Cooper Industries plc - Shareholder/Analyst Call

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Cooper Industries, plc. (CBE) February 28, 2012 8:30 AM ET


Kyle McClure - Director of Treasury and Investor Relations

Kirk S. Hachigian - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Mark Eubanks - President of Cooper Lighting

Ivo Jurek - President of Cooper Bussmann and Cooper Power Systems

Grant L. Gawronski - Group President of Cooper Crouse-Hinds, Cooper B-Line and Cooper Safety Divisions

David A. Barta - Chief Financial Officer and Senior Vice President


Jeffrey T. Sprague - Vertical Research Partners Inc.

Unknown Analyst

Julian Mitchell - Crédit Suisse AG, Research Division

Deane M. Dray - Citigroup Inc, Research Division

Kyle McClure

Good morning, and welcome to the Cooper Industries 2012 Outlook Meeting. I'm Kyle McClure, Director of Treasury and Investor Relations. This event is being webcast and recorded, and we have posted exhibits to our website that we will refer to throughout this presentation. These exhibits may be viewed at in the Investors section of the website.

Before we proceed, let me remind everyone that comments made today 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. Therefore, actual results may differ materially from those anticipated by Cooper. A discussion of these factors may be found in the company's annual report on Form 10-K and other recent SEC filings.

In addition, comments made today may include non-GAAP financial measures. A reconciliation of those measures to the most directly comparable GAAP measures can be found in our Q4 2011 earnings release, which is posted on our website.

And finally, I would ask everyone to please turn off their cell phones and mobile devices, and please hold questions until the end of the session. We have a terrific presentation planned for you this morning. Management representing 6 of the 7 Cooper divisions are here today, as well as Kirk and Dave. Bios for each of those folks can be found in the back of your presentations.

And now I will turn the presentation over to the Chairman and Chief Executive Officer of Cooper Industries, Kirk Hachigian.

Kirk S. Hachigian

Thank you very much. We do have a full agenda. Let me flip down, so you can see the agenda. We are going to -- I'll do a quick overview, and then we'll turn it over to Mark Eubanks, and he'll give an exciting update on this massive transformation in the lighting industry, solid-state lighting controls and technology, changing that industry. Then we'll turn it over to Ivo Jurek. Ivo is one of our new group presidents. He's going to give an update on Bussmann Power Systems, the protection-safety related businesses that are both back to peak 2008 levels, with great momentum heading into 2012. And then we'll turn the call or the meeting over to Grant Gawronski, who is the second group president today. He'll update us on Crouse, Safety, B-Line, also back to 2008 peak levels, again with great momentum around the unique portfolio and opportunity we have in heavy industrial projects around the world. And then of course we'll wrap up with Dave Barta, who will navigate this complex global end markets and key assumptions into our 2012 budget. As Kyle said, we do have 6 of the 7 businesses with us here today, so you'll hear from just about everybody regarding our portfolio.

I did want to take my time this morning to talk about 2 things, one, a few comments on our performance in 2011, and then more importantly give you our perspective on the trends in this global electrical industry and how are our initiatives and investments and acquisitions over the past 10 years have perfectly aligned us toward the global growth and the challenges ahead as we look into 2012.

For 2011, it was a good year, better than our estimates from a year ago. Our revenue was up 14%, EPS at $3.87 was on the high end of our estimates a year ago of $3.80, and our cash conversion was 1.1x. Again, all in, core was up 10%, which was great. 11th straight year of free cash better than net. And I think our biggest achievement was around this dramatic step up of restoration of the core. Despite the downturn in 2009, as you'd expect, we took a lot of cost out of the company. And I think in 2010 and '11 we stepped up that strategic investment and are extremely well positioned as we head into 2012. New products, globalization, the verticals which we'll spend a lot of time today on. We've taken down our share count, taken up our dividend. We funded our pension, and we have a terrific team and leadership in place. And of course, this is what we'll cover for the majority of the day.

This is a slide we used last year on our 5-year priorities. Some mixed results here. Our core at 10% of course was at the top end of the range. I call the acquisitions a bit punky. We did 7 for $300 million when it was only $200 million of revenue. So we were not successful with Laird over the summer which would have given us about another $800 million of revenue. The incremental leverage, of course, was a negative for the course of the year. Dave is going to address the pricing execution, and I'm going to walk you through in great detail where we put the incremental investments. But we needed to execute both the productivity, the pricing, the transfers of work and fund the SGIs to get to that kind of leverage, we didn't do it. The cash again was solid at 100% conversion. And what we did with the cash, we spent $1.3 billion roughly, $125 million on CapEx, which is right in the range, 2% to 2.5% of sales. We spent $305 million on acquisitions. We've made the $250 million initial Asbestos Trust payment, which again is very unusual, expensive, but it certainly puts the distraction behind us.

We spent $188 million on a dividend, up 7% last year, up another 7% in February of 2012. And of course, we spent $400 million on our buyback, mostly in the third quarter, the Laird deal was off, our stock took a big plunge, and we had $1 billion of cash, which generally is a good time to be reinvesting -- in our stock.

Putting the 2011 into perspective on the revenue side, looking back over the last 2 cycles. Now this is just Electrical. We've still not recovered from the steep collapse of 2009. We're $350 million off the peak revenue of '08, which was $5.8 billion. And all that's construction related. Our preference in our strategy, of course, is to buy our way back. We have $1 million of firepower on the balance sheet, but of course we've also well funded the core. The industrial, utility markets are going to continue to grow, you'll hear that today. We're hopeful that these construction markets begin to turn. And again we're loaded with new products, globalization and drive the core. And again clearly our focus is growth, and we'd like to get back to that $6.5 billion peak revenue, even including the Tools back in 2008.

On the EPS side is a much better story, of course. The last cycle, our revenues were down 11% over 2 years, and our EPS didn't recover for 4 years up until 2005. In this cycle, our sales were down 22% in one year and, of course, 2011 back to peak with $350 million less revenue. So the productivity programs, the asset light business model, the RP system mix and, of course, the share buyback all contributed to that.

On the cash side, high-quality earnings always, 11th straight year free cash flow has been greater than net 7 years now, where our cash has been better than 10% of sales. And the key here is strong predictable cash flow in all cycles gives us the confidence to reinvest, to do larger deals and to buy back our stock on the dips and never be out of the market.

In 2011, we spent $400 million on the buyback, $250 million on asbestos and $300 million on acquisitions, nearly $1 billion, and we still have $700 million of cash today and a $500 million credit line that's untapped.

So overall for the year, the other highlights I'd say that the Tools joint venture is in solid shape. Dave is going to give you a quick update on that. Danaher guys have been terrific partners, things are going well. I mentioned the Asbestos Trust. Despite coming up a little bit short on the acquisition side for 2011, we've still done 31 deals in the last 5 years and spent over $1 billion. Our pension is 93% funded, so that's a good story. And again, we ended the year with a terrific balance sheet, lots of flexibility. And I'm going to talk to you about these growth initiatives and how we're well-funded. It was basically a $32 million incremental spend on these strategic growth initiatives. And again, I'll walk you through it, and the company, though, is in terrific shape.

For those of you that do care, the stock has done very well. Our investments in these new initiatives, our capital deployment model, are all designed around rewarding our shareholders. And so here's our 3, 5 and 10-year returns. You can see that we added a new peer, this S&P Capital goods index of 40 companies. And it's the company should typically come to know 3M, Danaher, Eaton, Emerson, GE, Honeywell, ITW, IR, Rockwell, Roper, Textron, Grainger, UTX. For the last 10 years, we've been using a selected 15 peer comparison, you can see the note on the bottom left of the page, with Thomas & Betts now coming out. And 3 of the companies being tools companies, the change is basically 4 out of the 15, and we think it is relevant to change it. Rather than picking and selecting peers, we're going to go to this capital goods and still use the S&P. And again I think that'll be fairly relevant as we move forward. We won't have to continue to monkey with the peer indexes.

So that concludes my comments on 2011, I would tell you it was a solid year. It was a record year, but we certainly could've done better. As you flip forward into 2012 and you're thinking about the recovery from the economic crisis of '09, I think it is relevant to look back at our history and share with you some perspective on where we believe our industry is heading. Cooper has survived for 178 years, only because we have been able to be consistent and successively navigate important global transformations. In 1929, the company merged with Bessemer. Cooper had steam engine technology, Bessemer had gas diesel. And our ticker symbol today, interestingly enough, is still CBE, which is Cooper Bessemer Engines. In 1985, we doubled up on electrical. We merged with McGraw-Edison, almost 2 companies of equal size. McGraw-Edison brought us Bussmann Power Systems and the Lighting businesses for the electrical. And in 1995, over about a 10-year span there, we spun out the Cameron business, the Belden and the Gardner Denver businesses and sold the Kirsh Hardware and the automotive business. So it's was a realignment and a pure focus on electrical.

I would categorize 2012 and beyond that you'll continue to see significant transformation in our industry through technology and globalization. And these changes will create both threats and opportunities. Let me spend a few minutes on this topic.

As you think about the foundation of our strategy, it all starts from the core. We start with an incredible portfolio, terrific brands, most of them over 100 years old, some of the best brands in the industry. They're extremely well balanced in our end markets between industrial, construction, both commercial and residential, full of technology and now with about 40% of this portfolio located outside the U.S. From a market perspective, these are large, growing global markets. The ESS business is full of industrial, utility, very global sets of businesses, with significant room to grow organically and via acquisition. And again, Grant and Ivo are going to take a deep dive in both of those spaces today.

On the electrical product side, shorter cycle, more construction-related businesses, more U.S. dominant-based businesses, but again massive technology shifts in opportunity in lighting, interconnect in Bussmann, and massive global opportunities in both Bussmann and in B-Line. Again, Ivo, Mark and Grant will take you through this over the course of the day. But most significantly, most significantly, you cannot understate the impact of technology on our industry. As you think about the utility and electricity demand, the global demand for electricity continues to grow as we use more PDAs, iPads, electric vehicles and emerging markets continue to consume more electricity. You still have an age grid and upgrade opportunity in the U.S. and the mature markets and significant opportunity for power delivery, quality and reliability through the optimization of the existing assets and placing new access on the existing grid. And of course, productivity and automation through distribution automation, Mike gave a nice display last year, substation capacitors and Self-Healing Grid.

On the conservation and green and energy efficiency side, of course, solar wind and electrical vehicles with new products like protection for AC and DC inverters. You have a massive play in energy efficiency through lighting, LED, solid states and controls, motors, transformers, and of course Smart Grid Demand Response Volt-var trying to reduce the -- or improve the efficiency over the distribution grid that's in existence. And of course, vegetable oil and FR3 types of products as well.

On the energy and infrastructure side, global demand for fossil fuels continues to increase. Clean coal, deepwater drilling, horizontal drilling, hydraulic frac-ing and tar sands, of course, have completely changed the entire landscape on the energy field. Large investor projects now are pervasive in China, Australia, Saudi Arabia, Brazil, nearly doubles the opportunity for us. If you have the IEC, the NEC types of products, if you can get spec within EPCs and of course if you can manufacturer local around the world to satisfy these needs.

And then lastly, the need for protection of people, equipment and data in harsh, heavy-duty coal, oil, gas, mining, minerals, chemicals, all these toxic environments, there's never been a bigger emphasis on safety and protection. So again, if you have leading-edge products to serve these global customers, these global applications that can produce the products and serve the customer locally, it's a formula for success.

In summary, these are large, healthy growing markets, driven by capital investment, new construction and MRO. The breadth and diversity of the end markets is terrific, industrial, energy, utility, electronics, transportation, government and military. The transformational technology creates huge emerging verticals in oil and gas, mining, solar, electric vehicles and other opportunities. Globalization is rapidly expanding the demand for electricity and energy and industrial infrastructure. And lastly, the energy conservation move, of course, is driving massive replacement cycles in lighting, motors, transformers, et cetera. There's never been a better time to be in the global electrical industry. And so the big question is how quickly can we capitalize and grow our disproportionate share of this terrific industrial global market. And the answer is by investing and driving our key initiatives faster and harder. There's nothing new here. But in 2011, as I mentioned, we did invest an incremental $32 million in loyalty, innovation and globalization. And I'll give you some granularity now on where specifically we made those investments.

On customer loyalty, we invested an incremental $10 million in 2011. We stepped up our pricing tools and analytics. As you know coming out of the fourth quarter of 2010, we missed on the price material economics, we had a drag in the first and second quarter, and we expect to stay at least at parity for the course of 2012. We are leveraging our common ERP System with a CRM, e-tools, mobile apps, ease of doing business for our end users, distributors and agents all around the world. And in 2011 we made -- we won several key awards from significant customers on our web design and some of our applications in this area. We've also made big investments in global marketing and global sales teams to attack the verticals. And again Grant will take you into more details on this in a second. And then lastly, we've taken the tech center that we have built in Houston, and we have moved these centers around the world, leveraging the success, so that our customers around the world can see and touch and understand more about the technology and the products that we offer. And you can see those locations that we installed in 2011 and the new locations that we're planning on 2012.

