Thomas & Betts Corp. Q1 2008 Earnings Call Transcript

|
 |  About: ABB LTD. (ABB)
by: SA Transcripts

Thomas & Betts Corporation (TNB) Q1 FY08 Earnings Call April 30, 2008 11:00 AM ET

Operator

Greetings ladies and gentlemen and welcome to the Thomas & Betts First Quarter 2008 Earnings Conference Call. At this all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Ms. Patricia Bergeron, Vice President of Investor and Corporate Relations for Thomas & Betts. Thank you Bergeron, you may begin.

Patricia A. Bergeron - Vice President of Investor and Corporate Relations

Thank you. Good morning and thank you for joining the Thomas & Betts Corporation first quarter 2008 conference call. Our comments today contain time sensitive information that's accurate only as of today's live broadcast. These comments may also include forward-looking statements which make assumptions about our operations, business, economic and political environment including without limitation customer demand, government regulation, terrorist acts, and acts of war. These forward-looking statements are subject to risks and uncertainties detailed in the risks factor section of our Form 10-K for the 2007 fiscal year.

Dominic Pileggi, Thomas & Betts' Chairman and Chief Executive Officer, will begin our formal remarks with a review of business highlights. Ken Fluke, Senior Vice President and Chief Financial Officer will then review the financial results. We will then take questions from the investment community. Dominic?

Dominic J. Pileggi - Chairman and Chief Executive Officer

Good morning and thank you for joining us today. We are quite pleased with how 2008 started out for Thomas & Betts. Sales were up 25% helped by acquisitions and growth in international markets that offset segment specific softness in the US markets. Earnings from operations increased 22% reflecting the benefits from our recent acquisitions and an improved product mix.

Given the softer demand in specific U.S. markets and the dilutive impact of acquisitions, segment margins also performed well. Earnings per share for the quarter came in as expected and were in line with the guidance we provided on our February conference call. We are increasing our full year earnings guidance to reflect the benefits of the $12 million pretax or $0.13 per share legal settlement to be realized in the second quarter.

Aside from the solid financial performance in the first quarter, I am extremely happy with the progress we made with our strategy to position the company for long term sustainable profit and growth. We made great progress with the integration of Lamson & Sessions and our other recent acquisitions.

Taking a look at the markets, demand was mixed in the first quarter. International markets particularly commercial and industrial markets which have not experienced the severe credit turbulence seen in the U.S. remained strong in the quarter. These markets account for more than one-third of the company sales.

In contrast we experienced lower demand in domestic retail, utility power distribution and like commercial construction markets in the first quarter. These markets off course have been negatively influenced by the continued weakness in residential construction.

Typically when housing construction weakens, consumers shift their spending to home improvement projects. Generally this means we will see a pick up in products sold through big-box retailers and other hardware stores. This was not the case in the first quarter as consumers faced tight credit availability, record gas, food, and energy cost, and rising unemployment. We also have seen a couple of isolated cases with the changing dynamics in credit markets have led to the delay or cancellation of some speculative light commercial projects.

Differences in regional demand were also apparent during the quarter with construction in the North East and mid Atlantic weaker than in the southern regions. On the positive side, we saw solid demand for industrial MRO products particularly in markets such as food processing, oil and gas, power generation, and waste water treatment. Activity on large commercial construction projects and essential infrastructure also remained positive in the quarter. Despite these challenging dynamics, our diverse portfolio of leading brands, a well balanced distribution channel, and good execution helped us deliver a strong first quarter.

In our electrical segment, sales increased 31%, with acquisitions contributing 28% and foreign currency benefiting sales by 5 percentage points. Price was a non-factor in the first quarter. Underlying electrical sales volume declined by approximately 2% in the quarter. Electrical segment earnings were a healthy 18.9% of the sales in the first quarter despite the segment-specific weakness previously mentioned and the diluted impact of recent acquisition.

Notably, earnings in our electrical business before the impact of acquisitions increased slightly year-over-year despite the lower sales volume. Our ability to improve margins in such a challenging environment is testimony to our unrelenting focus on continuous improvement and cost controls.

Turning now to our other businesses. Sales and earnings in our steel structure segment were essentially in line with last year. Segment earnings also... segment earnings as a percent of sales increased to 19.3% of sales reflecting a more favorable project mix. As a reminder sales and margins in this business may vary from quarter-to-quarter due to the type and timing of projects and overall production volume. We continue to remain extremely positive about the longer-term outlook for this business as the need for a more reliable and efficient U.S. power transmission grid remains a key priority in utility capital spending programs. The uncertainty in this market is the exact timing around when these numerous and necessary projects are initiated. Labor availability, social and political issues along with material costs are all elements affecting the timing of projects.

The new manufacturing capacity we added to an existing facility is now in place and ramping up providing additional flexibility and meeting future customer needs. We believe we will see year-over-year volume improvements throughout the remainder of the year. Sales in our HVAC segment were up 7% in the 1st quarter, primarily due to foreign currency and price. Segment earnings were in line with last year's strong performance. As a percent of sales, segment earnings were 16.2% down slightly from last year, but still representing a very healthy performance.

As I mentioned earlier, during the quarter, we also achieved significant milestones integrating our recent acquisitions. At the time of our last conference call in February, we had just announced our intention to consolidate Lamson & Sessions four distribution centers into our centralized distribution model.

Today we're in the final phase of that consolidation with Lamson products shipping exclusively from our centralized warehouse. Three of the four Lamson facilities are completely closed and the last one will be by the end of the second quarter.

