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Executives

Mark Doheny – Director of Investor Relations

Kirk S. Hachigian – Chairman of the Board, President & Chief Executive Officer

Terry A. Klebe – Chief Financial Officer & Senior Vice President

Analysts

Scott Davis – Morgan Stanley

Robert Cornell – Barclays Capital

Richard Kwas – Wells Fargo Securities, LLC.

Christopher Glynn – Oppenheimer & Co.

Jeff Sprague – Vertical Research Partners

Eli Lustgarten- Longbow Securities

Anthony Kure – Keybanc Capital Markets

Shawn Severson – ThinkEquity

Cooper Industries, PLC (CBE) Q1 2010 Earnings Call April 22, 2010 12:00 PM ET

Operator

Welcome to the first quarter 2010 Cooper Industries earnings conference call. At this time all participants are in listen only mode. We will be 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 will now turn the presentation over to your hose for today, Mark Doheny, Director of Investor Relations.

Mark Doheny

Welcome to the Cooper Industries first quarter 2010 earnings conference call. With me today is Kirk Hachigian, Chairman and Chief Executive Officer and Terry Klebe, Senior Vice President and Chief Financial Officer. We have posted a presentation on our website that we will refer to throughout this call. If you would like to view this presentation please go to the investors section of our website 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 10K 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.

Kirk S. Hachigian

We’re very pleased to report that our businesses are showing signs that the world is getting back to some level of normality. With half our businesses posting positive growth year-over-year in the first quarter. Our results demonstrate the quick and decisive actions we took over a year ago position us to have a solid 2009 and have given us the confidence to raise our guidance for the full year.

But, before we go in to the detailed results, due to our recent announcement regarding our EVP structure and the tools joint venture with Danaher we are changing our segment reporting structure. If you turn to page two of our web exhibits, as you know we’ve historically reported two segments, electrical and tools. Today, we’ll start reporting three segments. Our electrical segment will be divided in to two parts, energy and safety solutions which directly reports to me and comprises Cooper Power Systems, Cooper Crouse-Hinds and Cooper Safety. These businesses have a heavy utility and industrial focus with 50% of the sales outside the US.

The second electrical segment reports to Neil Schrimsher who was recently appointed to Executive Vice President and is called the electrical products group. This group is more focused on commercial and residential construction but will still have strong exposure to the industrial markets via Cooper Bussmann, Cooper B-Line and Cooper Wiring Devices Arrow Hart and Interconnect businesses.

Tools will continue to report as its own segment until we close our recently announced joint venture with Danaher and then it will be recorded as equity income. We realize that it will take some time for the investment community to get accustomed to these changes but we do feel they provide more transparency as we continue to build on our very strong global electrical franchise.

If you’d now turn to page three of the handout, I’ll make some specific comments regarding the first quarter results. Our revenue in the first quarter was down 2% to $1,230,000,000. Our core was down 5%. Electrical and safety solutions was down 6% with the core being down 9%. Electrical products group was down 2% with the core being down 4% and tools stepped up nicely up 16% with the core up 9% versus last year so a real nice recovery versus the difficult first half or full year they had in 2009.

Our order rates are improving. Our book-to-build was 107% for the quarter. All of the businesses were over 100% and it’s the best book-to-build we’ve had in over two years. we had a very strong operating margin in the first quarter at 13% and even up 20 basis points from the fourth quarter 2009 and up a very strong 450 basis points from the first quarter 2009. We had a strong start again on cash flow of $70 million. We expect to now have our 10th year where our cash flow will be greater than reoccurring income. So, a very strong performance and a very strong start to the new year.

Then lastly, with regard to the CFO selection process, we have a board shareholder meeting the first part of next week and so you should expect a public announcement for us right after the board meeting on Tuesday.

Turning to page four and market conditions, all beginning to feel a bit better. Our industrial markets are our biggest market at 39% of sales has had a strong rebound in manufacturing. Factory utilization was up to 73% in the quarter and the ISM at 59.6%, both indicating very strong industrial momentum at home and abroad. Commercial construction or 24% of our sales seems to have bottomed and we’re seeing activity in renovation, energy efficiency projects and overseas but the new domestic construction is still not expected to recover until 2011.

Utility markets or 22% of our 2009 sales continue to be flat in the US but improving overseas. With the lack of new construction transformer sales continue to be the biggest challenge but we are seeing investments in reliability, efficiency and alternative energy. Lastly, in residential and retail or 10% of our sales we have begun to see order trends flatten out with better comps at the big box customers. With better weather, lower mortgage rates and an overall improved economic outlook, we expect new construction starts to improve in the back half of this year and in to 2011. 750,000 home starts would certainly feel pretty good off of these levels.

If you turn to page five now, I’ll comment on the business segment results for the first quarter. Energy and safety solutions because of its heavy reliance on Cooper Power Systems and Cooper Crause-Hines, it’s a mid to late cycle segment. In the first quarter of last year, our core sales were only down 12% but our backlog was falling quickly. The first quarter of 2010 was just the opposite, our book-to-build in the quarter was 108% for the total business and power systems was up over 110% book-to-build.