Another major area for investment for us, of course, was on the innovation side. It's hard to capitalize on efficiency trends, utility grid optimization, solar, wind, with 30-year-old product lines. So in the last 5 years, we've taken up by 2x our spend over $80 million, and in 2011, we're up $17 million on R&D over 2010. And I think it's nice to note that in 2009 we kept and held the R&D spend flat with 2008. So what have we achieved with all these incremental investments? Of course, our Vitality Index has gone from 7% in 2003 to 29% last year. And the question is, is some of that cannibalization? The answer is, of course. But had we not invested and cannibalized our existing product lines, we would have lost the share. Because of these investments, we gained access to new emerging global markets, new customers, new verticals and can protect our margins.

Innovation is the key component of our 6% to 9% core growth outlook over the cycle. And all of this innovation of, course, has not gone unnoticed. Cooper has again received the #1 innovative award by the Wall Street Journal Patent Board of 178 companies in the industrial components and fixtures space. It's 6 different criteria: number of patents, strength, innovation, cycle time, industry impact, technology strength and research intensity. We weren't even on the list 6 years ago. So this is a terrific accomplishment by the team and a huge competitive advantage.

The third big area of investment for Cooper over the past 7 years has been International. Why do we do it? Next 5 years, 2/3 of the global GDP growth will come from the BRIC countries. We want to continue to have access to low-cost manufacturing in places like Mexico, China, Romania, the Philippines. Of course we want to be able to follow the customers around the world whether it's oil and gas, electronics or different verticals. And then the last piece, of course, on innovation and M&A, 20 of our last 30 acquisitions were outside the U.S. We use international markets to support IT and design and R&D capability as well. Again, it's another key driver to our 6% to 9% core over the cycle. And I think if you listen to the ABB and Thomas & Betts transcript, the #1 reason cited by both ABB and Thomas & Betts to come together was ABB wanted access to the North American market, which is the largest low voltage market in the world, and Thomas & Betts wanted access to the international markets.

We have invested in this. Of course it's not easy, it's not quick, it's not cheap. We've been doing this now for the better part of 7 years. We've made 20 acquisitions, built 6 new factories and hired hundreds of international sales and marketing resources. And if you remember back to 2005, Grant was the individual that was hired at headquarters to run International. No longer do we have a single position at headquarters to run International. It's embedded in our businesses. It's embedded in our culture. It's part of what we do every day. The benefits have been a steady and consistent investment, we've executed, and our execution has paid off. We've moved from 24% of the portfolio International now to 40%, again, with very accretive margins to the overall portfolio. If you look at it on a little bit of a deeper dive, our business is almost a 50-50 mix between mature and emerging International. And in Western Europe, 75% of the sales are U.K., France and German-based. Again, we estimated a $5 million incremental spend in these faster growing markets like Brazil, Asia, Central America, Eastern Europe, Middle East and India, almost all sales and marketing growth-related resources.

Our international footprint is very comprehensive. We sell in 23 different countries -- excuse me, we manufacture in 23 different countries, and we sell in over 100 different countries. We have terrific talented people around the world. We have local products, local training, large complex local manufacturing, local distribution. This has now become a critical asset as we move forward into the new global emerging markets in the electrical space.

So I've talked to you about loyalty, I talked to you about innovation, I talked to you about globalization, and now let me just touch on M&A. We made 7 acquisitions, 6 outside the U.S. last year, $300 million, $200 million in revenue, all great properties, add significantly to our breadth and product capabilities. The guys will cover them shortly. The M&A priorities, our platforms are virtually unchanged over the last several years, tremendous opportunity out there in a $170 billion plus market. We have a great process. We've got capability in the field that bubbles the ideas up, and we have a great team at headquarters that can support and help do the due diligence, the legal, the environmental. We stay disciplined on price. We understand the quality of the properties. And again we're not afraid to walk away. This will be a continued focus as we move into 2012.

The 31 deals I mentioned earlier over the 5 years, about $1 billion, 20 outside the U.S. have all been a great fit, terrific people, products, technology, global distribution and local capability, and they fit right into the 4 strategic trends I discussed earlier, and significant opportunity in a number of deals on the energy and infrastructure and safety and protection. But again, I think the best way to share with you our strategy around M&A is to walk you through 3 quick examples.

The first strategy around M&A for us is filling out the white spaces on technology gaps. The EAS or Smart Grid is a perfect example. Power systems, of course, have the full suite of hardware and was really missing anything on the software capability. We made 4 acquisitions starting with Cannon in 2006. And by combining hardware and software, we have established Cooper Power Systems as one of the broadest providers of network optimization tools in the industry. AMI, DR, capacitor controls, substation automation, monitoring and reading, Volt-var and cell fueling grid are all capabilities now because of the combination of both hardware and software. Ivo will touch on this in a minute.

And the second great example we have in this area is the Lighting Controls. And you can see Mark's display over there, and Mark has made 5 acquisition in the Lighting Controls again to fill a gap in technology that existed within our portfolio.

The second example of M&A strategy is to execute on our deeper global penetration, of course. And we buy local products with distribution and brands, local manufacturing capability, local teams, leadership and customer relations. In Asia, we've made 4 acquisitions plus several obviously new factories, and South America is ramping up in a similar manner.

The third example, of course, is building platforms and leveraging deeper [indiscernible] in these verticals. Oil and gas, mining, solar, wind, electronics. This is a big part of Grant's presentation, and he'll walk you through the different pieces, and how we go to market with this more comprehensive package around oil and gas.

In summary, for 2012 and beyond, I think you can think about us leveraging innovation and technology, our strong brands, our global distribution and our strong free cash flow to continue to attack and advance critical technology trends, global expansion of our products and technology and following key customers around the world for deeper vertical penetration. And we'll do it both organically. We're not afraid to invest and align ourselves around these core initiatives, and we'll also do it through accelerated M&A.

Cooper's investments are summarized by consistency and years of steady investment. Again an incremental $32 million in 2011. That's a good balance between core investments and leveraging M&A, and it's not falling behind on global trends, either technology, globalization or recognizing emerging verticals. If you look back over the last 5 years, our capital deployment suggests this is exactly what we've done. Of course, a lot of this expense is SG&A and R&D. But if you look over the last 5 years, $603 million in CapEx and about $1 billion on 31 deals. So a nice balance. And of course, we continue to reward shareholders. We don't invest in the core at the expense of the shareholders. We do it to complement shareholder returns. And of course in the last 5 years, we've put up $1.6 billion to work at effectively repurchasing 37 net shares out of the market for a price below $43 a share. And, sort of, one of the reasons where we've been able to do that has just been extreme volatility in our stock and, really, everybody's. The oil and gas markets, gold, Asia, even the European exchanges. So we're able to take advantage of this volatility over the last 4 years by keeping flexibility on the balance sheet. We're confident in our ability to replenish and regenerate free cash flow in ups and down cycles, and we stayed disciplined on the M&A. And it's interesting, in 2011 was the largest volatility in our stock price. It was $4.5 billion from peak to valley. So the low was $41, the high was $70 over the course of the year.

We also obviously have a dividend policy, that's become a key part of our investors or owners returns. We target 30% of the prior year's net. It yields just over 2%. It's up 7% in 2011, and we raised another 7% in 2012. And our yield is competitive with that of our peers and the S&P.

In summary, our earnings are back to record levels. We expect 2012 revenue to get back to record levels. The macro industry dynamics are very favorable with this trend in technology, globalization and following the customers around the world. The Cooper's core investments will pay great dividends as we move ahead. We can stay in the top quartile investor returns, while we continue to invest in our core. Our M&A strategy complements our core growth initiatives, technology gaps, international penetration and deeper chasing of these key verticals. And then Cooper has maintained a very balanced and very disciplined capital deployment strategy, which we'll continue to do as we move forward. With that, now I'll turn the meeting to Mark Eubanks to update you on Lighting. Thank you.

Mark Eubanks

Thank you, Kirk, and good morning. I'm glad to be here this morning to present an overview of our Lighting business during our industry's most exciting time since the day we left gas lamps for electricity. I had a chance to speak to a few of you this morning over near our booth and hopefully you can see the excitement in our business.

By way of an agenda, we'll go through a brief overview of our business, some 2011 highlights, and then an economic outlook and then an in-depth overview of our business priorities in the areas of LED technology and controls.

We've finished 2011 with sales in excess of $1.1 billion, with 80% of our sales, as Kirk mentioned, coming from the United States. But our business is definitely globalizing. U.S. influence in construction specifications and LED in controls technology are flattening the global lighting markets. As a full line provider of lighting solutions, we have many leading brands in all major application areas, and we built a great business platform to help lead the lighting industry's technology revolution.

We frame our business strategy today around 4 key application platforms: Ambient, which is traditionally been fluorescent; Recessed or Downlighting as you see in this room, traditionally incandescent or compact fluorescent; Outdoor, pole-mounted lighting, traditionally HID; and then Lighting Controls. LED, Retrofit and Relight and Controls Integration are common themes across these platforms for all of our new product development activities. We are present in all categories of general lighting today, but commercial construction still represents more than 50% of our business. Even with the depressed commercial construction markets, our energy efficient solutions are still continuing to grow and thus position us well for the economic recovery in 2013. Shown here on the right are several of our diverse end markets, all of which are attractive long term and in the short term.

2011 results were highlighted by just under 7.5% core growth and a construction market that by all accounts was down mid-single digits. Relight, Retrofit and Lighting Controls provided offsets for these economic headwinds. 2011 also yielded record new product vitality for our lighting business, approaching 38%. This was bolstered by 70-plus more new products launched in 2011 and increasing rate of IP filings and issuances over the prior year. In our base business we also continue to make large operational gains, characterized by delivering price material parity throughout the entire year for '11 and strong service and quality improvements generated by our lean efforts. The new technology in our business offers a renewed life cycle and opportunity for further differentiation and category leadership. Like Kirk mentioned, our outlook for the residential and industrial MRO markets is positive for 2012. In the commercial markets, as I mentioned earlier, we expect this really to move sideways through 2012 with the recovery not occurring until likely into the first quarter of 2013.

In addition to the new roadway and infrastructure build we expect to see in the U.S., Mexico and Canada, this area offers significant opportunity for Relight and Retrofit due to the value proposition delivered from LED technology, and we're seeing it today. The only key leading indicators that we watch closely is the Architectural Billings Index. Many of you probably are aware that the ratings higher than 50 indicate increasing building activities for engineers and architects. This typically impacts our business -- this impact typically lags our business by about 9 to 12 months. Four of the last 6 months, including the last 3 have all been above 50, indicating a potential recovery in 2013.

Onto our business priorities and innovation. Innovation really is the key core strategy of our business and 1 of the 5 key business initiatives of the Cooper business model. We approach innovation in all areas of our business, including new products, manufacturing techniques and their ease of doing business. Today, I'll discuss our growth, focused priorities in the areas of innovation in the context of new products and technology, including our areas of focus, some of our early results and some of the metrics as we look back at our success.

As a subset, I'll also dive deeper into the 2 most profound drivers of future energy efficiency gains in the lighting industry. LED technology evolution and its market penetration, as well as Lighting Controls integration. One of the key fundamentals of innovation in lighting is energy efficiency. 20% of all electricity generated is consumed by lighting. Because of this, lighting offers a very attractive paybacks and ROIs for relatively small investment when compared to other building system efficiency upgrades. The other key fundamental is lighting performance or the delivery of illumination, whether for security or aesthetics or workplace productivity, this, along with the energy efficiency, are things that our new product development teams understand and are developing solutions to meet the needs of our customers. We utilize a disciplined tollgate process in our new product investment efforts, ensuring that our products are driven by the voice of the customer and meet specific cost and performance targets to deliver 2 value propositions. LED, relight, controls are all common themes across these platforms, and our success is demonstrated by our historical best vitality.

This slide is a broad -- is an example of our broad and deep penetration of LED technology across our product lines. All the products shown here were displayed in our 2011 LIGHTFAIR exhibition Booth. For those of you who don't know, this is our industry's biggest trade show. Of the 57 products shown here, 87 -- 80% were LED, shown here by the green shaded area. Of the remaining 10, 4 were fluorescent Retrofit kits, again keeping with our themes. These are all products that were launched in 2011, generated revenue in 2011 and will continue to do so in 2012 and beyond. Based on public information and market intelligence, I'm confident in our LED leadership position and our ability to drive core growth in excess of the market.

As I mentioned earlier, our aggressive R&D and NPI investments have resulted in a doubling of patent filings and issuances since 2009. The quantity and the strength of our Lighting and Controls intellectual property is a significant contributor to the Cooper Industries patent board recognition. The IP we're developing is contained both in our current products, as well as building features that are proprietary for future applications and differentiation.

Now we'll take a closer look at LED technology. Solid-state developments continue to accelerate both in increased efficiency and reduced costs. This cost performance curve on the left is the key driver of LED adoption in general lighting. Industry estimates today are that the general lighting LED market were 8% in 2011. This market adoption is expected to double over the next 3 years and then double again by 2013. It's not a matter of if, but when. This expansion will be driven by better ROIs in applications as efficiency tipping points are eclipsed relative to traditional light sources and other applications.

In the next couple of slides, we're going to spend a little time on this value chain as, really, as we review our strategy for leadership. The LED value chain has many divisions, but these can be grouped into 2 main areas: LED luminaires or solutions and then LED components.