Customer orders and invoicing for Lamson products has also been integrated into our IT systems allowing us to service these brands as part of our one order, one shipment, one invoice operating model. This further strengthens our competitive position and enhances our value proposition that reduces transaction cost and working capital needs for our customers.

We set a very aggressive time table for accomplishing this consolidation and our team has done a tremendous job meeting the challenge. The move was made on schedule and with no disruption in customer service. We are also consolidating certain other administrative and back-office functions of Lamson & Sessions, Homac, Joslyn and other acquisitions into our existing infrastructure and these activities should also be significantly completed by the end of the second quarter.

As expected, we incurred about $4 million in non-recurring charges to these integration activities in the first quarter. We should benefit from more than $20 million in annual savings when the integrations are complete. I'm pleased to report that our announced divestiture of the plastic pipe business of Lamson & Sessions continues to progress well and we will keep you informed as we move forward.

Looking forward, we believe 2008 will be another year of positive momentum, significant growth and record earnings for Thomas & Betts. Our recent acquisitions have added leading commercial, industrial, and utility brands to our already broad product portfolio. Our ability to integrate these brands into our globally integrated IT systems, past cycle logistics model and customer tailored marketing programs, coupled with our continued success in new product development and productivity improvement; not only strengthens our value proposition to our customers but significantly improves our overall balance and competitive position.

For the full year 2008, we continued to expect sales growth of approximately 25% with acquisitions contributing about 20%.

Price will play a more significant role on our underlying sales growth than previously anticipated. We have responded aggressively to the recent sharp escalation in fuel, energy and commodity costs particularly steel and copper with targeted price increases. Those of you who follow Thomas & Betts know that we have done an outstanding job mitigating higher commodity cost in challenging market conditions using a combination of price increases, cost reductions and productivity initiatives.

We have done this successfully in the past and expect to do so again as the situation calls for it. We have increased our outlook for the full year 2008 earnings to incorporate the benefit of a $12 million pretax with $0.13 per share legal settlement to be recorded in the second quarter. We are now targeting earnings per share in the range of $3.93 to $4.08; our previous guidance was $3.80 to $3.95 per share.

The biggest risk to achieving these results continues to be the risk I addressed in my comments last quarter. The potential negative impact of margin uncertainty and continued tightening and credit availability and volatility and commodity cost and availability.

Thank you very much for your continued interest in and support of Thomas & Betts. I will now turn the call over to Ken Fluke to review our financials in more detail.

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

Thank you Dominic and good morning. Our year-over-year EPS growth of 5% was in line with our guidance we provided in February. As a reminder we said we expected less than 10% EPS growth in the first quarter. We achieved our target despite certain U.S. construction markets being weaker than anticipated and reported our February guidance together.

It was especially pleasing to see higher electrical segment earnings as a percentage of sales before the impact of recent acquisition activity as net volume was lower than last year. Before I go into more specifics about our performance, I want to remind you we have begun to report segment earnings before depreciation, amortization and share based compensation. We believe this change improves the visibility into the underlying business trends in each of our segments. It should also make it easier to focus on the contributions from our recent acquisitions as well as keep sight on our performance excluding acquisitions. This change is also in line with how we measure performance internally.

Let me now turn to the financial highlights of the first quarter. Consolidated sales increased 25% on a year-over-year basis. This increase breaks down approximately as follows: 23 points from acquisitions, 5 points from foreign currency, no net price, and 3 points of negative net volume.

As Dominic noted previously, in our key electrical segment which includes all of the acquisitions, sales increased 31% with 28 points from acquisitions, 5 points from foreign currency and 2 points of negative net volume. A negative 2 points in net volume in electrical segment reflects modest increases in industrial and telecom products being offset by weakness in U.S. markets influenced by the continued slowdown in residential construction such as retail, utility, distribution and some areas of commercial construction. These same market dynamics also had a similar dampening impact on the performance of our acquisitions.

Gross margin in the quarter increased daily basis points to 31.3% compared to 2007.

Improved mix in our electrical and steel structure segments as well as the addition of higher margin product from the acquisitions contributed to this improvement. $2.5 million in non-recurring integration and acquisition expenses were also included in the quarter.

SG&A as a percentage of sales increased approximately one percentage point reflecting the impact of acquisitions inclusive of amortization and other purchase accounting expenses. Approximately $1.5 million of nonrecurring acquisition expenses were included in the quarter. SG&A as a percent of sales should improve from the first quarter level as the year progresses, as the actions taken to reduce duplicative operating expenses are realized.

Also as a reminder, first quarter 2007 SG&A included a $7 million legal charge. Earnings from operations improved 22% in the quarter when compared to 2007 with the acquisitions contributing significantly to this increase. As expected, the first quarter 2008 included $4 million of nonrecurring amortization and integration expenses.

Last year included the $7 million legal charge. Net interest expense increased by nearly $9 million due in large part to the acquisition activity which was funded by available cash and increased debt borrowings. The effective tax rate increased to 32.3% from 31% in 2007 as a result of the net increase in U.S. income. As expected, discontinued operations did not contribute significantly in this quarter. This leaves us with net earnings of $0.66 per share on both a continuing and total basis compared to $0.63 per share in the first quarter 2007.

Now I would like to make a few comments about cash flow in the balance sheet. We expect to again have an excellent cash generation performance for the full year 2008. And as a reminder and looking at quarterly trends the first quarter tends to be the least favorable in terms of cash generation due to the timing of certain seasonal payments.