We had solid activity around the world with higher energy prices and commodity prices and steady business activity in Europe. Our margins were up 200 basis points from last year due to the restructuring productivity programs in place, SG&A management and pricing discipline. Return on sales were very strong at nearly 17%. The overall outlook for energy and safety solutions is very strong for the rest of 2010 and certainly in to 2011.

If you turn to page six, electrical products group, a much shorter more domestic segment of our electrical businesses. Last year’s core was down nearly 19% in the first quarter and then in the first quarter of 2010 our core was just down 4%. We saw increased momentum over the quarter and ended the quarter with a book-to-build of 104%. We had very strong sales at MRO, electronics and transportation. Our international activity was strong, retail sales were flat excluding some poor margin private label business that we exited in the quarter but overall we still remain cautious around the recovery of the housing and commercial construction in the US and in Europe.

Margins at electrical products were also very strong, up 480 basis points over last year and again, driven by the benefits of restructuring, our productivity programs, SG&A management and pricing discipline. A consistent theme here that you’ll see throughout the morning’s call is starting back with the third quarter of 2009 we’re seeing the benefits of the permanent restructuring and productivity plans we put in place, our discipline around SG&A and pricing and expanding margins on flat to modestly down revenues.

For the tools group on page seven, the team did a great job staying focused while all the distractions of forming the joint venture were occurring. From our perspective this joint venture allows us to maximize our global competitive position. I’ll point out that we did not sell any equity in our tools business and we clearly expect the markets to recover from the steep drop in 2009. The combined businesses are more powerful than the sum of the parts from the perspective that the geographic coverage, product breadth and technology perspective offer a significant upside. Business has very little debt and a very favorable market outlook.

For the quarter, our core sales were up 9% driven by the recovery in global automotive and aviation markets and we had very strong demand for our [Weller] products. Retail was up nearly 5% and our operating margins were just about flat with the fourth quarter of ’09 and obviously up significantly over the lost in the fourth quarter of last year. Again, the same story as I mentioned earlier, restructuring, productivity, SG&A and pricing and here we got a little bit of volume and we leveraged up very well.

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

Terry A. Klebe

Before getting started on the quarter, we announced the tools joint venture with Danaher last month. That’s currently expected to close in the second quarter. On our balance sheet you’ll notice that tools segment assets are reflected one line item labeled assets to be contributed to the joint venture and the liabilities are also reflected in one line item. If, as anticipated, the transaction closes in the second quarter the investment in the JV will be accounted for as an equity investment which means our balance sheet will reflect investments as one line item, the income statement as one line item for the earnings and the cash flow statement two line items one for earnings and another for cash distribution.

Condensed financial information on the tools JV will be presented in the footnote to the financial statement. The joint venture assets will be marked to fair value and we’ll recognize a small gain which will be more than offset by the recognition of approximately $100 million after tax of cumulative translation adjustments that currently resides in shareholders’ equity and certain deferred tax items for the difference between fair value and pre-tax or tax basis. Importantly, the $100 million is really just a flush through from cumulative translation adjustment in to retained earnings for the income statement. It really has no cash impact at all.

We believe there are substantial synergies and value creation potential in forming this joint venture and currently anticipate that the [2002] earnings per share impact will be minor. Also, as Kirk covered, with the anticipated tools deconsolidation and changes to our management structure this quarter, we began reporting the former electrical segment in two segments.

We included historical information for years 2007 through 2009 in each of the 2008 and 2009 quarters in the press release. You will also notice that we are now including restructuring and normal recurring types of discreet tax items in our guidance. We will of course continue to be transparent in disclosing these items in press releases, conference calls and regulatory filings.

Now, turning to Slide Nine; Kirk noted we had strong first quarter free cash flow. While on the surface we’re down $67 million from a year ago, for the past decade this quarter comes in second place for first quarter free cash flow. In the first quarter we paid customer employee incentives an start building inventory as the winter ends in the US and Europe and we began to experience increased volume.

Our free cash flow in the first quarter of $70 million increases our confidence of achieving the 10th year in a row where free cash flow exceeds recurring income. Our balance sheet remains in great shape and our debt to total capitalization net of cash at 15.4% on March 31, 2010 compared to 15.7% at year end. Our net debt at March 31st was $545 million leaving us with tremendous flexibility.

Turning to Slide 10, we’re very pleased with the performance in operating working capital. You’ll note that we’ve included the results for the tools business in these results providing comparability. Inventory decreased 18% from a year ago and is only up $19 million from year end with a lot of the increase planned to accommodate plant and product line moves. Most important, inventory turns are up to 6.7 turns, a full turn improvement from a year ago.

For receivables, our days sales outstanding at March 31st decreased three days to 61 days compared to the first quarter of 2009. You can tell from these results we continue to aggressively monitor credit and collections and collect receivables within the terms granted to our customers. Our payables declined only 4% from March 31, 2009 driven by our sourcing and financing teams continuing to extend supplier terms offset somewhat by continuing improvement in capturing discounts negotiated on our supply base. Our operating working capital turns improved to 5.5 turns compared to 4.5 turns in the first quarter of 2009, a very solid start to the year.