Here on the left the LED components are characterized by the epitaxial growth process, the phosphor deposition and conversion and the LED packaging. These LED components are then utilized as building blocks for light engines in lighting Luminaire solutions that are then sold into application. We continue to focus our investments in the LED Luminaire area. This

chart on the left from a recent McKinsey Report shows overall market expansion of lighting and the dramatic increase of LED share relative to other sources, although fluorescent continues to remain meaningful. This is the reason we are making the aggressive investments in LED technology.

Last year we showed a video of our LED Innovation Center at our headquarters in Peachtree City. This year we launched 50-plus products through the center for Cooper Lighting. Shown here are only 2 of the many other products for other Cooper divisions that were also developed in our LED Innovation Center, really demonstrating the strength of One Cooper. In fact Grant now has several Crouse-Hinds engineers co-located in our LED Innovation Center in Peachtree City to further drive the same technology adoption across this product platform. As shown here and in previous slides, LED continues to displace traditional technologies and light sources in all types of applications.

We continue to believe we have the right strategy in focusing our current position in the value chain. This is a focused effort on building real technical core competencies in the areas of thermal, optical and mechanical designs, integrated controls and electronics and end-use applications. With that being said, we still continue to monitor industry activity and structure. In the early days of LED lighting, the big 3 lamp manufacturers, Osram, Philips and GE, all invested early in LED components. But more recently, each have focused their recent investments and priorities in the areas of applications and end-use. Even Cree, pure LED component maker, recently made a second acquisition in the Luminaire space to gain access to this end of the value chain. This chart on the left also from the same recent McKinsey Report shows the evolution of the area of value creation in the future lighting industry. This trend favors solution providers versus those in the LED component and replacement lamp business, validating our current approach.

The chart on the right is a discrete example of this future shift of value creation, as well as the deflation of the commercial LED downlight. By 2020, $100 cost of downlight today becomes a $40 cost of downlight with the LED value-add going from 67% to 23% of the total bill of material, a dramatic shift from today's value chain. Our understanding of applications, our channel presence, our technical core competencies and our LED Design Center are the key differentiators for our future success.

Shown here are 2 real examples of Cooper's LED value proposition, both in the retail interior environment as well as an exterior parking deck application. In both cases, the efficient traditional technologies, metal halide, were displaced in favor of LED. Both applications resulted in energy savings greater than 60%, paybacks less than 3.5 years and in overall better quality of light. As a value proposition, replacing incandescent sources is very easy, but both of these projects are real examples and real success stories of LED replacing other efficient technologies and providing real value for end users.

We'll now turn our attention to the lighting control systems integration, our increasingly influential technology in the Lighting business. In 2005 through our strategic planning process, we identified Lighting Controls as a key technology offering for the Cooper Lighting portfolio. We began to build out our controls platform that year with our first acquisition of a company called Novitas, the original inventor and patent holder of the ultrasonic occupancy sensor. Since then, we've made 4 additional acquisitions in this area, as Kirk mentioned. In 2007, we acquired Polaron in the U.K., one of the oldest architectural dimming companies in the world with systems dating back to the mid-50s. Then later that year, we acquired PCI, a leader of energy management systems in the U.S. with both analog and digitally controlled lighting relay systems. And then in 2010, we acquired ALC, a true complement to our PCI and Novitas acquisitions but in Europe. This was a U.K. based company again focused on energy management, digital and analog control. And then most recently, as many of you saw in the press release, we acquired Fifth Light, an industry-leading lighting-software driven addressable lighting controls company. Really, it enables granular building lighting control via occupancy, daylighting, time schedules and integration with building management systems. These acquisitions have enabled Cooper to lead and develop the 3 key global lighting controls markets: energy management, architectural dimming, and entertainment and theatrical. These are all attractive and sizable markets approaching $2 billion in total, and they continue to grow in excess of the general construction markets.

Today the majority of lighting and lighting control products are sold as separate products in separate boxes and then integrated by engineers and architects and contractors through design and installation. Future LED architects -- LED Luminaire architecture will physically integrate these discrete systems into one smart platform. One analogy is that of smartphones. Cameras, games, phones, music, calculators, all incorporated into one device, sharing components, physical space and offering a common user interface. LED luminaires offer a similar promise. With integrated light sources, daylighting and occupancy sensing, metering devices and power supplies, this promise will yield access to more functionality for less cost. Less cost and improved benefit shorten ROI periods and stimulate adoption. The acquisitions we've made and the core competencies we've developed position us well for this physical convergence of technologies.

Earlier, we discussed the LED value chain and the 2 main groups, LED components and LED solutions. Integrated controls offers a further expansion versus a division of this value chain, really focused on 4 key areas and functions: sensing, monitoring, metering and controlling. Shown here are some of the components and capabilities that Cooper has and will continue to aggressively develop through organic R&D as well as acquisitions. Independent reports estimate our market, as I mentioned, to be $2 billion, but expanding to $7 billion by 2020, more opportunity for Cooper to expand our global market presence.

As I mentioned earlier, the acquisition of Fifth Light gives Cooper a comprehensive control software platform. This technology platform allows us to seamlessly integrate all of our energy efficiency control systems under one platform, lowering cost and improving the performance of these solutions. Whether an architectural system in a hotel ballroom like this, an energy management system in a classroom or a multi-building real estate portfolio, we now have the software platform to support them all. With a simple Ethernet connection, these systems can be accessed via cloud-based servers through PCs, Cisco IP phones and any iDevice like this one here. And many of you, I showed this earlier, but our functionality today allows us to remotely control devices off of a simple PDA.

If you'll look over at the streetlight over on the right, I have the capability through a cloud server to simply turn on and off these solutions. I say I do. There. Smart lighting systems like this will be implemented in all areas of building infrastructure. This technology with our LED lighting systems will enable scalable solutions for all building types and application areas.

As I mentioned in my introduction, there's never been a more exciting time to be in the lighting business. Our end markets are showing some signs of recovery and we continue to focus relentlessly on energy efficient solutions, unlocking value for customers and shareholders. The lighting business is in great shape, and we are very well positioned for leadership today and in the future.

I'll now hand the floor over to Ivo Jurek.

Ivo Jurek

Good morning. I hope that you all had an opportunity to review the sampling of Bussmann's new products deployed into the military transportation and industrial markets over there in the corner. It is a small representation of how we deploy our investment in new product development. Over the last -- over next 30 minutes or so, I will provide you with an update on Bussmann and Cooper power systems businesses.

Let me start with Bussmann. The Bussmann business participates in an attractively sized market. Our most recent full year revenues reached approximately $650 million, a new record for this business. Over 38% of our revenues are generated from the outside of the United States. We are well aligned with global OEMs and are servicing our clients with well established premium brands in regions they operate in. We are well positioned to capitalize on the large market opportunity today that exists for the Bussmann product portfolio.

Bussmann is a business more than a circuit protection enterprise. Bussmann is a technology portfolio consisting of 4 businesses with presence in an attractive end market and fast-growing verticals. Our core electrical business includes overcurrent and overvoltage circuit protection devices, industrial automation product lines and specialty assemblies. The electronics portfolio contains overcurrent and overvoltage circuit protection, power magnetic and super capacitors. Our power management business is servicing clients with products spanning the power conversion, battery management, power distribution and circuit protection spectrums in premium high reliability and transportation segments. And finally, the wide range of products in our wireless platforms from devices that allow remote control of construction and material handling equipment to collecting and managing hard to access data through industry hardened wireless nation networks in process industries. Each platform is focused on delivering differentiated product and technologies to rapidly evolving markets.

Let's take a closer look at each of the platforms starting with Bussmann electrical. Our core electrical business is a global leader in circuit protection, servicing customers in industrial automation, factory automation, commercial construction and alternative energy market segments, delivering advanced solutions to blue chip global customers from a global manufacturing base. The electrical business generates approximately 39% of revenues from the international markets and continues to capitalize on high-growth market opportunities in Latin America, Asia and Eastern Europe in particular.

Our electronics business is primarily focused on consumer electronics, computing and communication markets. We service global OEMs who are market trend leaders, with overcurrent and overvoltage circuit protection devices, advanced power magnetics and supercapacitors. Our power magnetics technology and supercapacitors in particular offer a long-term market growth opportunity for years to come. These innovative, board level components help our customers to run their circuits more efficiently and cooler, expand battery life or simply offer a green alternative to batteries with super capacitors. This business generates over 60% of revenues internationally, with most of our manufacturing located in Asia.

Our High Rel [ph] and Transportation business is servicing customers in heavy-duty truck, bus, agricultural, construction, marine and military market segments. We have positioned this business to exploit increasing vehicle electrification and the green trend by focusing on providing value-added solutions to our global customers. Today, we offer advanced power distribution modules, DC to DC converters, AC to DC inverters, specialized power supply packs, battery management solutions and customized mobile wireless controls. With our most recent acquisition of Martek Power, we have expanded our international presence, expanded our product portfolio and broadened our customer base.

Bussmann advanced wireless solutions, industry hardened mesh networking products with secure communication protocols provide a cost-effective answer to our customers from monitoring critical equipment and eliminating downtime in a modern biotech plant to detecting leaks in aging water supply infrastructure. Bussmann's wireless products meet the challenges of securely connecting sensors to control systems in a cost-effective way, while presenting substantial long-term opportunity for our business.

Let's take a closer look at the end markets we participate in. We predominately operate in the industrial and electronics market space, including their high-growth subsegments such as alternative energy, industrial and factory automation, critical power, smartphones and data centers. Our markets are diverse, attractive and will grow over the long term.

The key indicators that impact our business are manufacturing capacity utilization and consumer spending. We expect manufacturing capacity utilization to continue improve, while the consumer spending will moderate somewhat in the short term. Both of these indicators are providing positive outlook longer term for our enterprise. Bussmann's prospects for long-term growth are outstanding. We have focused our business on new opportunities in high-growth market segments and organized these under strategic growth initiatives. We have refocused our business on new opportunities -- we have -- innovation and introduction of differentiated new products continue to open opportunities in new market segments and verticals. Solving our customers problems with game-changing technology is key in maintaining and commanding premium price. Factory automation, localization of production close to our global customer base and leveraging low-cost manufacturing footprint are key areas of our operating model that drive market share gains and deliver profitability improvements. And lastly, our strategy to drive growth from our base portfolio, capitalizing on opportunities outside of the developed markets with local presence in Brazil, China, India, Mexico and Eastern Europe, we are poised to capitalize on these opportunities. We are doing so with a highly competitive cost structure as well.

Let's take a closer look at our 3 key verticals: alternative energy, consumer electronics and high reliability transportation. We actively participate in these highlighted verticals. In alternative energy, our presence with hybrid electric vehicles, solar energy and wind energy, global OEMs deliver profitable growth today. We are closely aligned with strong market participants and market leaders in each of these segments. We offer a leading edge product portfolio from circuit protection to wireless monitoring and expect to see further acceleration and revenue generation as these technologies continue to move up in market acceptance.

Our Electronics portfolio, with specific focus on consumer electronics and IT, continues to deliver profitable growth by differentiated technologies. With specific focus on power management products and super capacitors in particular, our presence with key market leaders is yielding results. Recently, we won several business awards with leaders in the personal communication device arena that will nicely scale up our electronics business over the midterm. Just another example of how our investments yield attractive results.

In 2011, we have made an acquisition of Martek Power that has broadened our high reliability and transportation product portfolio beyond our traditional strength. Our advanced solutions assist our global customers to solve complex power management problems in heavy-duty truck, military, mining, marine and medical applications. With our portfolio and deep application know-how, we are well positioned to deliver sustainable growth in this attractive segment.

Let's take a closer look at solar. I think we had some discussions earlier in the morning here on this subject. Cooper has delivered nice growth over the last 3 years, with a dedicated focus on technology and specific needs of this application while leveraging our broad company-wide presence with the EPCs and distributors. We have grown our business to more than $60 million over the last 3 years, a terrific result in a market segment, which offers further potential for growth.

Our innovation effort is focused on proprietary and patent-protected product targeting fast-growing market trends in consumer electronics, computing, data centers and variety of other high-reliability applications. Relentless drive for energy efficiency, factory productivity improvements and planned safety is fueling demand for our differentiated solutions. From super capacitors, overvoltage circuit protection to advanced solutions for power conversion applications, to name few, are offering solid business opportunities for long-term growth.

Our rationalized footprint and regional proximity to key customers are enabling improvements in lead times. Our footprint-reduction focus wasn't just moving to low-cost countries, but it was to rationalize our product portfolio and invest in manufacturing processes to drive efficiency. The rationalized process not only allow us to develop a competitive cost base and reduce operational complexity, but it also allowed us to harmonize our manufacturing processes and build redundant capabilities to service our customers better. Efficient manufacturing base, robust VAVE process and comprehensive deployment of Lean enterprise principles serve as a sound foundation for our future growth.

With presence in key growth regions and sales in over 90 countries, Bussmann is well-positioned to leverage core as well as acquired product portfolio with key regional global channel partners and OEMs. Our continued focus on opportunities in Asia and Latin America will continue to deliver strong growth well into the future.