However, in looking at this year's first quarter cash flow performance, it is clear we considerably underperformed last year with inventory management being the culprit. And looking closer at our inventory performance, it is important to note that roughly half of this increase over year end 2007 is raw materials and half is finished goods.

Raw material increase reflects the need to support the build required for the traditional construction season which typically begins in the second quarter. As well as some minor buy ahead in anticipation of what we believe will be significant increases in material costs as the year progresses. We are comfortable with the plans we have around the raw material build.

The increase in finished goods included a plant build of extra inventory to ensure high service levels during the consolidation of Lamson & Sessions warehouses. I'm happy to report that the consolidation transition is going very well and in hindsight we do not need this buffer inventory. We have plans to reduce it as the year progresses.

We normally have some seasonal build in finished goods inventory in the first quarter and this is also reflected in our numbers. But to a lesser extent we did have some buildup of finish goods inventory above necessary levels and this relatively modest amount will be addressed as the year progresses.

Further impacts to cash flow in the quarter included $8 million of capital expenditures and we expect to spend up to $60 million for the full year. The quarter also reflects the completion of two previously announced acquisitions for $90 million including Homac Manufacturing Company, a leader in secondary underground power distribution connectors. Debt at the end of the quarter reflects an increase of $46 million used to help fund the $90 million of acquisitions made in the quarter.

We finished the quarter with a $110 million in cash and $858 million in total debt. Looking forward we have a $115 million in notes due in May and our current plans are to use our existing credit facility to fund the payment of these notes.

Finally a few comments about our 2008 guidance. The first quarter performance was in line with our prior guidance and looking at the remainder of the year we see nothing that materially changes our overall outlook for the year.

Compared to the sale guidance we provided in February, we see a modest deterioration in net volume gains for the year offset by higher pricing to combat commodity cost increase. The second half of the year should show higher sales from pricing and less foreign currency increases as compared to the first half of the year. The second half of the year should also show a very modest net volume improvements helped by our steel structures business when compared with last year.

Additionally, a couple of components in our 2008 guidance provided in February have been modified to reflect the new segment reporting. Corporate expenses should approximate $12 million a quarter for the remainder of the year. This is before recognizing the $12 million favorable legal settlement in the second quarter, which will be recorded as a reduction in corporate expenses. And depreciation, amortization, and share based compensation should approximate $25 million dollars a quarter.

On the earnings side for the year, when compared to our February guidance, we see further improvements in operating expenses offsetting the modest deterioration in net volume gains.

We are maintaining our prior underlying full year guidance for EPS, and are increasing in it by $0.13 to reflect the second quarter favorable legal settlement. Looking at the second quarter, we are estimating a slightly higher year-over-year sales increase in the second quarter and than the 25.5% growth we saw in the first quarter.

Again, we believe we will not see any net volume improvement year-over-year for the quarter. This sales estimate should translate into EPS growth of approximately 10%. Again, this is before the favorable impact of the legal settlement. Cost savings for the warehouse consolidation will not be meaningful in the second quarter as it will take us the quarter to better understand, and develop the rhythm for a centralized warehouse so we can take advantage of the throughputs. Also most of the action plans to eliminate duplicative operating costs related to our acquisitions have been finalized and will be implemented in the second quarter, giving us the foundation to realize savings from these efforts in the second half of the year.

We do not currently anticipate any significant non-recurring costs from these efforts in the remainder of the year, including the second quarter. So there is no confusion surrounding our second quarter guidance, I believe it's important to repeat we are looking at an approximately 10% increase in EPS in the second quarter before the $0.13 per share impact that will be booked in the quarter for the favorable legal settlement.

In closing, we are executing extremely well on our aggressive plans to integrate our acquisitions, and are looking forward to what we believe will be another exceptional year in 2008. Thank you for your continued interest in Thomas & Betts, I will now turn the call back to Tricia.

Operator

This call is the property of Thomas & Betts corporation, any redistribution, retransmission or rebroadcast of this call in any form without the express, written consent of Thomas & Betts Corporation is strictly prohibited. The telephone replay of today's call will be available through 12 midnight on May 7, 2008. The number to access the replay is 2016127415 account number 9517 and the pass code 281135.

In addition, the recorded webcast is available on our corporate website www.tnb.com. Thank you, we will now open the call up for questions.

Question And Answer

Operator

[Operator Instructions]. Our first question is coming Alex Rygiel with FBR. Please state your question.

Alex J. Rygiel - Friedman, Billings, Ramsey & Co.

Yes good morning gentlemen.

Dominic J. Pileggi - Chairman and Chief Executive Officer

Hi Alex.

Alex J. Rygiel - Friedman, Billings, Ramsey & Co.

There are any chance and may be you kind of given the status you gave us a lot of numbers, but is there any chance you can quantify the delusion from the acquisitions in this current quarter and then comment on whether not deal they will be dilutive neutral or accretive in the second quarter, and then potentially comment on the full year accretion of those acquisitions?