On Slide 11, our capital expenditures were $15 million the first quarter of 2010 compared to $29 million the first quarter of 2009. Capital expenditures that originally were anticipated to occur in the first quarter slipped to later in the year including two building acquisitions, one in the US and one in Romania. Capital expenditures continue to be forecast at $110 to $120 million for the year.

In the first quarter we did purchase 632,000 shares of our common stock spending $27 million against proceeds from the issuances of $14 million for the 841,000 shares we issued in the quarter. Our outstanding average diluted shares did increase by 1.3 million shares from a year ago primarily as a result of the stock price increase. Under existing board authorizations we can purchase in excess of an additional $14 million shares as of the end of the quarter.

In February, 2010 our board did approve increasing our dividend 8% to $1.08 per annum demonstrating our confidence in our continued strong earnings and cash flow generation. During the first quarter we completed the acquisition of [Ilaram] a small strategic explosion-proof product line in Columbia that gives us a very nice base to build off of in the region. In April, we purchased Eka System’s assets which provides us RF technology for energy automation systems, smart grid solution portfolio significantly expanding our market capabilities.

With our balance sheet in great shape and with our consistent strong free cash flow generation, 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 first quarter on Slide 12; in both 2010 and 2009 we incurred restructuring charges. First quarter we recorded $3.5 million compared to $8.8 million in the prior year first quarter. The 2010 charge is primarily related to two factors that are in the process of being closed at year end. One of these factories was completed in March and the other is scheduled to be completed in July. In the first quarter of 2009 we also recognized $8.4 million of discreet tax items. The net impact of restructuring and discreet tax benefits was to increase income from continuing operations $0.01 per share in 2009’s first quarter and decrease income from continuing operations per share $0.02 per share in 2010’s first quarter.

Now, turning to Slide 13 on revenues and earnings per share. Today, we reported a revenue decline of 2.2% from a year ago with currency translation contributing 2.1% and acquisitions .4% for revenue. Price realization was slightly negative at around 1% leaving between a 3% and 4% volume decline in the quarter. As I mentioned at our outlook meeting in late February, currency translation tailwinds for the first quarter would be around 2% which we had about 4% built in to our forecast so we ended up pretty close to what we thought. And, at our outlook meeting, we remain cautious on revenue improvements.

The good news is that we saw sales and even more so orders build as the quarter progressed and anticipate core revenue growth beginning in the second quarter as I’ll cover in a few minutes, we’re increasing our forecast for the year. For the most part, the businesses with the steepest declines in the first quarter of 2009 improved the most in the first quarter 2010, specifically tools, electronics and Bussmann electrical MRO.

The US continued to be the weakest market overall with core revenues down around 9% with international offsetting a portion of the decline as international core revenues increased approximately 3%. Our book-to-build, as Kirk said was well over 100% in the quarter indicating that they’re beginning to build momentum for the remainder of the year.

We reported on a GAAP basis $0.70 in earnings per share compared to $0.48 per share in last year’s first quarter, a 46% increase. We continue to have strong execution and cost management in the quarter and while revenues were close to the middle of the guidance adjusted for the lower tailwinds from fx, earnings excluding the restructuring which was not in the guidance exceeded the forecasts.

Turning to Slide 14; gross margins increased 360 basis points to 33.2% in the first quarter compared to last year’s first quarter. We had great execution on productivity and realization of cost actions we implemented over the past 18 months. Our overall price realization was close to -1% of revenue in the quarter but we also managed to reduce material costs adequately to offset all of this negative price realization.

Now, with the significant increases in most metals over the last year, we’re out in the market implementing price increases and are forecasting to stay at least equal on price versus material for the year. Selling, general and administrative expense for the quarter as a percentage of sales is 19.9% compared to 20.4% in the prior year first quarter, a 50 basis point decline and 30 basis points below the fourth quarter of last year. Very good cost management across the company while we continue to invest in our growth initiatives. General corporate expense in the segment income statement decreased to $18.9 million from $21 million a year ago. With the actions we’ve taken we expect general corporate expense to be around $20 million per quarter for the remainder of the year absent legal or other charges.

Turning to Slide 15; solid execution and continuing to maintain cost disciplined increased operating earnings 50%, 41% exclusive of restructuring. Our operating margin increased 450 basis points to 13% from 8.5% in the first quarter of 2009.

Continuing to Slide 16; our net interest expense decreased $2.8 million from a year ago primarily as a result of the $275 million of notes we retired last November. Our effective income tax rate for the first quarter was 19.2% versus 10.9% for the first quarter of 2009 or 20.1% excluding discreet tax items. We expect the second quarter to be in a range of 19% to 20% tax rate. Our first quarter continuing income increased 46% to $119 million on the 2% revenue decline.