In July 2011, we have announced the acquisition of Martek Power. It provides a significant strategic expansion of Cooper Bussmann's portfolio in power electronics and power conversion applications. The addition of Martek takes our strength in power management for military, aerospace and North America transportation and extends it into key verticals such as medical, telecom, data storage and European transportation market segments. In addition, Martek's proven R&D capability in industrial and mission-critical power management applications expand our capabilities to deliver advanced power management solutions to a large universe of customers with high reliability needs. Subsequently, on January 5, 2012, we have announced the acquisition of the British Standard fuse-link product portfolio from General Electric Industrial Systems, which strengthens Bussmann's overcurrent circuit protection product lineup. This acquisition advances our growth agenda and presence in key markets such as India and Australia. Both of these deals help to expand our presence in growing market segments and add product breadth as well as technologies to our toolkit.

In summary, we are participating in highly attractive market space, staying the course of balanced investment in innovation, talent development and improving our operational capabilities while penetrating international markets further will help to outperform the market in 2012 and beyond.

Let me spend the next several minutes on Cooper Power Systems. Cooper Power Systems participates in a large global market space. We finished 2011 with $1.3 billion in revenue. Our customers are large utility industry leaders, global OEMs and key players in the renewable generation business. Targeted investments made has allowed us to expand into growth markets such as Asia, Latin America and the domestic commercial and industrial market verticals. Cooper Power Systems serves the electrical industry. At our core we saw power distribution problems up and down the power lines. Our product work end to end across our systems, power delivery, power quality, power reliability and smartmeter automation. Our market-leading products help transform, connect, protect the electrical grid for utility, commercial and industrial customers around the globe. We'll dive a little deeper into each one of these segments.

Each geographic region has its own infrastructure challenges and power delivery opportunities vary around the globe. In developing economies, power delivery systems are being built for the very first time. In established economies, the grid is expanding to meet ever-growing demand while working to upgrade the aging equipment found in legacy systems. In all cases, Cooper Power Systems is a leader in protecting systems from harmful lightning, excessive loading or switching. The American Recovery and Reinvestment Act of 2009 approved by the U.S. Department of Energy with roughly $4.5 billion to modernize the nation's electrical power grid as utilities around the globe -- as the utilities around the country continue to deploy these funds, they seek proven solutions from proven providers. With over 75 years of industry experience, Cooper Power Systems is the provider of choice. Our brands convey a promise of high quality, superior customer service and unparalleled domain expertise that spans across apparatus and software systems. Very few manufacturers can claim real experience with hardware and software that are integrated to automate a power system.

Power outages are disruptive and costly and utilities to strive to avoid these events to the maximum extent possible. However, utilities will always select customer safety as their primary goal. In order to solve this problem, Cooper Power Systems developed the oil circuit recloser over 60 years ago. Modern hydraulic and electronic versions of this early Self-Healing Grid device are going into service every day, and Cooper still holds its place as the industry leader. Cooper has broadly expanded its reliability solutions beyond the recloser into automation software, communication technologies and overall power system solutions design. As we move into the next generation of energy delivery, Cooper will continue to shape the Smart Grid with a proven leadership record.

In recent years, the conversion from legacy electromechanical meters into electronic meters, or AMI, has received much press coverage. This new wave of meter technology provides utilities and end-users with data that is more frequent, more reliable and more interactive than any point in the past. As the premier Smart Grid solution providers to the public power industry, Cooper Power Systems has over 3 million AMI network nodes installed and supported at cooperative and municipal utilities. We are a Smart Grid AMI vendor, with significant distribution experience. Cooper Power Systems is a true free-agent AMI vendor that is mere agnostic, providing utilities with considerable options and our flexible network allows low cost of ownership.

In addition, Cooper Power Systems is the industry largest demand response solution provider, helping utilities to manage their peak loads every day. We have over 4 million demand response devices from thermostats to control relays deployed and supported, with over 350,000 smart devices delivered last year alone. Finally, our Yukon software platform is the most mature enterprise software platform in the industry, with almost 25 years of delivering AMI demand response, power quality and reliability functionality to the industry. With a wide variety of power system solutions we have discussed previously, Power Systems naturally extends into common verticals, markets that connect into the power grid. In some cases, they are large institutional users who run their own power systems, such as military bases, mining operations or universities. Cooper has a historical presence with these markets, and we capitalize on their expansive growth. Cooper has been trusted source for products and applications in areas beyond the traditional power utility segment.

The market factors are turning favorable as the global economy recovers from a global recession. In addition, investments and infrastructure around the globe have been delayed until the present. As an example, we are reaching the end of useful life of more than 50 million power distribution pole-mounted transformers in the United States alone. This, in turn, will drive the start of a replacement cycle, which will present a substantial opportunity for one of our largest businesses.

With our great brand presence and most power providers in the industry and a broad portfolio of solutions, Cooper is in a great position to deliver growth. Specifically, we are focusing our businesses on high-growth verticals such as renewable energy and the expansion of Smart Grid data centers and mining. We have a long history of innovation and technology developments that work to solve complex power industry problems, from asset management and efficiency to global needs for sustainable, renewable green alternatives to current technology. Making this happen is an organization passionate about service to customers with processes and tools in place for relentless pursuit of operational excellence.

Finally, a global platform has been created to develop products that are not only unique to customers in global markets but are built in local markets as well. Our continued expansion into markets like Mexico and Brazil are recent examples of our globalization efforts.

Today's electrical grid faces many challenges and companies that are positioned to deliver comprehensive solutions will capitalize on the highest growth opportunities. The Smart Grid is about monitoring what's going on in the grid, leveraging communication technologies and advanced -- it's about leveraging communication and technologies and advanced software to improve the quality and reliability of power delivered. No other supplier in the Smart Grid space has Cooper's range of capability and demonstrated market expertise in these arenas. Concerns over integrating these solutions together in cyber secure manner is no trivial task and requires expertise in both the power systems and information technology embodied by Cooper's capabilities. Our innovation effort is focused on keeping up with changing technology trends and broadening our product portfolio. Our product vitality trend is on a trajectory to exceed 30% and is way to keeping up with relevant technologies in our customer base. From FR3 Fluid Solutions to our revolutionary high reliability connectors for underground switching to our converged controls platform, we continue to deliver high impact innovation to this marketplace. Cooper has a legacy in technological innovation and product leadership, but convergence into a single platform for our controls was not a historical priority. While these controls have always provided market-leading functionality prior to 2008, customers that worked with CPS were forced to learn and manage multiple disparate designs for their different types of equipment. Today, leveraging the innovative platforms with a design first introduced on our form 40 recloser, capacitors, regulators, relays and switch control products all share a common look and feel and our easy-to-use design. In essence, we are providing customers with contemporary technology and a common operating system across multiple control platforms.

We operate in a business that rewards rapid product delivery in emergencies with ability to execute complex engineered to order projects on a tight schedule. Investment in the Lean manufacturing, reduction in average fulfillment lead time and a broad presence with on-site field engineering personnel are key in driving customer satisfaction. And finally, our engineering and design tools are tailored to rapidly deliver products configured to customer unique specification and needs without taking additional time and proposal or order fulfillment, in essence a key strategy to maximize value delivered to our customer base while taking market share.

Cooper Power Systems has adopted a straightforward approach to globalization. Local products for local markets manufactured in local facilities. These investments continue to fuel our growth outside the United States, with sales in over 110 countries presently. Our technology centers in Shanghai and São Paulo are managing project decks loaded with product specific to Asian and South American markets and are expected to deliver growth for years to come. As to the new DOE mandate, the new proposed Department of Energy efficiency standard targets lowering losses for distribution transformers. Cooper actively provided leadership in driving the development of these new standards and recognizing this trend in advance, we are ready to deliver designs that will meet this new mandate. Cooper has been providing innovative transformer solutions that provide improved efficiency for many years. From the introduction of our Envirotran transformer in 1990s to the Envirotran ES transformer designed to meet NEMA TP1 efficiency standard using FR3 in the first decade of 21st century. The FR3 is the most sustainable, most tested natural transformer oil in the industry. As our history demonstrates, we are ready to capitalize on opportunities this mandates drive for efficiency improvements presents.

In summary, it is an exciting time in the Power Systems industry. Demand for electricity solutions continues to grow steadily. Power delivery infrastructure is evolving and renewing. Our quality and reliability requires innovation as utilities seek to manage their assets and smart metering and demand shifting technologies continue to become more efficient in relevant technologies. Our expansion in automation, international markets and attractive CMI verticals puts us in an outstanding position to benefit from these trends. We have never been more optimistic about our future. With governments around the world actively investing in infrastructure improvements and legislating greater energy efficiency, we are certain about the positive long-term prospects for our industry and business. Our expertise, customer recognition and innovation history will keep us in a premier place to shape the future of the grid. Thank you. With that, I'd like to introduce Grant.

Grant L. Gawronski

Thank-you, Ivo. Good morning, everybody. Hopefully most of you had the opportunity to view some of the display boards from Cooper Crouse-Hinds, Cooper Safety and Cooper Lighting that we have on the right side of the room. The products that we have here today are just a small sampling of the product offering and also the applications that we have for harsh and hazardous and heavy industrial environments. And they also provide a very nice representation of the breadth of the product line that we have to go and attack industrial verticals. In fact, the entire Cooper portfolio has huge exposure to industrial end markets. And this has been an important part of our history. A key component of the growth strategy that we have for 2012 and beyond is to capitalize on the natural portfolio synergies that we have across the company and offer the broadest package of not just products but solutions possible to our customer base. The opening slide that you see here offers a cross-section of the types of challenging markets that we participate in. And in each of these photos, you will see products from Cooper Crouse-Hinds, Cooper Safety and Cooper B-Line, very natural synergies to sell together.

So while energy and infrastructure are attractive and fast-growing end markets, the most important thing is that in Cooper, we have a very unique position to attack these with our breadth of product line and we'll go into a little bit more depth on this on the remainder of the presentation.

So for more than a century, Cooper has had a leadership position in the markets that we serve. Our portfolio has expanded and our ability to drive the commercial synergies has expanded as well. The breadth of products that we have and we possess today gives us, again, a very unique opportunity to be, again, not just a product provider, but a solutions provider at multiple stages of a project. And sharing this innovation that we have division by division, across a multifaceted technology base brings new solutions that we offer to a project, front-end engineering and design processes. As we go through a brief overview of 3 of our divisions, again, Cooper Crouse-Hinds, Cooper Safety and Cooper B-Line, you'll see how the opportunity to capitalize on the synergy is created.

So let's start with Cooper Crouse-Hinds. Cooper Crouse-Hinds is a billion-dollar business. It's long been recognized globally as the premier provider of products to harsh and hazardous environments. Roughly 60% of the revenue today from Crouse-Hinds is generated outside the U.S. and this is in large part made possible by having the broadest offering of both historical and new technology products. Additionally, we continue to add to this portfolio, acquiring a leading EX [ph] manufacturer in Brazil earlier this year, and then of course, we constantly evaluate opportunities that add either technology or enhance our global position. Crouse-Hinds is 115 years old, and for 115 years, they've been the leader in durability and protection in harsh, hazardous, onshore and offshore environments. Crouse has a traditional core of electrical products from controlling apparatus and panels to high amperage connectors, cable terminations, fittings, junctions and lighting, and we've complemented that with acquisitions around instrumentation, middleware, surge protection and diagnostic evaluation equipment with EMTO offering.

Cooper Safety, the second division, is our European headquartered business and has a little more than $600 million of revenue today. 90% of the revenue of Cooper Safety is generated outside of the U.S. and they've also done an outstanding job of adding key high-spec industrial items to their offering. These include some of the key brands that you see in the lower right-hand side of the slide such as Hernis, explosion-proof camera business, the Gitiesse communication framework system and also MEDC exposure-proof signaling packages among others.

Historically, much of the technology for protection, communication and signaling applications in the end markets we serve was developed in Europe. This is why having Cooper Safety based in Europe has been a huge benefit as we built out our platform of products in these key areas. The Cooper Safety industrial product offering was built both via a combination of organic development and acquisition and is today represented by, from left to right, notification and signaling systems, network communication systems, explosion-proof and marine camera and monitoring systems and a complete line of cable glands, breathers, drains and other hardware.

The final division that we'll cover is B-Line. B-Line is a high-quality spectrum of business offering cable management, enclosures and support systems. When you look at the chart on geographic representation, the one thing that jumps off the page is the heavy concentration of B-Line revenue in the U.S. The global growth opportunity for B-Line, especially when put together with Crouse-Hinds and Safety, is absolutely huge. The international piece of B-Line has been growing at north of 20%-plus annually, and they continue to leverage the position of both Crouse and Cooper Safety and the rest of Cooper as they go out and win the spec and global projects. Three great examples of these global projects would be Reficar which was in Columbia, Gladstone, which was a project at Australia; and then also Samref in Saudi Arabia. All of these were multimillion dollar project wins that were earned with an excellent product offering and a combination of a package of Cooper overall.

Like the previously named projects, in almost every large project, every large electrical bid, cable management is a very large spend and key consideration, and B-Line has a full suite of products to address these. Regardless of the application, whether it's aluminum for onshore industrial applications, stainless steel or fiberglass for offshore or corrosive applications, B-Line has the product and the global manufacturing to be able to handle this. B-Line also has an impressive enclosure offering that offers numerous solutions and, most importantly, customization opportunities for large projects or stock requirements. And then to round out the portfolio, in B-Line, we have a comprehensive offering of support and structure systems.