Dominic J. Pileggi - Chairman and Chief Executive Officer

Alex I think the best way to look at it, I'll just start with the chart we had in the back of that's part of the press release shown and the impact of acquisition, and you could see the segment impact was about $17 million positive. Now coming off with that what obviously be the moment in you see on the segment chart, and that would be obviously mostly related to acquisitions, and then not all, but a significant part of TJH net interest increase would be you used to fund the acquisitions, so put all that to together quiet frankly you will see at the pretty much neutral in the first quarter. So keep in mind that also would it would be inclusive about $4 million of one time non-recurring expenses that we had in the quarter to get all these activities ahead of us, so when you look at the first quarter I think the best way to probably look at is, which is roughly neutral, but if must take into consideration the one time was actually a little bit positive. Going to second quarter we still see further improvements in the underlying earnings that were showing from the 1st quarter, and obviously we don't expect to have that non-recurring $4 million again, so you can see that we are expecting it to start to ramp up, and be accretive as the year goes on. And remember, the second half we should have out the majority of the duplicative operating costs.

Alex J. Rygiel - Friedman, Billings, Ramsey & Co.

That's helpful. Dominick, you've been through different economic cycles through your career. Can you comment on your comfort level today of being successful at raising prices during a period when volumes are declining?

Dominic J. Pileggi - Chairman and Chief Executive Officer

Sure I think if you take a look at why we're raising prices, I think everyone clearly understands that these are not speculative price increases. They're pass-throughs of real live issues that are out there, and there is a global demand for commodities goes up, and the cost of delivering those commodities goes up, it's just simply a fact that we're going to live with rising commodity costs, and I think people understand that.

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

And I think everyone's feeling that, and adjusting accordingly too.

Alex J. Rygiel - Friedman, Billings, Ramsey & Co.

And currently are you neutral running behind or running modestly ahead of the price increase versus cost increase curve?

Dominic J. Pileggi - Chairman and Chief Executive Officer

Alex, I think in the first quarter, we really didn't see or feel in our underlying business big movements in commodity costs. We think that's going to be more of a phenomenon going in the second and the third, and we've already put price increases that we believe necessary to cover those going-forward. The only thing if you looked at the first quarter that may be a little subjective is the huge increase in fuel costs, that impact that would have on our freight rates as well as our energy costs in our facilities, I would say that those probably had a dampening impact to our overall performance in the first quarter you know, we usually we do brigade job and true productivity improvements to cover all that, I don't think we probably get all that probably recover in the first quarter especially when your net volume was down year-over-year. But, going forward I don't see that be in much of initiatives.

Alex J. Rygiel - Friedman, Billings, Ramsey & Co.

Thank you, very helpful.

Operator

Our next question is coming from Meredith Taylor with Lehman brothers. Please state your question.

Meredith Taylor - Lehman Brothers

Hi good morning.

Dominic J. Pileggi - Chairman and Chief Executive Officer

Good morning.

Meredith Taylor - Lehman Brothers

I would be interested in getting a little bit of the further break down on the commercial construction exposure within the electrical segment. I know it's about 37%. Can you give us more of the sense of how that breaks down between international and U.S. and within the U.S. what portion is new construction?

Dominic J. Pileggi - Chairman and Chief Executive Officer

You're correct about the breakdown was about you know, between 35 to 37% in both of our commercial and industrial business and the international business and to us the international business is primarily European and Canada, most of the business we see there is also in commercial and industrial markets not related to residential. So, it's relatively the same.

Meredith Taylor - Lehman Brothers

Okay. And then push a little further I mean can you give us the sense of what the mix is between light and non-red and having non-red?

Dominic J. Pileggi - Chairman and Chief Executive Officer

Sure, plus you know we've said that if you could retail and residential together it's somewhere less than 15% of our business, and then utility the balance were somewhere around 20 so.

Unidentified Company Representative

And that's why it's close to 100.

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

Less than 15 as Dominic mentioned. Remember, we were trying to look at the first quarter and trying to integrate all the acquisitions into that and the number he is using is more looking at what first quarter kind of looked like, because remember, we have got all these acquisitions and we're just trying to see how that affects those percentages, but that's our best guess. And really the residential number I think that he's talking about not really direct residential, it's our best guess... retail and anything that may be kind of semi-related to residential, not necessarily direct. We don't have a lot of direct residential.

Meredith Taylor - Lehman Brothers

Okay, but it sounds like, of the commercial construction exposure, about a third of it is lightened on rent, two-thirds heavy?

Unidentified Company Representative

That's about... that would be about right, Meredith.

Meredith Taylor - Lehman Brothers

Okay, got it. You mentioned that you were seeing some cancellations on some of the lightened on rent projects; can you give us a sense of the data point that is you're seeing on the heavier projects?

Unidentified Company Representative

On the heavier projects, we really haven't seen any changes or push outs of projects. It's been mostly in the lighter or speculative areas, you know, small residential or shopping centers, you know, residential related construction where people have had some bank issues and then going to another bank and not being able to get funded. But on the larger projects or the infrastructure projects or institutional projects, we really haven't seen any push back thus far.

Meredith Taylor - Lehman Brothers

And much visibility do you have in terms of pay back you're getting from distributors, from customers, backlog levels, etcetera?

Unidentified Company Representative

Well I think our visibility is pretty good I mean we are out there with the distributors and with the customers so, it's a real visibility and right now that reflects what we said in our comments that we think that the institutional and margin projects continue to... you know it shows strength in the industrial business is still moving along, and you know, we think that will be the case probably throughout 2009 and maybe into early 2010. Very little recovery if any of the residential and the light commercial side related to the residential business.

Meredith Taylor - Lehman Brothers

Okay, that's helpful, thanks.

Operator

Our next question is coming from Christopher Glenn with Oppenheimer, please state your question.