With this being the first quarter with new electrical segments we provide on Slide 17 where our segment performance was under the old segment presentation which included all of our electrical businesses. Overall, electrical revenues declined 4.3% with acquisitions contributing 4.5% and translation 1.6%. Return on sales increased 330 basis points to 15.7% and incrementally increased 20 basis points from the fourth quarter of 2009. A very solid performance with the seasonal sequential revenue decline of 1.6% from the fourth quarter.

Turning to Slide 18; for the quarter our newly reported energy and safety solutions segment revenues declined 6% with currency translation increasing revenues 1.9% and acquisitions increasing revenues .9%. Price declines were close to 1% in the segment and were fully offset by declines in overall material costs. If you recall, the businesses in this segment performed relatively better during the free fall in revenue in the first quarter of 2009 as they completed projects and shipped backlog.

We anticipate positive core growth starting in the second quarter for this segment as the comparables are more normalized and the world economies continue to recover. Sales in this segment through global electrical distribution increased low single digits, more than offset by utility and project business declines compared to a year ago. Overall, the energy and safety solution segment earnings increased 6.5%, a 6% decline in revenue and return on sales decreased 200 basis points to 16.9% in the first quarter of 2010.

Turning to the electrical product group segment on Slide 19; for the quarter our newly reported electrical products group segment revenues declined 2.2% with a core revenue decline of 3.5%. Currency translation increased revenues 1.3%. Price declines were a little over 1% in the first quarter but fully offset by material cost declines. Demand for electrical products strengthened in international markets but were more than offset by a weak US market.

Global electrical distribution sales declined approximately 5% from the first quarter of 2009 primarily driven by declines in non-residential construction markets in the US partially offset by MRO strengthen. The retail channel revenues declined high single digits driven by the elimination of low margin source and sell products while the OEM channel was up strong double digits. Overall, the electrical product groups segment earnings increased 48%, return on sales increased 480 basis points to 14.3% from 9.5% in the first quarter of 2009.

Turning to the tools segment on Slide 20; a great recovery in our tools business where sales increased 16% from the first quarter of 2009 with currency translation increasing revenues 6.7%. We had a strong recovery on the top line compared to the prior years for tools across the global and in substantially all product lines. Professional tools was the strongest performance and Europe the weakest region. Retail sales improved low single digits as retailers continue to be cautious on promotions and inventory levels. Tools operated at $12 million profit and 8.2% return on sales compared to a $3.9 million loss a year ago.

Before turning the call back to Kirk, I’ll comment on our forecast, turning to Slide 21. We started 2010 with earnings per share forecasted at $2.70 to $2.90 excluding restructuring. As the economy returns to a more stable state we are now including ongoing restructuring in our guidance and expect to incur $0.06 to $0.08 per share for the year. As I mentioned, this month we acquired the assets of Eka Systems. This acquisition had the technology on RF radios for our AMI smart grid solutions and will require additional R&D investments. We anticipate about a $0.03 dilution from the acquisition in 2010.

So the comparable old forecast to the new forecast is $2.60 to $2.80 going to $2.85 to $3.00, an increase of $0.20 per share at the high end of the range, or said differently, if we continue to exclude items today’s guidance for EPS would have been $3.10 on the high end of our forecast. As said, the new forecast includes restructuring and other items but it is important to note it does not include the non-cash charge related to the formation of the tools joint venture.

Turning to Slide 22 on some details on our 2010 outlook. For the second quarter we’re forecasting revenues to increase 2% to 5% with the energy and safety solution segment up 2% to 5% and electrical products group flat to up 3%, the tool segment up 12% to 17%. The forecast includes around 1% currency translation tailwinds and around a .5% contribution from acquisitions. In other words, a core revenue increase in the low single digits for the second quarter.

Our forecast does include approximately $0.01 to $0.02 per share of restructuring in the second quarter. Including the restructuring, we anticipate earnings per share of $0.72 to $0.77 per share for the second quarter. If the tools joint venture closes during the quarter the tools revenue will be deconsolidated from the date of closing onward and we’ll take a non-cash charge as I previously discussed that is not included in the earnings forecast. For the year, we’re forecasting revenue to increase 2% to 5% and earnings per share including restructuring to increase 16% to 22% to $2.85 to $3.00 and we expect free cash flow in excess of $500 million and this to be the 10th year where free cash flow exceeds recurring income.

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

Kirk S. Hachigian

In summary, on page 23, after a very challenging 2009 where our revenues fell 22% and our earnings declined 30% excluding restructuring, we have achieved very solid and stable results on a much reduced cost structure for the last three quarters. On roughly $1,250,000,000 of revenue, we earned $0.70 in the third quarter of 2009, $0.72 in the fourth quarter and $0.72 again in the first quarter of 2010, all excluding restructuring.

We see solid momentum building across our businesses as the global economies recover. Strong industrial production, higher energy and metal prices, increased demand for electricity, growth in trends around efficiency and green, improved exposure to emerging technologies, electronics, transportation, EAS or LEDs, we had a record vitality index and 39% of our portfolio is exposed to international markets.