So when you look at a view of the family of products together, and also you get a great view to the right of the room today, as we have a representative sampling of the products, you see that the offering covers a range of required safety connection material to the most technical explosion-proof switch gear protection. You see mechanical and structural products from B-Line. You see industrial fittings, plugs, receptacles, panels, lighting and instrumentation from Crouse-Hinds. And from Cooper Safety, we complete the portfolio with cable glands and connectors, signaling and communication systems and high-end explosion-proof cameras. This is the package that we use to attack both verticals and our end markets and, more specifically, key vertical segments within those end markets.

Now our end markets look very good. If you look at the end markets for the 3 divisions we just highlighted, you see a great deal of similarity across the Industrial segment and specifically around energy and oil and gas, represented by the blue piece on the pie chart. It's also important to note that the structural protection and durability factors that are found across our product line fit very well with mining, wastewater, other industrial processing areas which are terrific growth opportunities in addition to oil, gas and energy. So we're bullish on our end markets today and we continue to invest in and expand both our platform and our portfolio and we do this both organically and via acquisition.

So just quickly, to summarize the division overviews, first of all, we believe we have an unmatched offering of high-spec products especially for global projects. Number two, we have markets that are growing, technical, very high-yield opportunities, and then, most importantly, we have tremendous opportunities to share synergies across, not just these 3 divisions, but all of our Cooper business units.

Now the macro outlook for our end markets continues to be very strong, and that strength is in markets that we both have a presence in today and also those that represent opportunity for further penetration in the future. Oil and gas has been a historic strength for us. The growth indicators around that, of course, remain robust. Rig counts and demand are up. Exploration remains active and the investment around global refining continues to be very steady. Industrial investment is also getting stronger and continues to pick up and our business in material processing and converting, harsh and corrosive industrial environments and also those that require water and gas ingress prevention are all strong as well. And within these robust markets, there are key verticals that again represent significant growth opportunity for us to leverage the total Cooper package. These are verticals that are well aligned with our core competencies and have significant barriers to entry.

If you look to the upper left, you see the characteristics of the vertical markets that we are attacking. These are very high-growth markets. They are very difficult to enter. They are highly technical and they're also markets where you get rewarded for innovation. It's extremely hard for a new competitor to enter this space even in a niche, and our historic position today remains unmatched. If you move to the bottom half of the page, you see a cross-section of environments that we're talking about. Oil and gas, mining, shipbuilding, heavy industrial, again, these are markets where it is very difficult to become established as a high-quality player. And these verticals are global. They require high-spec products with superior engineering and they are perfectly aligned with our history, our recent investments and also our plans going forward.

Now this page shows at the highest level why it is so difficult to become established in the challenging industrial markets that in Cooper, we call home. To win, first of all, you need a comprehensive and highly technical product offering. That means not just one solution, but all required solutions, and in Cooper we have that. Additionally, unique global infrastructure and support. You need to be local in local markets as projects around the world continue to have more and more global content. And quite frankly, we've spent the better part of a decade making sure that we're in place to compete and win everywhere in the world. The global structure that we have includes a world-class solution selling team that's both technical- and solution-capable, which continues to be a huge asset to our channels. And our technical leadership has armed them with a continuous stream of new products, and also, we've given them complementary acquisitions, which puts more in the package for our sales team to offer.

So to show an example of our capability, we're going to do an overview of our approach to winning in oil and gas opportunities on the next several pages.

Now, Kirk put this page up earlier. And on the prior page, we stated that in order to win in these challenging verticals, you need a broad and very technical product line. And quite frankly, our line in Cooper is unparalleled. So looking specifically at oil and gas, we started with our historical product offerings which you see listed down the left side of the page. And for purposes of this discussion, we've included the 3 divisions: B-Line, Safety and Crouse-Hinds. Then, over the last 6 or 7 years, we've strengthened that portfolio with 1 dozen bolt-on acquisitions, and that, today, gives our global commercial teams an opportunity to present a value proposition to our customers that gives us the best opportunity to be the global partner of choice.

Now the newest piece of the oil and gas portfolio is referenced on the slide that you see now. First on the left was Gitiesse. It's an Italian-based provider of communication solutions for Marine based applications, just picked up recently. We also, in the center, acquired Yuhua in Changzhou, China, a [indiscernible] provider of EX explosion-proof CCTV cameras that's a great fit with the existing Hernis package of EX cameras that we have. And then finally, Blinda. And we acquired Blinda in Brazil so that we could get 2 things: Number one, a significant manufacturing footprint and number two, a certification foothold in the very robust Brazilian market. So the technology and geographic position that we gained with these continues to solidify the position that we have across Cooper as a global leader.

Now continuing on the oil and gas vertical. If you look at the product portfolio depicted on this page, you can see the offering that we have for a host of oil and gas environments. Whether it's onshore or offshore explorations, refinings, FPSOs, storage and other midstream applications, we have the solutions. We can offer electrical solutions for all of these to a global customer base regardless of the certification.

To go one level deeper, specifically, on our drilling portfolio. This is an area, quite frankly, where we had been a bit underrepresented in prior cycles. This is a big growth opportunity for Cooper. Today, with some significant addition to our product portfolio, we're looking at increased penetration in both onshore and offshore applications. This portfolio, especially when combined with our existing global infrastructure, is experiencing extremely strong growth year-to-date and we expect an excellent year overall in our drilling segment. And these drilling products, like our total product offering, participate in markets no matter what the standard is that our customers require. In different parts of the globe, there are different standards, whether it's NEC, which is the traditional American spec; IEC, the general European spec; or Russia, Australia or any other country, we have the specifications and requirements to meet customers' needs. We have the size, the scale, the geographic presence to be able to meet all global and local requirements. And we've successfully secured the required certifications around the world so that we can partner with end users and EPCs on any oil, gas or energy project worldwide. And this global strength, complemented by our unmatched local commitment, has us very well positioned against the competition.

In fact, if we present a snapshot of some of our global competitors, you can see the range of products that we have in Cooper versus the others. So the Cooper portfolio is listed down the left side of the page. First of all, we have a complete explosion-proof offering, whether it's NEC, IEC or other global standards. We also have an instrumentation package. We have EX CCTV, communications and signaling in the package and then we have cable terminations and management. No competitor, whether they're American, European or Asian, can today match the Cooper portfolio, and this is the strength of driving our total Cooper portfolio through the vertical.

And I'm referencing back to Kirk's page on our global investments. Today, we have a commercial and operational footprint that is unrivaled. Our key differentiator to our customer base is that we can meet a local requirement for both content, and that's manufactured content, and specification in every market that we serve. Our group manufactures on 5 continents and actually 6, if you consider that our Saudi Arabia factory actually serves North Africa very efficiently. And we have a sales force that is locally present, doing business in more than 30 different languages and providing technical and application expertise as needed everywhere in the world. And the investments that we've made is not just limited to manufacturing footprint in sales force heads. Our spend and technology has grown by more than 50% in the last 4 years. This will continue to grow and these investments have been extremely impactful, resulting in more than 150 new product launches annually, many of which you see displayed again on the right side of the room.

These are not just tweaks to product lines. They are new products such as LED lighting for classified areas where, as Mark mentioned earlier, we get huge support from the Technology Center that we have in LED at Cooper Lighting, actively cooled enclosures to drive tremendous efficiencies and more. So like my counterparts, we have never been better positioned from a product standpoint, and combining this with our operational and commercial excellence, puts us in a leadership position to support our customer base.

So we talked about our product offering, we covered our global footprint, we covered our ongoing technology investments and the quality of the sales teams. This slide now illustrates just how well we put these attributes together and become entrenched in support of our end customers. In an oil and gas vertical, a large percentage of our business is project-focused, projects are very important. This simple project time line shown here displays the breadth and frequency of touch points that we can have for any specific project. So if you're a single-line player, you may get 1 or 2 touch points. If you have the breadth of product line that we have across Cooper, you get multiple touch points. So we're working projects very early, with communications and instrumentation. We continue to participate in and win specification on multiple parts of the electrical requirements over the life of the projects. And these projects, they are extremely complex, long-life-cycle, billion-dollar projects, and it's a level of contact and project participation which has us positioned as the electrical leader with our customer base. So looking at the right side of the room again, this is a snapshot of the product line that we can offer. And when you compare that to a single-line offering, it puts us in a very strong position.

So looking at it another perhaps simpler way, first off, we earned the specification with the end-user. We've done that for more than 100 years. We also provide product expertise and solutions with the global EPCs and then we partner with the premium distributors around the globe to deliver a package of our brands, combined with our global manufacturing, distribution and selling network that drives efficiency for our customers and an installed base for Cooper. And all of these customer partners, end users, EPCs, distributors and contractors, benefit from our global network of training centers. Again, Kirk referred to this earlier in the presentation. Wherever our customers are concentrated, we have put in state-of-the-art training facilities that support them as they pursue safe and effective engineered solutions. And we can train successfully regardless of the specification required for the project or the language needed to be trained in. So it's just another way for us to enhance our value and improve our rate of project participation.

And the project participation is very impressive. If you look at just the 7 projects listed here, first of all, the projects are owned by huge end users and EPCs. Number two, they're global in nature. They're positioned across multiple continents. And number three, they are perfectly aligned with the Cooper structure. And I should also point out that these projects are not exceptional. These projects collectively have yielded more than $50 million in revenue across just 3 of our divisions and they are the 3 that we discussed today. And again, these are only 7 projects out of literally hundreds and hundreds that we participate in annually. So this is the benefit of the investment we've made over the last decade and, quite frankly, this is the type of score card that we use to measure our progress. And best of all, there's a huge amount of opportunity to penetrate other verticals where we are not as entrenched as we are today in oil and gas.

Some of these verticals are shown here. Recall we have an excellent core competency based listed on the left side of the page, competencies that are acknowledged as industry best and when we match these competencies with the market penetration model that we've executed on for oil and gas. We should expect impressive growth rates in these segments as well. So a huge opportunity for us to continue growing in 2012 and beyond.

So in summary, in our group of Cooper Crouse-Hinds, Cooper B-Line and in Cooper Safety, we believe we have the premium package in the electrical industry. We are the unquestioned leader from a technology, quality and reliability standpoint. The portfolio of business units and products and our global infrastructure allow us to be the partner of choice for our customer base everywhere in the world. And with plenty of room to grow, we should expect great performance in this business segment in 2012 and beyond.

Well, thank you very much. And with that, I will turn it over to Dave Barta, our CFO.

David A. Barta

Thanks, Grant, and good morning. I'm going to spend a few more minutes talking about 2011 and then turn my attention to 2012 and our outlook. I think 2011, as Kirk described, was somewhat of a mixed year marked by a significant end market volatility, and that's certainly challenged visibility. Overall we experienced solid industrial end markets with notable strength as Grant pointed out in certain vertical markets like oil and gas, and for that matter, energy markets as a whole.

Our utility business maintained a solid pace with strength noted in alternative energy. Reliability investments, that was somewhat offset by continued weak commercial and residential new construction. And while the commercial construction market seemed to continue to bounce along the bottom, as Mark described, the adoption of energy-efficient products did positively impact the business, and the businesses that touched that end market and allowed us to outperform those markets significantly. The U.S. market seemed to pickup steam late in the year while Europe suffered from macro issues all year long, although our European business actually grew last year, in fact, during the fourth quarter, almost 2% in the downmarket. The developing markets were a bright spot for us for the full year, but slowed as we described in our fourth quarter call late in the year.

As Kirk described, our sales increased in total 13.8%, with core growth of about 10%, making 2011 the strongest core growth year in the last 10. Acquisitions added 2.8% and FX was a positive 1.1%. The sales for the ESS group increased 16.3% with a core growth at 11.8% and acquisitions adding 290 basis points to the growth rate. Sales for the EPG group were up 10.9% as the early cycle and MRO businesses continue to perform well as did the lighting business, as Mark had described. Core sales growth for this segment was 7.7% and acquisitions added 270 basis points.

From an operating income standpoint, operating income increased 12.3%. However, the operating margin decreased slightly from 15.9% to 15.7% and I'll talk more about that in detail in the next slide. The operating margin for the ESS group was flat at 16.9%, while the operating margin for the EPG group decreased 60 basis points to 14.2%.

We'll build [ph] a busy chart, but the chart summarizes the margin walk by segment and in total from 2010 to 2011. This is a topic we covered at each and every quarterly call. The summary is, the decrease in margin is the result of primarily 2 factors, the first of the impact of growth initiatives, both organic and via acquisition. These were controlled and conscious moves to invest in our business at a time where business conditions permitted such investments. The impact of acquisitions, strategic growth initiatives and restructuring negatively impacted our overall operating margin by about 90 points.

The second issue is one that we're not proud of, and Kirk alluded to this, and we've then taken significant steps to address this. He referred to line 3, which is the productivity price economics line, but we're not pleased with these results. Our pricing management and net productivity should've been more impactful and more positive to our overall margins and we're going to talk about, in the outlook section, the steps we've taken to make sure that's true going forward. However, we all look at price versus material and productivity separately. I think it's important to look at this topic, obviously, as one that's got a lot of attention in our business at the end of 2010 and certainly throughout 2011.