Christopher Glynn - Oppenheimer & Co., Inc.

Hi, thanks. Sounds like you're doing quite a job on the integrations.

Unidentified Company Representative

Thanks Chris.

Christopher Glynn - Oppenheimer & Co., Inc.

On the $20 million in savings you're targeting from I guess that's the warehouse consolidation and some other back office, with none of that reflected, I guess in terms of analyzing what the margin accretion might be from acquisitions, you know, just add back $5 million to operating profits to kind of get a sense of where that's going?

Unidentified Company Representative

I think in the second half of the year we should be at the 20 million annualized run rate, yes.

Christopher Glynn - Oppenheimer & Co., Inc.

Okay, and then on the unit volume outlook, I think targeting a little bit more in the second half, you said, mentioned steel structures, I assume that would also include electrical?

Unidentified Company Representative

I think that's a fair assumption, but remember when we were going through the dynamics when we put our February guidance together, those volume numbers are relatively modest and now we're splitting hair on relatively modest numbers, you're talking 1 or 2 kind of points. I think that's a fair comment we're not anticipating seeing deterioration in volume in the second half of the year.

Christopher Glynn - Oppenheimer & Co., Inc.

Okay, Splitting hair is not but just directionally would seem like the economies weakening if anything directionally and I think you have tougher comparisons with the electrical segments so, leaving the triviality out of it, maybe just put some teeth into the directionality.

Unidentified Company Representative

As we said, we see that we are not living that deeply in the residential and, you know, that related construction and the markets that we are dealing in are still showing strength and we have some visibility to projects and you are going into, you know, the building season, you know, the seasonality. So, the numbers we have, we feel pretty good about what we will see out of the industrial and the heavier construction progress particularly in the vertical markets that we talked about such as oil and gas, such as food and beverage and some of the other infrastructure projects, so, you know we see... we still see good activity there. You know, there's has been a lot of efforts and our sales and marketing area of different products and programs and so on, they've been working on for over a year, we believe we'll see some of that benefit to as the year goes on.

Unidentified Company Representative

Yes, Chris, I would add to that, that we are seeing our customers particularly in a market like this or distributors particularly seeing some real value and that value preposition of being able to add some of our new brands as well as our existing brands into that one order, one shipment which really does translate into a lower transaction cost from them, and our service levels are strong enough that they don't have to carry the inventory and still able to service their customers when they need it. So, it's a combination of all those things, you know, I was feeling pretty good about you know where we are in that space.

Christopher Glynn - Oppenheimer & Co., Inc.

Okay, that's, that's helpful. And did the warehouse consolidation in the first quarter, did that contribute to any kind of... are telling the distributors, maybe go to someone else temporarily, or was there any impact or the core growth of that activity?

Dominic J. Pileggi - Chairman and Chief Executive Officer

No, that activity as I mentioned in our prepared statements. I think our teams did a tremendous job my hats off to them to do that without disruption in service, and you heard Ken, we built a little bit of inventory in anticipation of some issues that we really didn't need but we treated that as an insurance policy, so I was very, very happy with the results, and the feedback that we've gotten from distributors and from our own sales organization has been very good.

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

You know, Chris, to echo what Dominic said, I mean doing one warehouse is usually a big deal. We took on four and, you know, in a three month period of time, it was huge. And, you know, we keep harping on this, but it was very successful, you know, hats off to the people we've got who worked really hard this quarter focused on getting that to be successful, and, you know, that was a huge effort and that really bodes well for us going forward, and it's a big step that what we had as part of our integration activity behind us, and it makes us much more confident in the savings numbers that we see for the second half of the year.

Christopher Glynn - Oppenheimer & Co., Inc.

Agreed, and lastly, you mentioned positive mix in electrical is that sustainable, kind of based on the end market shifts out there, or more on kind of the lumpiness side?

Dominic J. Pileggi - Chairman and Chief Executive Officer

I think Ken mentioned that that was positive mix due to some of the acquisition products, so yes; we do believe that's a sustainable situation.

Christopher Glynn - Oppenheimer & Co., Inc.

Okay, thanks very much

Dominic J. Pileggi - Chairman and Chief Executive Officer

Thank you Chris.

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

Thank you Chris.

Operator

Our next question is coming from Steve Gambuzza [ph] with Longbow Capital. Please state your question

Unidentified Analyst

Good morning.

Christopher Glynn - Oppenheimer & Co., Inc.

Good morning. Steve,

Unidentified Analyst

The guidance for the second quarter, 10% growth off the second quarter last year, you reported $0.80. Is that a clean number last year?

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

Yes.

Unidentified Analyst

Okay. So I guess if we look at where that would putt you if you add the $0.13 that you expect to book for the full year in the second quarter of the legal settlement, you get a $1.67 for the first half of the year implying about $2. 33 for the back half of the year to get to your guidance...to the mid point of your guidance range?

Dominic J. Pileggi - Chairman and Chief Executive Officer

Yes the $1.67 in the first half; is that makes sense.

Unidentified Analyst

That's with the $0.13, so you guys output had about 233 in the... for the back half of the year to get to the mid point of your range.

Dominic J. Pileggi - Chairman and Chief Executive Officer

Obviously yes in the mid point up.

Unidentified Analyst

And that's up. You know I guess, versus some relatively strong comps in Q3 and Q4 last year. I guess you reported a $1.68 in the second half of last year that saw 39% growth. I was just wondering if you could talk a little bit more about some other specific drivers, obviously we'll have some synergies flowing in from the Lamson acquisition, but it seems like some fairly significant growth forecasted for the back half of the year, I'm just wondering if you could provide some more commentary on what's driving that whether it's resumption of volume or improved pricing or if, you know, some more color on that?