The work we did last year on the balance sheet also position us well to continue to invest in the core, buying great companies that complement our strategy, Eka Systems in a great example, and to continue to return cash to our shareholders. As Terry pointed out, in February we increased our dividend 8% and we continued to buy our stock in the first quarter. Lastly, we are well aware of our peak earnings of $3.59 in 2008 and so it feels very good that after a year we just had that we’re back to guidance in that $3 range up over 20% with last year. All in we feel the team got off to a very strong start in what should be a very solid 2010.

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

Mark Doheny

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Scott Davis – Morgan Stanley.

Scott Davis – Morgan Stanley

I don’t want to get nitpicky but typically if you go back and look at kind of the long term average, about 22% of your full year comes from 1Q which would imply that to do $2.85 things would really have to fall apart, $3 and change is a little bit more realistic it seems just based on history. What’s causing the conservative guidance? Is it partially as a result that you’ve got to go out and get pricing and it’s not kind of in the bag yet? Or, is it just you still want to kind of wait and see and see how things come through?

Kirk S. Hachigian

I think Scott look, we went through an economy last year that is really unprecedented. I think you still have some lingering issues with regard to unemployment, you have linger issues with regard to commercial construction, 25% of the mortgages, people having equity in their homes. So I think the predictability of the recovery and the steepness of the recovery is probably what makes us a little bit more conservative.

As I pointed out, if you look at the last three quarters now, we have quickly resized this company really from the fourth quarter of ’08 and the first quarter and second quarters of ’09 to kind of get back in to this shoebox that we’re in. I think if you see any volume coming through this we’ll continue to update you and give you better numbers as we see them coming through.

Now, the book-to-build in the first quarter is positive but as we noted in the press release that momentum built. January was kind of punky, February was decent but March really drove the quarter. So the question really is April may pick up where March left off or is there something else sort of going out there? I think we’ll want to see how that materializes on the top line before we give you any better numbers than we’ve given you.

Scott Davis – Morgan Stanley

Can you talk a little bit about utility and project businesses? We’ve heard from other calls that utility has been the big kind of disappointment this quarter and project business as well where we’re seeing some price pressure and some real weakness in volumes. Are you guys seeing a similar type of activity? And if so, what gives you confidence you’re going to be able to get the pricing necessary to keep margins up next quarter?

Kirk S. Hachigian

The utility business in the first quarter was just about where we thought it would and we had been commenting on it for the better part of 209 Scott that we were a little surprised early in 2009 that it wasn’t getting better. But, as we went out and saw the customers of course you’re seeing decreased electricity demand in the US for right now, stress on their balance sheets with liquidity and things like that to come up with the capital budgets. I’d say the first quarter wasn’t any different than we predicted across the board.

What was good is the north of 110% book-to-build. It was one of our best businesses book-to-build and as you know that businesses is probably our best backlog type of business. So a couple of quarters like that which certainly bode well for the back half of this year to start seeing sequential positive growth. I think we still love the business globally of course overall. The price economics on that, transformers is generally where you have the toughest piece of it but we think the pricing is stabilized and people will be responsible on trying to recapture some of the copper costs, steel costs that have gone up dramatically. It’s very difficult for any manufacturer to eat those costs in this environment.

Terry A. Klebe

I’d add Scott, especially on the MRO more shelf good type things, we’ve been in the market with price increases starting late last year so we have absolute confidence those are flowing through now and will really start flowing through in the second quarter. The project business clearly, it has been competitive and we anticipate it will stay competitive as we move through the year at least until volumes start picking up some. We won’t have the type of spreads we had last year but the first quarter I’ve got to tell you came in within a $1 million of where we thought it would on material price versus material economics.

Scott Davis – Morgan Stanley

Terry, just for context what percent of your revenues now would you say are kind of project related?

Terry A. Klebe

Overall it’s tough to say because some of that goes in to renovation but there’s probably half and half is a rough benchmark.

Operator

Your next question comes from Robert Cornell – Barclays Capital.

Robert Cornell – Barclays Capital

I was interested Kirk, you had mentioned the non-res business had bottomed. You referenced the US was still going to go down but maybe just give us some color around why you think that business bottomed?

Kirk S. Hachigian

Again, I think if you look at the fourth quarter and you look at the trends month-to-month versus quarter-to-quarter and of course we’ve got all kinds of reports that dissect it but March domestically Cooper Connection was nearly flat Bob with year-over-year. If you talk to the electrical distributors, you look at inventory levels and you look at the momentum there, that’s the reason why we believe we start to see some positives in the second quarter there.

Our international business was very strong as Terry noted and so the order rates, the book-to-build and the momentum and sequencing of the order rates over the quarter would certainly lead you to conclude that the worst is behind you and we’re seeing a bottoming in that market.

Terry A. Klebe

Bob, that doesn’t mean that year-over-year you still don’t have revenue declines because last year we were burning off the projects, right.

Robert Cornell – Barclays Capital

The lighting profitability, how’s that hanging in here and what are you doing on the price cost front side there?