This chart summarizes our material versus price history, which you can see until 2010, this was not an issue. Rapid inflation, competitive dynamics, and to a degree, internal execution issues, proved to be an issue in the fourth quarter of 2010 and this bled over into early 2011. The positive is we did recover in the second half with price inflation ending flat for the year.

As we move forward, this will continue to be a challenging topic, especially as we do expect material inflation to, again, be part of our lives going forward. We're much more confident of our ability to avoid the self-imposed execution issues that we saw late 2010 and early 2011.

A second area of disappointment as I mentioned was in productivity. While we achieved decent gross productivity results, those efforts were offset by significant labor and other inflation issues in certain geographies, and, unfortunately, we are also impacted by too many internal execution issues, some of which we described on our quarterly calls around transfer of work between facilities. And I'll address this topic in further detail on the outlook section.

So despite what I would describe as somewhat of a mixed year, we're certainly proud of the record EPS performance for the company, especially when you consider we achieved record EPS in the year, but sales that are still about $350 million below the prior peak's EPS year. On the $355 million lower sales as compared to 2008, we're approximately $50 million lower in operating profit, which we more than made up for in tax rate and lower share count and better performance from the tools business. We're obviously excited about bridging that $350 million especially when the commercial and residential markets start to grow, and the fact is, we should more than make up that $50 million of lost operating profit based on the leverage we'll get on those incremental sales.

So despite the margin decline in 2011, there was still historically strong margin performance, certainly top 5 performance in the last 10 years and certainly adding back some of the investments from the self-imposed issues in SGI investments, a top 3 type performance. So we do remain confident in our ability to continue to progress to or beyond the prior peak margins while still maintaining a balanced view of a [ph] round growth. We're also pleased, as Kirk mentioned, of the cash conversion. Certainly, for the company, it was great to once again achieve 100%-plus cash conversion, and that was in a year we had a significant working capital requirements due to the growth and slightly higher CapEx. This is an extremely important metric as I think you know for our company. We plan, we monitor and we reward based in part on cash, and this is really the fuel for the capital deployment model that Kirk covered.

As we look at 2011, as I mentioned 11th consecutive year where free cash flow exceeded net. We look across our traditional peer group, there's only 2 other companies that have achieved this kind of record. So we're glad to be in pretty good company with those peers but certainly look forward to 2012 where we began to set our plan around 100% or better cash conversion.

From a debt standpoint, we remain, as Kirk mentioned, in terrific shape. At year end, we had just under $700 million in cash and about $750 million of net debt. As well, we have no significant debt maturities in any one period, although we do have a $325 million tranche coming due late this year, I would say we have a great flexibility as to how that is addressed, so no concerns there at all.

From a net debt to total cap standpoint, we ended at 17.5%, up slightly from last year, but still in great shape. We think we're in fantastic shape to utilize our multi-lever capital deployment model for the benefit of our shareholders.

Kirk went over this, but just to cover some of the high points again, in 2011, we utilized all of those levers. Within the year, we deployed $125 million to capital expenditures, made the 7 acquisitions that were referenced for approximately $300 million. We funded the asbestos trust and removed that particular liability from our balance sheet. Additionally, we returned cash to shareholders through the dividend which was raised again in our last board meeting and we repurchased 8 million shares of our stock. We accomplished all of this while still remaining in great shape with great flexibility as we move into this year.

On the share repurchase, we've always maintained and will in the future a policy of eliminating the creep that arises from employee benefit programs. In addition, we have entered the market to repurchase shares opportunistically and certainly like to maintain that flexibility and have that as an option at all times. And to that point, we have approximately 13.6 million shares existing under our discretionary buyback authorization.

From a return on capital standpoint, another positive step coming off the lows of 2009, our focus on profitable growth, working capital management, CapEx control and reducing fixed structure in our business and the discipline that Kirk mentioned around acquisitions will continue to allow us to move our performance higher as measured by ROIC. So we're very committed to maintaining those kinds of disciplines, and again, we'll continue to take this line backup to our peak, if not above peak levels.

So just a quick summary for 2011, we're certainly pleased to report a record EPS year, driven in part by the strong core growth, and I'd point out that results are very consistent with the outlook that we gave you a year ago. I think Kirk's opening chart showed that. We tend to try to give you the closer to the pin type estimate and then make sure we deliver on that. As well, the cash performance for 11th consecutive year with free cash flow on conversion rate of 100% are positive. And this allowed us to continue to deploy the capital for a long-term benefit of our shareholders. So we enter 2012 well positioned to capitalize on the significant opportunities the guys have talked about this morning.

So now we'll turn to 2012 and our outlook. First, we'll begin with a review of our overall end market exposure. You saw the individual businesses and their end market exposure. This pulls it all altogether. We believe we're very balanced with respect to our end markets at this point. This chart shows the transition over the last 8 years as we've moved more to the industrial and utility and somewhat away from residential and commercial. Some of the moves was through conscious efforts around acquisitions and, certainly, some of our internal organic efforts, while certainly a portion of that's due to the fact that the resi and commercial markets are depressed. So we remain well positioned to capitalize on the ongoing strong industrial and utility markets. I think it's also encouraging for us to think, at the same time, we're well positioned as the residential/commercial markets turnaround also to enjoy the market exposure we have there.

To break these down in a little bit more detail. Industrial sales were approximately 35% of our overall revenues in 2011, with 49% of that outside the U.S. and we're expecting this year to see our industrial phasing businesses to grow in the range of 7% to 9%. The U.S. industrial market remains solid with macro indicators providing support for continued growth in the U.S. industrial. At the same time, we expect our OUS Industrial business to reflect strong growth, albeit, likely at levels slightly below what we've seen in the past with slightly lower growth in some of the emerging markets. The data for many of the verticals, like oil and gas, certainly backs what we think is a pretty strong view of the worldwide and global industrial markets.

From a commercial market standpoint, that was approximately 26% of our sales in 2011, and we expect growth in commercial this year to be 1% to 4%. We do expect it to vary quite a bit by geography. We do believe that the U.S. commercial markets are bouncing off the bottom, but we remain realistic that a true recovery will be very, very slow. As I looked at my notes from last year, again, I was reminded that we were reviewed as being much too conservative, I think after this outlook meeting, we've got 100 calls from people saying you're too conservative. Commercial's coming back quickly and unfortunately, I guess, we nailed that one. And so again, we still see this is slow evolution off the bottom. We expect the energy-efficient and LED adoption to be continued nice offsets due to lack of new construction. However, the bottom line is we do not expect to see significant recovery in this market. We're likely see continued declines in some sub-markets like in Europe and those where government-related investments.

With regard to utility, we are forecasting utility market which is about 27% of our sales to increase 5% to 8% this year. Based on the factors of that Ivo outlined, this market needs to grow faster globally to accommodate the growth in the newest [ph] upgrades. We're also hopeful that the increase in demand for power in the U.S. will restore the emphasis on reliability, bolstering demand for not only our traditional hardware but our EAS products as well. They are improving our presence in markets outside of the U.S. and we expect those markets to supplement our U.S. growth nicely.

And with respect to residential markets, we do expect residential markets to improve this year, albeit, it off a very depressed levels. This market, which represents about 7% of our sales, we expect it to grow 3% to 6% for us this year. Many of the macro indicators have turned positive, along with the continuation of very attractive mortgage rates. As well, some of the projections demonstrate the potential for actual housing unit deficit to be developing, which continues to bolster the outlook for residential for the next several years. We have a terrific portfolio of products sold in the residential and retail markets including the #1 residential lighting fixture, our Halo brand downlight.

So our summary for the end markets, continued solid industrial and utility markets with a return to growth off a low base in residential. Commercial markets will remain somewhat anemic with selected pockets of stronger growth, offset by certain pockets, as I mentioned, of likely greater weakness such as Europe and government-supported dependent [ph] spending. We expect continued growth in the developing markets at likely reduced levels and tougher growth prospects with some of the mature markets largely as a result of the impact of Europe's challenges.

Turning a little bit to our balance sheet and our expectations, with respect to balance sheet management, we are budgeting and continue to progress in working capital metrics. Inventory turn increases get tougher as we move from one of the brute force approach to more deployment of tools such as [indiscernible], to help us change the way we really run our businesses, but we do think we still have opportunities. Our ever increasing international footprint puts more pressure on DSO. We're planning improvements in this metric as a result of improved tools and more rigor around terms and compliance. DPO chart is not on here but we do see DPO as a significant opportunity and we're taking many actions and many steps to improve that metric and make that a nice source of cash going forward. 2012 will also be another year with significant capital expenditures. We've given guidance of $130 million to $150 million so on the low-end, higher than what we spent last year, and that's largely a result of the expended [ph] time and expenditures for the 3 plants that are under construction.

So the summary is, while we recognize the challenges to continue the cash conversion streak, we're targeting 100% cash conversion for 2012. We're focused on the objective. In fact, it's still part of our compensation mix that we offer a reward [ph] on achieving that objective. From the standpoint of operating leverage, we're also committed in improving the operating leverage going forward. We work for the year expect the leverage on the face of the financials to improve significantly. I don't think you're going to hear about issues of incremental investments affecting margin and execution issues. We think those are a thing of the past. Normally you'll hear about price versus material being a challenge to our leverage. There will still be some bleed through from acquisitions that will depress margins and we'll certainly be very clear on that at the end of the quarter. We do expect leverage results to be more consistent with our historical results going forward.

So when you talk about leverage and what are we doing different, there's certainly a lot of opportunities we think to improve our leverage profile and many of those will help us get back to that historic level. First, operational productivity. All of our businesses have a gross debt of at least 5%. Greater, in most cases, to account for breakage and those that are exposed to high inflation geographies, while this can leverage our ever every improving global footprint to counter inflation and FX issues in many cases. When you hear of productivity standpoint, I think that's significant opportunity to the company, a lot that we can do there yet. Just a huge opportunity and we're taking a lot of actions there and we include neutralizing the material inflation with price, the impact of our global sourcing team, I think it's just really starting to be felt. We're seeing significant opportunities. The guys spent a lot of time talking about how we're leveraging across Cooper vertical markets and so forth. A lot of opportunities here, as well as we leverage across Cooper, not only at the operating footprint but certainly in our material buy. And then certainly, last but not least, the materials area, VAVE efforts. There's been a lot of focus in the company on that in the past and I think it's picking up steam as we feel it's a tremendous opportunity to get smarter around with the types of materials we use and the types of production we use to get to the end product.

And then last base cost productivity, I think any incremental investments going forward, you've heard of a few this morning that are going to be self-funding. So we're not going to make an excuse on this around not achieving leverage. We have SG&A productivity efforts underway. So our guys' view of productivity starts with invoice sales, it ends with net income. Productivity can impact everything in between. So we have a lot of opportunities around productivity and we're also going to better leverage the fixed SG&A costs with the volume that will be coming.

The summary, more specific to 2012 outlook, we finished Q4 on a strong note, and that momentum has continued into 2012. But we're not changing our outlook for the first quarter. January results and February, March forecasts indicate our sales may well be at the high-end and likely above the high end of the range we provided. This is driven by the continuation of strong industrial markets that we saw at the end of Q4, strong growth in emerging markets, a pickup in the electronics business and continued growth in our European businesses. From an EPS perspective, we would again maintain the prior guidance, albeit with expected results to be at the upper end of the range we provided. This also includes an increase in a legacy environmental reserve from an issue arising in the 1950s, where we could record as much as $10 million this quarter. So higher sales will lead to above EPS range. EPS, however, will be booking an environmental reserve that will bring us back into that range.

We also maintained our previous outlook for the year. We prepare and present these estimates as I described as a closest to the pin exercise, including what we know and expect. While the first quarter might lead one to become a bit optimistic. I would caution -- actually, one of our peers recently said, the uncertainty around the global economy will continue to challenge visibility. And I think certainly that's something that concerns us. We're watchful, and day-to-day, we even see markets open and close. We saw it in the third quarter and many of our business with July just falling off the map and then fourth quarter, things got strong at the end. So either quarter-to-quarter or month-to-month, a lot of volatility. So we see our guidance as close to the pin view.

And as always, we'll narrow and adjust the range as we move forward, should that situation dictate that we do so. So to be clear, first quarter sales at or above the high end of the range and EPS at the higher end of the range, including an environmental issue that was not included in our original guidance. Probably important to note, too, we expect the tools equity earnings this year to be $68 million, so up slightly and anticipate a question that I've already gotten this morning, so I might as well address it. I think we've traditionally said that there's not a fixed time line for either Danaher or Cooper to contemplate any type of transition with regard to the JV. That was set up to be very flexible, but the focus was certainly on bringing those businesses together. And with that being said, we certainly reserve the right and do consider it important to make sure that we're considering all options and opportunities that might present themselves with respect to that business and with respect to our customers, our shareholders and our employees. We're very pleased, as Kirk mentioned, with how the partnership has worked out and the combined improvements that we were able to achieve and I think there's certainly much more to come.