Dominic J. Pileggi - Chairman and Chief Executive Officer

I think that's fair, that's fair. You're right, I mean, it puts us at a very nice run rate in the second half of the year. It's probably higher than what most people expected and obviously goes well for years after that. Key things again, is over the last year, we would have added a lot of significant acquisition activity, the normal purchase accounting charges and not full periods of time, and volume and sales and all that, to and fro in there that would have been in the third quarter and fourth quarter numbers that we would have last year. We don't have that this year. We've had a fair amount of time to integrate those businesses. We've seen margin improvements so that we believe they will come from in the acquisitions as those business settled out and start performing where we expect them to be. Again as we've talked about, there is a significant amount of duplicative cost that are going to be coming out. All those activities are all well down the past as we speak and those plans for the most part it going to be finalized and done here as we exit the central quarter. So, that makes us move more comfortable. We are going to see a much more favorable dynamic in expense arena going into second half of the year, and our acquisitions, the strength of them, the stronger margins portfolio that that was brought to us, we believe all that's going to start showing up a pretty clearly here in the second half of the year.

Unidentified Analyst

Could you comment on what the purchase accounting drag in the second half of last year was from some of those acquisitions and it's kind of how much of that will involve?

Dominic J. Pileggi - Chairman and Chief Executive Officer

If you go back and I would probably highlight all those things in prepared remarks and I don't have those things right here in front of me from last year.

All I could give you feel for is I can add on some of this will hit off the question from some one is at the $4 million non-recurring that we had in the first quarter all about half of that would have been in those type of things like backlog amortization and step up inventory costs and there just to give you feel for that, and we don't see any more of that going forward.

Unidentified Analyst

And geographically you had mentioned purchase accounting as one of the drivers to SG&A. Do you include all depreciations charges in SG&A or just a purchase accounting?

Dominic J. Pileggi - Chairman and Chief Executive Officer

If the depreciation itself with the mix obviously there is depreciation going to the cost to sales, but anything SG&A related would be down there, draw the amortization related to the type of things really set in us SG&A.

Unidentified Analyst

Okay, so all so all of the purchase accounting whether it's --

Dominic J. Pileggi - Chairman and Chief Executive Officer

Well, it depends, the inventory step up percent of that would be up in the cost of goods sold.

Unidentified Analyst

But what about step-up on acquired property plant equipment?

Dominic J. Pileggi - Chairman and Chief Executive Officer

Yes there would be a proponent in gross margins too.

Unidentified Analyst

Okay.

Dominic J. Pileggi - Chairman and Chief Executive Officer

But they aren't amortization. It goes along with this majority of that in SG&A and I think we have kind of highlighted in that one back chart attached to there to give you a feel for higher estimates that fell out to by SG&A cost from the quarter.

Unidentified Analyst

Thank you very much.

Dominic J. Pileggi - Chairman and Chief Executive Officer

Thank you.

Operator

[Operator Instructions]. Our next question is coming Brent Rakers with Morgan Keegan. Please state your question.

Brent D. Rakers - Morgan Keegan & Co., Inc.

Good morning. I just wanted to follow up first on the utility side in the first quarter, and through the fourth quarter you had been tracking and flattish kind of trends, could you give us a better sense for how depressed utilities activity was in Q1?

Dominic J. Pileggi - Chairman and Chief Executive Officer

The activity for utility Brent was mixed in Q1 and obviously the demand related to U.S. residential certainly had a negative effect and there was really no impact from storms. So the effect of the residential had a negative effect but there is also activity in other areas and other another products areas, so it was generally mixed but dampened.

Brent D. Rakers - Morgan Keegan & Co., Inc.

Dominic would you go so far as to say that your utility reported within the electrical and the volume basis was down double digits in Q1?

Dominic J. Pileggi - Chairman and Chief Executive Officer

I don't if it was that dramatic and I think.

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

Top of my head and I would say it a mater of fact.

Brent D. Rakers - Morgan Keegan & Co., Inc.

Hey and then outside the storm issues you mentioned. Do you any changes in that business over the next several quarters?

Dominic J. Pileggi - Chairman and Chief Executive Officer

No, not really I wont see anything they should dynamically change and I think one of these again advantages I think we have is that the inventories and the distributions, our distributors have learned they don't have to carry a lot of inventory, so they're not buying what I would call speculative or buy ahead inventory, so I think you'll see a normal flow through. You're not going to have to wait for inventory to burn down or things like that.

Brent D. Rakers - Morgan Keegan & Co., Inc.

Okay, and just I think Ken had talked about earlier guidance for the future quarters with regard to corporate expense and share base comp and I guess looking at those numbers it looked like the first quarter numbers were about $7 million, or so higher than that?

Dominic J. Pileggi - Chairman and Chief Executive Officer

Okay.

Brent D. Rakers - Morgan Keegan & Co., Inc.

Does that sound about right, first, and second if it is, could you comment on that?