Kirk S. Hachigian

I always say it’s a real positive story for us. We mentioned some retail business that we got out of it, that was specifically on lighting. We held price to down probably close to about 1%. Our controls business is still growing double digits, our back log was up double digit in the business and we probably have one of the best pipelines of new products. The vitality index, as you know, is a measurement of sales from three years, introductions in the last three years, is over 30%. The margins were up year-over-year nicely. So we feel we’re doing a pretty good job on lesser revenue managing the overall cost equation.

Robert Cornell – Barclays Capital

A final thought, on tools I think the semantic on the tools impact when from minor to moderate or something like that. What’s the tool impact joint venture dilution, if anything, going to be in the second half? Then what accretion might we look forward to in ’10?

Terry A. Klebe

Right now Bob we have to mark to fair market value and of course there will be some acquisition related expenses that flow through. But net of those, currently we expect it to be pretty neutral to our EPS guidance for the year.

Robert Cornell – Barclays Capital

What about in ’11?

Terry A. Klebe

’11, we do not have those numbers but I can assure you it will be accretive. Hopefully, nicely.

Operator

Your next question comes from Richard Kwas – Wells Fargo Securities, LLC.

Richard Kwas – Wells Fargo Securities, LLC.

On the recent acquisition, this seems to fill in the product portfolio for the smart grid. What’s the potential revenue opportunity? Not so much when you look at the product itself but when you think about the overall portfolio and how this positions you to really take advantage of the trends in the business, how should we think about that a little longer term?

Kirk S. Hachigian

That’s a great question. The first acquisition in this space was Cannon and that had power line carrier technology, demand response and really gave us a lot of software through the Yukon system that allowed us to do substation automation, capacitor bank automation and things that really fit nicely with our core utility business. We made two other acquisitions, one was around this data concentrator technology and the other was around self healing grid. Those were the three.

The piece that was missing from our portfolio all along was a RF technology on meter reading. So Eka had established and developed this technology over about 10 years, 50 more or less engineers with very modest revenue because they really didn’t have the resources having spent so much energy and money developing it to roll it out with a sales and marketing. Utilities, let’s be honest are slow to adopt technology that doesn’t have a strong balance sheet behind it.

So, we think this fills in very nicely a piece of the overall portfolio. Purchase price around $15 million but as Terry said, it’s still going to burn some cash and be sort of an R&D investment for us for probably a couple of years. The overall business is still very exciting. North of $200 million, very profitable, type of EBTIDA margins, it is a software business, and my guess is you can see solid double digit growth for the next three to five years on this business.

Richard Kwas – Wells Fargo Securities, LLC.

Were you getting turned down because you didn’t have the technology and so does this put you in an area where you can really win some more substantial projects?

Terry A. Klebe

Absolutely. We use to have to partner with somebody in the urban areas because we have primarily power line which does not work as well or cost effective in the urban areas. We’ll see how big this is but this gives us the absolute full portfolio to do anything out there. We have to build out the technology, we have to integrate it in to our platform today but very exciting what it could do for us.

Richard Kwas – Wells Fargo Securities, LLC.

There’s been some rumblings regarding stimulus funds starting to flow through. It seems like a few companies out there are a little more positive. What are you seeing? What are your thoughts for the rest of the year?

Kirk S. Hachigian

I’ve seen the notes and we’ve talked to our guys in a couple of our businesses and the one piece on the smart grid side is we went out and talked to customers over the last couple of months. What we found out is all the contractual issues around IP and who owns the IP and then the funding, getting the contracts started are very slow, probably delaying more projects than stimulated.

On the lighting side, I’d say second half of this year we ought to see some more of that money roll through. So nothing in the first half and we’re hopeful that you’ll begin to see things in the second half but frankly Rich, not baking really anything in to the guidance that we gave you on revenue or earnings.

Richard Kwas – Wells Fargo Securities, LLC.

Last question, further restructuring beyond what you’ve already quantified, what else needs to be done?

Kirk S. Hachigian

There’s nothing significant out there. I mean, we have been through it now under pretty tough conditions. I would say a lot of small stuff but there’s not many big projects left to do this year really.

Terry A. Klebe

We have a couple of projects that we don’t have the AFEs in on yet but it will be pretty typical type things where we’ll always be looking at a couple locations a year to close, some product line removes, etc. So we’ll keep incurring some level of restructuring like we always have but it will be substantially less than it was in ’08 and ’09.

Operator

Your next question comes from Christopher Glynn – Oppenheimer & Co.

Christopher Glynn – Oppenheimer & Co.

Give us the international growth, 3% I think but, any comments on the developing markets, how that did by some of the regions?

Kirk S. Hachigian

Let me kind of walk through it. We’re seeing life now in Mexico which is nice. It’s been pretty tough down there for the last say 12 to 18 months but that’s come back nicely. South America strong, Asia very strong, Middle East still kind of punky for us. The commercial construction is obviously taking a hit out there and some of the energy projects I would say more timing than anything else but we were still down in the first quarter there. Terry anything else?