So again, the summary for the estimate for the year sales growth of 5% to 7% based on solid industrial utility in the resi markets with commercial bouncing off the bottom. We expect nice growth in emerging markets with developed markets being more of a challenge largely due to Europe and the associated effects. From an EPS driver perspective, we expect price inflation to be neutral, while productivity and share count will be nice positives. The tax rate will be negative, largely offsetting the lower share count. And finally, we're in great shape with respect to our pension and expect no material P&L or cash impacts from our pension.

At the end -- and in the market macro summary, we expect positive markets for oil and gas, utility, general industrial and resi. However, we certainly couldn't leave today without highlighting some of the other factors that somewhat temper that excitement. There are still macro issues that we're facing that can't be ignored, the slow rebound in commercial, the European mess, slow emerging market growth, political instability in the Middle East, the U.S. deficit and political challenges and, last but not least, the choppiness and volatility that I mentioned. It really concerns me, particularly with regard to how that impacts visibility.

For the summary, we see end markets that can be volatile, opening and closing in a matter of days, but overall, a reasonably stable and, in many cases, improving. We remain balanced in our pursuit of growth opportunities and margin expansion. We simply see opportunities on both fronts. And 2012 will be a year that we see improved margin leverage with an intense focus on the areas I discussed earlier, and our disciplined approach to cash and capital deployment will allow us to continue to be able to utilize our cash deployment model for the long-term benefit of our shareholders. So we're excited about our potential, and I appreciate the chance to talk to you about it today. So I'll turn it back to Kirk for closing comments.

Kirk S. Hachigian

Great, thanks, Dave. As we laid out last year, of course, we are not coming off our next 5-year priorities, which is the core 6% to 9% over the cycle. As we pointed out, we grew 11 and 10 on the high-end, and we've got a range of somewhere in the 5% to 6% on the core for 2012. Of course, we are going to continue to redeploy the cash in larger and midsized acquisitions. I think we laid out for you the criteria. The new positions of both Grant and Ivo and we are filling the corporate business development job that Tom O'Grady [indiscernible]. We will leverage the incrementals at 25%. I think Dave gave you good details there on price productivity, and the SGIs remained flat, and we'll execute a little better there and, of course, maintain our cash conversion.

As I mentioned earlier, it is really a terrific time to be in the global electrical industry. Despite the economic issues, the deficits, the political unrest, our core, we're still up 12% -- or 10% last year driven by energy efficiency, electricity demand and safety. We expect these trends to continue to be a tailwind to our business in 2012 and beyond. As Dave pointed out, the end markets are getting better. Utility spending, energy demand, emerging markets and retrofits are all positive, but there are some issues out there around Europe, the Middle East, China, government deficits, potential wars and political unrest and, again, the recovery of the nonconstruction. But net-net, we expect our markets to continue to improve into 2012. And I think the guys did a terrific job today walking you through the myriad of investments we've been making all along with the company. And customer loyalty, to better serve our global customer base, we've been adding more technology and innovation, and, of course, around globalization, to be able to better serve our customers anywhere in the world with local products, local certifications, local manufacturing, and local training.

When you add it all up, we have favorable global market trends, we have end markets that are improving and we have been investing both organically and through M&A in the core. The company's never been in better shape, and we certainly believe our best years are ahead. With that, we'll open it up to your questions, and I will put on my glasses so I can see you.

Question-and-Answer Session

Kirk S. Hachigian

Second row here on the edge.

Jeffrey T. Sprague - Vertical Research Partners Inc.

Two questions. Just on deals, could you actually give us a little color of what midsized or larger means? Obviously, you sold [ph] Laird. Would you consider that midsized or large? Are we going bigger than that?

Kirk S. Hachigian

No, no, no. That would be midsize. Somewhere in that sweet spot of between $300 million and I'd say $800 million as sort of that kind of nice range for us. It's hard for us to find properties that large that fit our criteria, so we don't really love chasing something where we only want a small percentage of the total. So you've seen us be comfortable with $100 million deal. So if we have to do $500 million deals to get there, we're comfortable with that, as well.

Jeffrey T. Sprague - Vertical Research Partners Inc.

That's kind of what I was wondering. The smaller deals, obviously, have been actually home runs. I guess the question is, can you find enough of those to move the needle? And maybe how does the deal pipeline look right now?

Kirk S. Hachigian

It looks really good. A lot of private equity, a lot of global businesses. And we just expanded our breadth of what we're looking for. So when you look at power systems, when you look at what Ivo has done on the traditional Bussmann, we've expanded the definition of the business. Grant in Mining and Marine. So there's a lot of adjacencies, and we keep talking about this $137 billion space. It's not hard for us to find properties. It's hard for us to find the right value on these prices. And you're right. If we find smaller things then we can pump them into our global network. It's pretty easy for us to get the benefits out of expanding the breadth there. So that's what's been successful for us.

Jeffrey T. Sprague - Vertical Research Partners Inc.

And just a separate, kind of, unrelated question. Mark made the comment about, kind of, the Luminaire and lamp companies beginning to consolidate. I was unclear if he was kind of suggesting that was a positive or a negative. I just wonder what your view of that kind of the strategic rationale. And is there any kind of channel conflict that's created as that begins to happen a little bit more?

Kirk S. Hachigian

Well, it's an interesting topic, right? I mean, you saw Philips go after Genlyte some years back. GE hasn't done much in the space, but Siemens announced a spin out or the separation of Osram. And then you saw Cree go from the semiconductor to the fixture space. So it will be interesting to see what transpires. I think the source, traditional source guys, GE, Osram and Philips, have figured out that the value creation here is going to be on the package and on the Luminaire and on the Controls package. So the nice news is, that we are ahead of them. The nice news is that we are agnostic between the different sources of chips themselves. And so we think we are in an enviable position with the relationships with our distribution and the agents and all that we can bring to the market. So I wouldn't say we're concerned about it, but we certainly keep an eye on it. I mean, Philips has arguably been overly successful with Genlyte in that process either. So I think it's still, "Can you manage the details and can you buy the right technologies and work your way through the distribution and the agents?"

Why don't we just go over to Cliff [ph] right there.

Unknown Analyst

Cliff Branson [ph]. I'm always struck -- of the companies that I like, and yours is one of them, is the small amount of talk about -- lots of talk about retrofits, but not lots of talk about service, not lots of talk about servicing other people's equipment, retrofitting other people's equipment. Now can you talk about the ability of your company and your product lines to serve those kinds of functions in the aftermarket?

Kirk S. Hachigian

It's different. It's a good question. On the Power Systems side, there's some of that. But mostly, it's MRO and replacement of consumable products. So on the few fuse side, on the Crouse side, on the lighting side, when the new tenant goes into a commercial office building, that's what we refer to as retrofit. But a significant portion of our business, Cliff, is what we call MRO. It's a replacement cycle. It's not necessarily a service cycle. But we're not selling generators. We're not selling HVAC, rooftop HVAC where you have a service contract or an elevator where you a service and a maintenance agreement associated with it. It's just not the nature of our beast.

Unknown Analyst

The other thing is can you expand maybe, Dave. It would seem to be, particularly, as you have, in the last 5 or 6 years, tried to think globally across your silos, your previous silos, the opportunities for supply chain opportunity. You touched on it in your speech. Can you give us a little more color on that?

David A. Barta

The guys did a nice touching on the One Cooper kind of approach when it comes to addressing the market and accessing some of the verticals. And again, I didn't spend a lot of time on it. We talked a little a bit before the meeting started. We have just that kind of opportunity as well kind of behind the scene. So as we think about our business, number one, in terms of their core competencies around manufacturing, we have certain businesses that certainly have what, I think, you would describe as certain competencies, how we leverage that across. Because you start seeing there's a lot of things that start lending themselves from one business well into another. LED lighting. It wouldn't make sense for Crouse-Hinds to develop what Mark has, for example, down in Peachtree City. So certain opportunities, and we're taking a lot more time to look at that. And actually I think that's a real nice opportunity for us to improve access to market, to improve our cost base, to improve our quality. And then it also then transcends into the material side of things in terms of global sourcing. We took quite a number of years and quite a few dollars to put SAP across the company. We now have visibility into the material buy, the corporate sourcing function that's working hand-in-hand with the divisions. And they're looking at what we can do across Cooper. For example, purchase service that they pulled together all the buy in the U.S. and knocked $2 million out of it in January. So opportunities like that certainly exist to improve our cost base, improve our utilization of manufacturing assets. And also on the distribution side, when you look at the places our divisions are, some are more well represented in some geographies versus others. So there's opportunities there to leverage that. And I think you're exactly right. There's certainly a change, and hopefully you picked up on it. This One Cooper approach to things that started with our phasing to electrical distribution is now expanding to vertical markets, and certainly with Grant and Ivo in their new roles, we expect to continue to take that momentum and make this a company that can leverage the package across One Cooper.

Unknown Analyst

Two questions, Kirk. First one. And it's not so much about the next 6 months, it's about the price cost. I mean we have [indiscernible] 15%, 20%. So you get some benefit there, some operational improvements you've identified. But over time, we're seeing globally structurally, everybody what I would call big power, big generation, big transmission, are just beating each other up on price. And how do you, aside from Vitality Index, protect yourself, protect pricing and think about other industry players? And the second part is, oil and gas, 2 different things. There's some movement from gas to oil right now. Talk about both challenges and benefits to you in the near term in terms of the activity shift.

Kirk S. Hachigian

Yes, I'm not sure the pricing environment is any different than we've experienced over the 10% or 15%, 20% last year. And so the global projects have always been competitive. As Grant pointed out, having a broader array of products and services that we can offer, one of the investments we made in customer loyalty was this global sales network calling specific on Korean, Chinese, European and the U.S. EPCs to get specified in. Grant talked about the instrumentation part of his business' earlier cycle and specifications so we can find the projects earlier and get in on the prints earlier. So that's all typical types of stuff that we've always done. We try to stay out of the footprint of the big elephants, so the GEs and the Siemens and those guys, big generation projects. We're generally a smaller dollar value, but huge importance in safety and protection. So we can still command the premiums that we do in a lot of those applications. And global certification, I think, Grant, was the last piece. If you don't have the certifications, then you're not able to provide the local support around the world, you're not going to win those jobs. On the difference between the oil and gas, we prefer the oil side of it because there's the refinery piece of it. But the gas is equally as important to us. We've been building those relationships with the drillers, again calling more on those end-users, so the NOVs and the Baker Hugheses and the Schlumbergers, to get again more spec in there working with our distribution partners around the world. They're booming. They're booming in the Middle East, onshore, offshore. So that's equally as expensive. But you don't refine like you do on oil. So oil's a little bit more attractive to us from a longer investment perspective.

Julian, why don't we -- go ahead, Julian will go first. Then we'll work back to Dean.

Julian Mitchell - Crédit Suisse AG, Research Division

Yes, I guess my first question was on -- you talked a bit about certain verticals like oil and gas where you're packaging everything together. Some of your larger peers like Schneider, obviously, have a very distinct kind of solutions, which is horizontal above products. How are you guys thinking about bundling your stuff, maybe, into solutions? Obviously the history is a product company. It sounds like in certain verticals, you are looking at solutions as well. But how do you think about it across all the businesses?

Kirk S. Hachigian

Well, that's the goal, right? I mean, the larger you can get, and that's how we use the M&A to roll up a space and continue to bundle up those products and services. And so those relationships with the EPCs are important, and those global relationships are more important. But Mining, Oil and Gas, Marine, those are the areas that we're focused on. And I think Rockwell does a good job. I think Schneider does a good job. There's a number of companies that do, do that. When you go down to Brazil, when you go to these different markets around the world, you've got to be able to call not only on the end users, the Petrobras, but you've got to be able to work with the EPC, you have to have local certification and you have to have local production and sales support. So that is the direction we are going. I think you're spot on.

Julian Mitchell - Crédit Suisse AG, Research Division

And then just a quick follow-up. In your power business, you talked about a new plant in Brazil opening up. What are your ambitions around transformers selling into non-U.S. markets because that's extremely competitive?

Kirk S. Hachigian

We stay away from that. We -- I think Ivo made a nice argument about the switch gear and our position there and capacitor banks. Because we offer the whole array, we stay out of the more commoditized end of it. So we would not go to a place like that and build a transformer factory. We go down and build a switch gear capacitor, those types of [indiscernible] Regulators and things like that.

Go ahead, Deane.

Deane M. Dray - Citigroup Inc, Research Division

A couple of questions. One of the interesting points about the potential interest in Laird was that it would be passive electronics that basically filled a white space with Bussmann. So just talk about what that interest might be in terms of how you build out that market. And then secondly, related to Julian's question, regarding the power conversion market, I can't help but notice one of the displays on the -- all the AC to DC converters, and you've got someone in your peer group that has struggled in that power conversion market. And so just give us sense -- more of the data centers. Just give us a sense of how you stay out of the commodity side to that, and where is the sweet spot of the power conversion market for you.

Kirk S. Hachigian

Okay. I'll let Ivo take the second question. And your first question was around Laird, I can let Ivo handle that as well. But Laird, we have about $130 million electronics business within the Bussmann portfolio. What the Laird acquisition did is it just brought some adjacent product lines. And it was more global. And so what it did was it gave the sales force and our team a broader breadth of product offerings to take to the same customer base. So the Industrial Wireless, some consumer electronics and some other interesting markets for us. And so it wasn't an overlap of our product offering. It was in adjacency of a new series of products that we can bring to the same customer base. Why don't you take the question on the inverters and what you're seeing on that?