Dominic J. Pileggi - Chairman and Chief Executive Officer

I think that's probably fair. I think in the first quarter, the corporate expense piece was probably less than $2 million higher than that guidance and that's really just related to some timing around certain legal expenses we had. There's really nothing substantial there, but I think if I remember correctly, it's a little less than $2 million and the other piece is, as you look back at the chart that we show for the acquisitions, and so on, you have some of that non-recurring amortization hitting that number for probably about a million dollars or so. And then you also would have higher stock compensation expenses in the first quarter, which is normal but as I called out in the February guidance, that won't be at those types of levels once we get through the rest of the year. And if I remember right, those dynamics are pretty much the changes that you'll see from what was in the first quarter versus what I just guided to for the rest of the year.

Brent D. Rakers - Morgan Keegan & Co., Inc.

Okay, and then just you talked a lot about price inflation and the opportunity, I guess what you are doing there, could you may be quantify what the total increase might be, are you talking about a 2% kind of number for the next nine months?

Dominic J. Pileggi - Chairman and Chief Executive Officer

I would tell you that, that varies in all the product line, the steel, the product lines related to the steel are up over double, will be up over double digits, so it's going to vary product line to product line, but I would say that there will be reflective of the increase in the commodity cost.

Brent D. Rakers - Morgan Keegan & Co., Inc.

Okay, Dominick, do you have a rough number kind of segment wide with an electrical for the next 9 months?

Dominic J. Pileggi - Chairman and Chief Executive Officer

For, for price increases?

Brent D. Rakers - Morgan Keegan & Co., Inc.

Yes for price increases.

Dominic J. Pileggi - Chairman and Chief Executive Officer

I don't really know, but as I said it varies product-to-product but in this field you will see around the double digit ...

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

Yes it will be easier for us to call that out as the quarters go on and we actually start to see that and you know, like we said in the first quarter we really didn't have much of that.

Brent D. Rakers - Morgan Keegan & Co., Inc.

And then just last question related to that if assuming these price increases are you know a couple of percentage point or so for the next nine months and you left your year revenue guidance unchanged. You obviously have in order to leave the EPS guidance unchanged for the year; you obviously have other things going on within the profit margin side boosting the overall performance. Could you maybe elaborate on what some of those new ounces [ph] might be?

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

Well, as I call it out in my prepared remarks, yes, we believe our operating expenses will be improved from where we had in our guidance before, I mean part of that obviously will be for opportunities that we've seen here recently as we go down in the past with the acquisition integration, and that's been very successful, and obviously since we're down the road, we can find the opportunities there, but also we have always been pretty good at managing our productivity and cost management and you know this period of times require that, and you know we put in necessary emphasis on that in the areas where it's needed, and that should help us buffer any type of you know which is relatively modest deterioration in volume gains from what we had in our guidance previously.

Unidentified Company Representative

Higher synergy is the quick way to say that, right from the acquisition versus.

Unidentified Company Representative

Well, it's more than just that. I mean it's not just synergies, it's actually looking at the underlying businesses to define areas that we need to do, we can do a better job in cost management within. And those things are well in place too.

Brent D. Rakers - Morgan Keegan & Co., Inc.

Great thanks.

Unidentified Company Representative

Thank you.

Operator

Our next question is coming from Jeff Beach with Stifel, Nicolaus. Please state your question.

Jeffrey L. Beach - Stifel, Nicolaus & Co.

Yes, good morning.

Unidentified Company Representative

Hi, Jeff.

Unidentified Company Representative

Hi, Jeff.

Jeffrey L. Beach - Stifel, Nicolaus & Co.

Hi. Would you give us a status on your Lamson & Session business that you pulled out as a discontinued and whether there's interested buyers.

Unidentified Company Representative

Go ahead, I am sorry.

Unidentified Company Representative

Okay Jeff.

Jeffrey L. Beach - Stifel, Nicolaus & Co.

And then just a one with it, can you describe a little bit about, I don't think you've done this before, but describe a little bit about the profitability of that business and get us again into a kind of a ballpark idea of how much sales were pulled out of Lamson & Sessions and put into that pool?

Unidentified Company Representative

First part of that question about the activity, I did say in my prepared remarks Jeff that we're very pleased with the progress being made there, and we'll keep you posted as that progresses, but we're happy with how that process is going.

Unidentified Company Representative

Second part of that, I guess, and I just... I would say cut it down in the middle of the road, half and half. Half is probably the pipe business, half is the business, sales volume that we're keeping.

Jeffrey L. Beach - Stifel, Nicolaus & Co.

Obviously... I am sorry... obviously a great margin. Sorry I was going to say great, margin difference between the two businesses?

Unidentified Company Representative

Yes, I mean the other one really fits our profile, that's why we're so excited about the acquisition to start with; when we get this all about we really believe this is going to be a real win for the company.

Jeffrey L. Beach - Stifel, Nicolaus & Co.

All right, thank you.

Unidentified Company Representative

Thank you Jeff.

Operator

We do have a follow-up question comes from Alex Rigill with FBR. Please state you question.

Alex J. Rygiel - Friedman, Billings, Ramsey & Co.

Yes, it's one with a follow up, just to confirm, I believe your commentary was that you anticipate your volume to be modestly down in the second half of the year, is that correct?

Unidentified Company Representative

No, that's not correct, Alex. The comment would be, we don't believe there will be any net volume in the second quarter okay? That doesn't mean negative, doesn't mean positive. We don't expect the net volume to be any. And in the second half of the year, we had volume in our guidance, okay? My commentary around that is, is that what we see today is we won't have as much of it in the second half of the year as maybe what we had in our February guidance, okay? But as a reminder, we should see volume improvements in our steel structure business and relatively modest improvements in the rest of the company.

