive 2% for the year?

Does that go back to the mix issue that we talked about in the context of the pieces of the puzzle?

We are not estimating or forecasting 2% price in 2010.

I thought I heard that earlier.

Very modest price increase overall in 2010.

Okay.

And then lastly, just share count assumed in the guidance.

Can you help us with that?

Pretty flat with 2009, because we are buying enough shares to offset what we call creep shares.

Great.

Thanks very much.

Thanks.

At this time I would like to turn the call back over to Mr.

Mark Doheny for closing remarks.

Thank you.

As we conclude the call, I would like to invite the investment community to join us for Cooper's 2010 investor outlook meeting, which will again be held at the New York Mandarin Oriental Hotel on Tuesday, February 23.

We'll begin presentations around eight-thirty AM and conclude by 11 AM.

As we did last year, we will have presentations from both corporate senior executives and division management.

With that, thanks for joining us today.

Please feel free to contact me with any followup questions you have.

Ladies and gentlemen, thank you all for your participation on today's conference call.

This concludes the presentation and you may now disconnect.