Ivo Jurek

So as to the second part, you're absolutely right. Our power conversion product, the DC to DC PoL, we are specifically focusing on the highbrow military, medical, high reliability applications. And so those applications continue to grow nicely. I mean, they are not as commoditized as some of the competitors that you have run across and those markets are very well positioned for our long-term growth. They have an ever-growing demand to electrify and certainly ever-growing demand to take some of the heavy-duty harsh applications, again, ranging from military to otherwise to a more efficient source of electrification. We're very well positioned in that marketplace.

Kirk S. Hachigian

Go ahead.

Unknown Analyst

Kirk, just a question on the 50% goal for outside U.S., how important is that to you?

Kirk S. Hachigian

Not. It's just math. I mean, if you take the emerging markets and you take what we -- 31 acquisitions, 20 of them in international by definition, faster growing and more investment in sales commercial resources, by definition, it's [indiscernible] that way, but there's nothing important about it. And then it's 48 or 52.

Unknown Analyst

Right. But if it takes a while, it's not -- you're not putting a time frame.

Kirk S. Hachigian

No. It's not important, but we do -- places like Kazakhstan and Algeria, we just keep putting in this incremental investment. And It takes 6 months, a year to get your payback on some of that, but we're going to keep going forward. When we stubbed our toe even in the third quarter on the leverage, we never sat there and contemplated pulling back the investment. That was not an area that we were going to go at. We're sitting with all that cash, and our best ROIC is on these organic investments, so it's just not a place that we're about to cut.

Unknown Analyst

Right. And then just a follow-up. Over the last year, you had some retirements, some people leave the company. How do you feel about the [indiscernible] of the company right now? Are there any holes that you need to fill from the outside?

Kirk S. Hachigian

Well, we struggled with Tom's role because we had -- it was the perfect role for Tom. It was sort of a make versus buy. We owned the innovation piece of it, and then he had the acquisition piece of it. So we've struggled with the personality or the characteristics of the guy we're looking for to fill that void. I would say on the operating side, Mike Stoessl at Power Systems was a retirement. We certainly knew that a year, 18 months in advance. I think the promotion of both Grant and Ivo is certainly going to help us on the globalization, the M&A, the innovation piece of it, help me on the day-to-day of running the company. Dave is more than up to speed after 2 years now. And then our job through the talent development initiative that we have, and we didn't talk much about it today, is to continue to bring up the internal candidates. So most all those positions were filled with internal candidates who've been with us for 3 to 5 years. So it's the nature of the process. It's a tough job to be a Division President at Cooper. We don't sort of tolerate much in the way of misses. But that's good. There's nothing wrong with that. I think it's an up or out kind of a system. We challenge our people, and they have to deliver. It's a tough environment.

Let's grab Scott in the front, and then we'll try to swing around [indiscernible]. Yes, Mr. Davis?

Unknown Analyst

Kirk, can you just give a little bit color on the quarter? And not to focus too near term, but it sounds like things are tracking...

Kirk S. Hachigian

You're like the big picture kind of long term -- that was all your right. [indiscernible] The quarter's good. We're trying to bring it down. So if you took out the 50-year-old sort of environmental thing, it was sort of -- the answer is a leverage there is looking better. We're not concerned or we're not convinced, I think is the right word, that Europe is out of the woods. China is slowing, no question. Brazil is having some pains. The U.S. is in trouble, but from a deficit perspective, a government perspective, they still don't recognize it. There's not much going on there. So it's odd. Third quarter looked like we're in stall speed. Fourth quarter looked really good. Retail was up 10%, but the International dropped off substantially. First quarter looks better. But I'll tell you, Scott, I've never seen it so volatile almost month-to-month, quarter-to-quarter. So it's a little harder because we still choose to give you guys a guidance and an outlook. It's just really hard to predict right now. But I'd say that the leverage and all the data points that we're seeing are positive.

Unknown Analyst

Are you seeing a substantial weather impact?

Kirk S. Hachigian

It's a good question. Somebody else asked that on the construction side. Are you seeing things a little bit better because it's been warmer and are able to start -- home starts and stuff like that? It's hard to tell. Mark, would you have any comment on that or, Grant, because your commercial products?

Mark Eubanks

Certainly in Outdoor and Roadway. There's enough clear opportunity in the winter months. The good weather [indiscernible]. Not too much detail.

Kirk S. Hachigian

Grant, are you seeing anything on commercial product?

Grant L. Gawronski

I support that. I think it's unremarkable in terms of an uptick on commercial products. [indiscernible]

David A. Barta

I would say a counter to that has been the utility business which we hate to love, ice storms and snow storms. But the state certainly has seen very little of that. So it’s probably -- actually the weather's actually been a little bit hurt on that side of it. But business is still performing well.

Unknown Analyst

Okay, moving more big picture, if you will. I think you make a pretty compelling case that you have full-scale businesses most places in the world. It's hard to tell though in Asia. I mean, it's a big area. When you think about it, $500 million, $600 million of revenues.

Kirk S. Hachigian

Across the whole region, about $500 million.

Unknown Analyst

Right, across the whole region. Do you feel like you truly have scale?

Kirk S. Hachigian


Unknown Analyst

And I guess the other, kind of, part of it is -- I'll ask the second part of it first, is that it's a little bit scary when you see somebody like an Emerson struggle with a business as large as their embedded computing. I mean how fast can things become commoditized in that region and local competitors come up the curve? Or are you guys just kind of slide under the radar screen?

Kirk S. Hachigian

We stay in very specific niches. We stay in markets that we know. Our margins today across all of these are accretive to our overall. The areas that we'll focus on and continue to focus on are the -- Grant's whole package and Ivo's whole package between Bussmann and Power Systems and the whole industrial oil and gas. It's the space we know. You still have a lot of international investment going on, so we can get specified either locally or in Korea. We're able to service that business. Grant's opening his next -- his new factory. In fact, we'll be out there next week. We leave on Friday. Tremendous opportunity on the electronics side and still more acquisitions to come in the region on the Power Systems side. So I think we stay in our markets and our niches, not trying to go over there in lighting or wiring devices as some of the more lower margin commodity side. So I think we can continue to navigate or stay below the radar screen and still grow a nice presence. We are not a size and scale in Asia yet. Southeast Asia, we're opening up a new facility in the Philippines, and we'll be in Singapore this trip visiting customers as well. So I would say it's a significant area for us to go to. Three big areas for us still are that Asia, the Middle East and then, of course, in South America. We still have a long way to go in South America.

Okay. Why don't we pick there, and then we'll go in the back and grab Terry.

Unknown Analyst

I don't want to [indiscernible] but did anything stand out outside the plan, be it business or utility business, construction or by region? Anything stand out as outside the plan?

David A. Barta

Really pretty widespread which I guess is the good news. The Electronics business we talked about that took really a strong dip in the fourth quarter, that came back nicely, the Crouse-Hinds business. Everything Grant went over today is up nicely, and then I would say slightly exceeded expectations. But our 7 businesses, as we measure our company, not a single one is below plan. So it's really kind of a widespread top line positive. And as Kirk mentioned, the leverage and the performance in terms of dropping off the bottom line certainly at the high-end of our expectations.

Kirk S. Hachigian

Even Europe hung in there. I'd say even in the early 6 weeks, Europe is, sort of, keeping a modest growth rate in front of them, so it's good.

Unknown Analyst

And then apex $20 million for incoming 4Q, down to $14 million of plant in 1Q. Why the swing? Because there isn't that much seasonality in that business. I mean there are some but not [indiscernible]. Why is the big -- why are we seeing a big drop there in 1Q?

Grant L. Gawronski

Their plan really did reflect kind of a traditional seasonality. I think it's slightly below last year, but not much so in line. And their view is a more modest top line given things that were going on. So we'll see. Their business performed okay in January, but still, expecting that type of result in the first quarter. There is a lot of retail promotion on that business for Christmas season. There is a holiday sort of promotional piece of that on the retail side.

Unknown Analyst

Just one quick one. You saw quite a bit of inflation in your Transformer business in '09. Where are we in our pricing recovery?

Kirk S. Hachigian

I think we're in reasonably good shape. I think we are at least at parity. It mean, it hasn't been an issue.

David A. Barta

Our Transformer business actually was not one of our problem children last year. So the Transformer, the parts of the business, the whole Transformer specifically. Again, Kirk mentioned earlier because of the fact we are on the distribution side, more of the attention, you hear about more the pricing issues you hear about are on the big Transformers, the high KB stuff that's on the transmission side. So I would say, the business is -- their rigor around pricing is there and they had a positive or basically a neutral year last year for the year.

Unknown Analyst

Kirk, why don't you take a minute or 2 to talk about the impact on financials past and forward from the New Product Vitality improvements? So you had a lot of improvement. You're at 29%. I think last year you said the goal was 30% so you're kind of there. Where do we go from here? Do you think the financial -- the benefit of the financials both moving organic up and improving margins in the future versus where we've been over the last 3 to 5 years is similar, weaker?

Kirk S. Hachigian

I think the margins and all the new products are generically accretive to the average margin of the business. So in the Lighting business and Grant's business and Ivo's business, the Power Systems business, the margin is generally all accretive. The issue has been as we've ramped up the R&D spend, that's been a hit on the SG&A side. It's in actually I think in the cost of goods sold we put the R&D? So that's been a hit. Now what you'll get as we flatten that out, you're going to get a productivity play on that side of it, because you're going to continue to grow the revenue. Your margins are going to continue to be accretive, and you're not going to spend at the same rate you've been at in the SG&A and the R&D. So I'd say the Vitality Index, we are not pushing it to a next plateau. We think that at the rate we are now, 29%, 30% is a very healthy rate for placing. There are some business that are still painfully low 7%, 8% or 9% kind of vitality, so we're pushing on those. But I think as a company, we're pretty pleased with the load and the spend, percent of sales and the amount of R&D that we pump back into the organization. So I think from that perspective, we feel very good about it.

I think the same thing on the International spend. We don't have a number of positions that are sitting there open like we did at the beginning of last year to go put 10 people in South America, 10 people in North Africa, 10 people in Asia. So the incremental spend there is, well, will sort of taper off. And so I think there's a huge opportunity for Grant to feather together the selling organizations globally and self-fund any incremental investments we want to make on sales or marketing or even on the R&D side. I think we're pretty good there. So I think that's where you're going to begin to see this leverage. I think the first quarter leveraging up is a pretty good example of what we can kind of get back to very quickly.

Unknown Analyst

So do we -- would you expect that new product vitality to flatten out around this 30% range?

Kirk S. Hachigian

It'll flatten out. I think as Mark in the Lighting and the LED side, if it sort of go through and you get the maturity on some of the stuff, it's going to start to taper off. There's ability for Crouse to continue to increase and some of the other businesses to continue to increase their vitality. But, yes, I would say flatten off and sort of stay in this range would be very healthy.

Unknown Analyst

Okay. And then I may have misinterpreted the chart, but I think it was Slide 58 or something that looked at the growth rates long-term in the Lighting business for the whole industry. I think the industry was growing 6% through '16 and then 3% -- expected to grow 3% after '16.

Kirk S. Hachigian

Is that what you have, Mark?

Mark Eubanks


Kirk S. Hachigian


Unknown Analyst

How do you think about from a strategic perspective, that kind of a deceleration if you believed it? And I think it implied only a 30% penetration on LED. Why would LED penetration stop at that point as well?

Kirk S. Hachigian

Do you want to take it, Mark?

Mark Eubanks

Actually, LED penetration rates go beyond that 30% That's about [indiscernible] that one year. That's about 24 bps [indiscernible] but we'll continue [indiscernible]. The global markets is the same. There's no question about it 6%, a much bigger number. Some of that in the economies [indiscernible] being part of it. We are going to see more value creation and deliver value to the customers.

Unknown Analyst

We're obviously a long way away but pretty good size product portfolio, trying to be in this 5% to 9% range. Do you worry about a structural slowdown in big business like that this far out or...

Kirk S. Hachigian

No, no. I think this transformation in LED is I think the penetration on Controls, the energy efficiencies play, and I think there will be a comeback in natural construction and housing. So I feel pretty comfortable that you're going to get -- that's why to get to that 5%, 6%, 7% and the other side of it picks it up, we'll be well in the middle of the range that we've given you on the core.

Unknown Analyst

And then just lastly, on incrementals. I think the first quarter x the environmental piece which, Dave, I think you said was not contemplated in prior guidance. Just want to be clear on that.

David A. Barta

Correct, correct.

Unknown Analyst

So that implies -- I think it implies 25%-plus incrementals. And the guidance has got about 22%. Being conservative or is there something else out there that would slow down incrementals relative to Q1 run rates?

David A. Barta

No, I think your math is pretty close. I would expect again x environmental to see those incrementals more in the mid-20% range. So at this point, nothing to -- we're concerned about with regard to not achieving that type of leverage.

Kirk S. Hachigian

It's after 11. We will stay. Management will stay, and we'll be in the room for the next 30 to 45 minutes. Thank you very much.

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