Alex J. Rygiel - Friedman, Billings, Ramsey & Co.

And just a question about that, given the slowdown in the economy first affected the housing market, now affecting light commercial, it sounds like in your guidance you're suggesting that the end is near, and that slowdown in construction from residential trickling into light commercial does not extend into heavy commercial. Is that correct?

Unidentified Company Representative

That is our opinion, that they are separate markets and we continue to see strength in the heavier projects and the industrial projects, and that the residential and commercial is as you put it.

Alex J. Rygiel - Friedman, Billings, Ramsey & Co.

Very helpful, thank you.

Unidentified Company Representative

Thank you.

Operator

Our final question is coming from Ryan Jones with RBC Capital Markets, please state your question.

Unidentified Analyst

Good morning, I believe you stated this, but I just want to get a breakdown again on the electrical sales growth into its component parts?

Unidentified Company Representative

We missed that question. Can you repeat it again?

Unidentified Analyst

Sorry, Eric can you hear me better now?

Unidentified Company Representative

Yes.

Unidentified Analyst

Sorry about that. I wonder if you could... I know you gave it to us... could you give us the component parts to the 31% of sales growth, and electrical again?

Unidentified Company Representative

Yes, I've got that here. If I remember correctly, we had... you are talking just electrical, not the total company.

Unidentified Analyst

That's right, yes.

Unidentified Company Representative

Of the 31points, 28 were acquisitions, 5 was foreign currency and 2 points were negative net volume.

Unidentified Analyst

All right, that's helpful. And then, if we exclude the 2.50 million integration expenses that are in the cost of goods sold, it looks like gross margins picked up to 31.7% about a 120 bits of improvement over the prior year period? Is there anyway to quantify the mix versus price versus probably some fixed costs or deteriorating fixed costs assumption on volumes?

Unidentified Company Representative

I think the key thing as you should take away is, we are pleased obviously with the productivity being able to show in the quarter and the underlying business, when you didn't have any net volume year-over-year, so that was one pleasing thing. As I made the comment there really wasn't any net price in the quarter, so that wasn't a factor into the margin improvement for us, and as I mentioned we also didn't have any volumes so that was a factor. So as really, the margin improvement that came from the mix was better for us, in the quarter probably year-over-year and also all the hard efforts we have as reminder you follow this for a while we did take out a facility last year and those benefits obviously are shown up in the numbers too.

Unidentified Analyst

Okay that's helpful. And then if we annualize the FX benefit this quarter, $22 million on this top line. And we annualize that? Would that imply no organic growth for the full year guidance?

Dominic J. Pileggi - Chairman and Chief Executive Officer

That probably would, but I don't think that's the right way to look at it. That currency is probably at its peak in the year-over-year comparison, and that's going to start dramatically dropping down year-over-year in comparison when we get to the second half of the year.

Unidentified Analyst

So it's about current quarters when that should start to top out?

Dominic J. Pileggi - Chairman and Chief Executive Officer

I mean I think the pretty has topped out here in the first quarter if all things being equal and we will probably have less of the year-over-year in the second and then its starts dropping off even more as the year goes on.

Unidentified Analyst

Okay, and then turning to acquisitions a little bit any appetite to do a deal offshore or internationally?

Dominic J. Pileggi - Chairman and Chief Executive Officer

I'm sorry, could you repeat that.

Unidentified Analyst

Sorry about that. Turning to acquisitions, is there any other type to do a deal offshore or internationally going forward this year?

Dominic J. Pileggi - Chairman and Chief Executive Officer

Yes, we have no. If you just look at the acquisition pipeline in general, we are always looking for good value based acquisitions, and international would be as appealing to us as domestic, of course, but given the current expectations out there, and the weakness of the dollar currently, we don't see anything significant right now that excites us, but as that situation changes, you know, we'll continue to work in that area.

Unidentified Company Representative

Particularly in the international arena I mean the dollar to where it sits right now is a real disadvantage.

Unidentified Analyst

So, maybe in line with the FX expectations are for the third and fourth quarter you can take a harder look at doing a deal off for maybe in sort of fourth quarter?

Dominic J. Pileggi - Chairman and Chief Executive Officer

Not like we have to absolutely do something, internationally, we're just looking for the best acquisition opportunities no matter where they lie for us, going-forward. We're just saying we want to make sure that they have a lot of availability for shareholders, regardless of where they are in the world.

Unidentified Company Representative

We do look at our business on a global basis.

Unidentified Analyst

Okay. And then just one final housekeeping question. I noticed the tax rate increased this quarter, and I was a little bit surprised given that seems like international sales picked up somewhat in... thought that would provide a little bit of increased profitability and lower tax rate jurisdictions; any commentary there or is that not really material.

Unidentified Company Representative

It's not really material, I mean the tax rate in the February guidance as I highlighted was approximately 33% and this is just slightly below that and I'd say going forward our tax rate's going to be approximately where I guided to before, around where we are right now, up to 33% for the year.

Unidentified Analyst

Okay thanks very much. I appreciate it, thanks.

Dominic J. Pileggi - Chairman and Chief Executive Officer

Thank you Ryan.

Operator

This does conclude our Q&A session. I would like to turn the floor back over to management for any closing comments.

Dominic J. Pileggi - Chairman and Chief Executive Officer

Thank you for joining us today. Good bye.

Operator

Ladies and gentlemen this does conclude today's teleconference, we thank you for your participation and you may disconnect your lines at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!