Terry A. Klebe

Asia was very nice. Overall Chris, we were up overall international 3%.

Kirk S. Hachigian

Western Europe I think Terry if you took out fx was about flattish?

Terry A. Klebe

Western Europe was flat to down slightly. That of course is our second largest market so you can tell by that. Nice, nice growth in the rest of the world.

Kirk S. Hachigian

But, holding our own in Europe. Our businesses are more France, Germany, UK, very little in Italy, Spain and Ireland. We’ve held our own over there I would say.

Christopher Glynn – Oppenheimer & Co.

At what point do you think you could see some restocking and what kind of impact would you guesstimate that could have?

Terry A. Klebe

That’s a tough one. Right now we’re not seeing restocking I’d say anyplace except the electronics business which that channel has come back really strong. So you know, it’s really going to take continued increased demand. I think you saw nice pick up on the industrial side of it but any distributor that’s for example covering a lot of non-residential construction whether here or Europe is not increasing inventory at this time.

Kirk S. Hachigian

I think the good news Chris is that utilities when we went out and saw them are sitting on very low levels of inventory. Electrical distribution in the US is sitting on very low levels of inventory so that’s an upside in addition to sort of just general economic growth.

Operator

Your next question comes from Jeff Sprague – Vertical Research Partners.

Jeff Sprague – Vertical Research Partners

Just on the balance sheet Kirk, your thoughts, you’re letting the share count creep up here even with all this flexibility. Obviously, the number is still minor but what does the M&A pipeline look like and what are your thoughts on share repurchases if deals don’t start materializing?

Kirk S. Hachigian

Look, the tools deal was not easy. It was two large companies, doing due diligence on the others’ business. So, for the better part of three or four months we were pretty focused with our BD teams and our legal teams and our business units on that deal to get that done. Then at the same time we got this small deal done in Columbia and we got this smart grid acquisition done. We have a pipeline but I would say in the near term there’s nothing of large significance.

So the biggest challenge is revitalizing and getting some projects closer to a finish line. There’s a lot of interesting pieces, there’s a lot of interesting things out there. We have put back the dedicated BD resources in Europe, in Bussmann, in Power Systems, in Crouse-Hines and so that’s the way we generate these leads and fill up the pipeline. Some of those positions are filled and some of them we’re in the process of recruiting for right now.

I think that bodes well and there’s really never a shortage of opportunities for us so I think that’s a big area of focus. Part of Neil’s job as the EVP is taking me out of some of the day-to-day and allow me to spend more of my time on the M&A side.

Jeff Sprague – Vertical Research Partners

Could you give us a little additional color on Bussmann, geographically where you’re seeing things pick up by end market?

Terry A. Klebe

Jeff, I’d tell you it’s across the world. Europe is up nicely, Asia is up very nicely, both electronics as well as electrical and even our transportation business which was down substantially last year has picked up very, very nice. I’d say that geographically the weakest area would be the US clearly, rest of the world doing very, very well.

Jeff Sprague – Vertical Research Partners

Then just finally on power, you danced around it a bit here on the call but is the strength that you see building in the pipeline mostly the newer smart grid stuff or do you actually see some pick up in the traditional products? Transformer prices are weak but is demand starting to improve there or elsewhere in the portfolio?

Terry A. Klebe

Jeff, I’d say it’s pretty much across the board. Last year we took down throughout the year all the backlog in that business by the time we got to the end of the year so at this point we’re building backlog but it’s pretty much across the board, across every product line in the portfolio.

Operator

Your next question comes from Eli Lustgarten- Longbow Securities.

Eli Lustgarten- Longbow Securities

One clarification on the utility business, your guidance is assuming that the utility business gets better in the second half of the year and grows through the year?

Terry A. Klebe

Overall Eli our forecast for utility we gave an outlook of essentially pretty flat. That had a little bit of fx in it clearly because there’s a nice part of that business that’s international. So, it’s not really up so much in the back half of the year because last year was so weak but comparatively it’s a relatively modest sequential increase as the year goes on.

Kirk S. Hachigian

It’s rolling out kind of as we thought Eli. I mean your book-to-build, you’ve got to build the backlog, your book-to-build goes positive in the first half and then your sales come thereafter because of that lag. So the back half of the year would certainly look better from a shipments perspective than the front half of the year.

Eli Lustgarten- Longbow Securities

I’m going to ask a couple of questions on the new segments. [Inaudible] electrical products which the margins if you look at the historical you gave us typically we’re averaging somewhere around 15%. You saw that climb back there in the fourth quarter and you dropped off a little bit in the first quarter. Is that just seasonality? And is sort of 15% where we can expect the business for the year as we look out? I’m just trying to get some sense of how you’re looking at the electrical products business?

Terry A. Klebe

Electrical products has a little bit more seasonality to it and mix to it as far as the other businesses Eli because it’s tied much closer to the construction side and it has less international to it. The margins will fluctuate a little bit but for the year should be right around that 14%, 15%, probably 15% range.

Eli Lustgarten- Longbow Securities

Historically that’s sort of where it was, the little data you gave us goes back to 2008 numbers, I assume that you’re targeting to improve the margin in that part of the business as you go forward the next couple of years?

Kirk S. Hachigian

Yes. That’s where the volume has been down too because you’ve got lighting in there and you’ve got wiring devices in there so residential and non-residential Eli have been hit the hardest. So when you roll the volume back on that side of it you’ll get better. The good news is Bussmann’s margins are generally pretty good and B-Line has traditionally good margins as well.

Eli Lustgarten- Longbow Securities

One final question, to go back to the new energy and safety business, you had a good bounce in margins. The historical data shows us you were at 18% in 2008 or numbers around that manner, is that sort of a realistic target to get back towards this year or is that more a couple years out?

Terry A. Klebe

That segment a lot of that will be dependent on what volume does because that segment will leverage up much better and must faster than the energy products group will. There’s a lot more industrial there type of businesses. Well, put the other way, electrical products has a lot of source and sell business in it. We important a lot so we don’t have a lot of manufacturing leverage per say on that segment or as much as we do in the energy and safety solutions segment.

Eli Lustgarten- Longbow Securities

But there’s nothing inherently structurally that would stop that business from getting back to the type of margins you had in 2008?

Terry A. Klebe

Absolutely not.

Kirk S. Hachigian

Volume through Power Systems Eli is the big driver there. The Crouse business will leverage up well, the safety business will leverage up but if you look at where the volume – the transformers as you get some volume back in those factories, that will leverage back up to that 18% kind of number.

Operator

Your next question comes from Anthony Kure – Keybanc Capital Markets.

Anthony Kure – Keybanc Capital Markets

Just a quick question, I’m not sure if I caught the fx assumption for the full year forecast?

Terry A. Klebe

It’s right around 1% positive.

Anthony Kure – Keybanc Capital Markets

Then the comments on the project versus MRO mix, was that in the context of the company overall or was that a utility comment?

Terry A. Klebe

It’s company overall.

Anthony Kure – Keybanc Capital Markets

Would you care to comment on what that will be for the utility, how would that be different?

Terry A. Klebe

Well the utility is much more we build it as we get the orders so that’s probably an 80/20.

Anthony Kure – Keybanc Capital Markets

Just looking at the long term core growth, I know we’ve heard mentioned many times 2004 to 2008 the 7% to 8% type core growth. Just given what we’ve seen from the recent macro indicators and how the pace has progressed here early on. If we exclude commercial construction, do you think the rest of your businesses are growing at that sort of clip?

Kirk S. Hachigian

You’ve got a couple of examples where you see Bussmann snapping back because of the automotive and some of those issues. If you assume housing starts go back from say 500,000 to 550,000 to 750,000 that’s a 50% jump albeit off a lousy number but that’s a 50% jump. If commercial construction, like you said throw that out, if the utility business comes back to sort of historic norms I think those numbers are well achievable with the electrical business. Then the acquisitions that we have made all should support a higher core growth rate. Our international exposure ought to give us access to higher core growth numbers.

If you look at our developing markets growth in the quarter versus just total internationally, substantially higher. So yes, I think if you look at those historic core growth rates, well within reason to use as we dig ourselves out of this albeit unusually low trough that we just came through.

Operator

The last question comes from Shawn Severson – ThinkEquity.

Shawn Severson – ThinkEquity

Could you give a little more color on the industrial outlook? Obviously things have picked up a bit over the last six, seven, eight months. Just as you look forward to the year where you’re expecting in terms of specific segments and some geographies where you expect continuation of this improvement and where you’ve seen it today so far as well?

Kirk S. Hachigian

If you took our industrial business you could almost sort of split it in two pieces. One piece of it is related to energy and metal prices and things like that. So it’s the oil and gas, it’s the Crouse sort of space. The other piece of it is really directly correlated to factory utilization. The harder you run the factories, the more consumption. I would say right now the MRO business has dramatically picked up from factory utilization in the high 60s going to the low 70s. The normal cycle on that is high 70s to low 70s.

If you get anywhere near back to those levels we’ll do very, very well. The piece that was still flat in the quarter we saw was sort of Gulf Coast refineries and a lot of new investment. Now, with $85 oil prices and steel, copper, aluminum double, we have very good expectations through our relationships with the EPCs and such that there is a ton of business on the order boards and a lot of activity going on around the world.

So we are very encouraged that that will pick up and gain momentum in the back half of the year as well. So we really like the industrial space. This is where we’ve done a lot of acquisitions. Most of our international exposure is very heavily related to the industrial space as well and that bodes well for the developing economies as we go through the year as well.

Operator

There are no other questions.

Mark Doheny

With that thank you for joining us today. Please feel free to contact me with any follow up questions that you may have.

Operator

Ladies and gentlemen thank you all for your participation in today’s conference call. This concludes the presentation and you may now disconnect.

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Source: Cooper Industries, PLC Q1 2010 Earnings Call Transcript
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