Cooper Industries plc (CBE)

Q1 2011 Earnings Call

April 25, 2011 12:00 pm ET


Dan Swenson - VP of IR

David Barta - Chief Financial Officer and Senior Vice President

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


Noelle Dilts - Stifel, Nicolaus & Co., Inc.

Richard Kwas - Wells Fargo Securities, LLC

Scott Davis - Morgan Stanley

Jeffrey Sprague - Vertical Research Partners Inc.

Terry Darling - Goldman Sachs Group Inc.

Eli Lustgarten - Longbow Research LLC

Shannon O'Callaghan - Nomura Securities Co. Ltd.

Robert Cornell - Barclays Capital

Ajay Kejriwal - FBR Capital Markets & Co.

Jeffrey Sprague - Citigroup

Julian Mitchell

Brian Langenberg - Langenberg & Company, LLC

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Christopher Glynn - Oppenheimer & Co. Inc.

Deane Dray - Citigroup Inc



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Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Cooper Industries plc Earnings Conference Call. My name is Walter, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today's call, Mr. Dan Swenson, Vice President, Investor Relations. Please proceed, sir.

Dan Swenson

Thank you, and welcome to Cooper Industries' First Quarter 2011 Earnings Conference Call. With me today is Kirk Hachigian, Chairman and Chief Executive Officer; and Dave Barta, Senior Vice President and Chief Financial Officer. We have posted a presentation on our website that we'll refer to throughout this call. If you'd like to view this presentation, please go to the Investors section of our website at

As a reminder, comments made during this call may include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which are outside the control of the company, and therefore, actual results may differ materially from those anticipated by Cooper. A discussion of these factors may be found in the company's annual report on Form 10-K and other recent SEC filings.

In addition, comments made here may include non-GAAP financial measures. To the extent they have been anticipated, reconciliations of those measures to the most directly comparable GAAP measures are included in the press release and the web presentation.

Now let me turn the call over to Kirk.

Kirk Hachigian

Thanks, Dan. Good morning. We're very pleased to report today that our teams got off to a very strong start to begin 2011, reporting a strong combination of core growth, record earnings per share and ramping up our critical internal investments into our future. While there continues to be significant challenges in the global economy, domestic unemployment, European debt crisis, state and federal deficits, mounting global inflation, unrest in the Middle East and certainly, the earthquake in Japan, we still see global economic conditions on a slow but steady recovery.

If you turn to Page 2 of the web pages, for the first quarter in 2011, we reported revenue at $1.28 billion, up 18%, with the core up 16%. Energy & Safety Solutions was up 19%, with the core up 16%, and Electrical Products Group was up 17%, with the core up again 16%. Our earnings per share were $0.93, up 33% over last year, and adjusted for -- excluding these discrete tax items, $0.87 or up 24% versus the first quarter of last year, both exceeding our peak earnings per share of $0.81 reached in the first quarter of 2008. So again, a nice return to record EPS profitability.

Our total operating margin was 15.5%. Energy & Safety Solutions margins were 17.1%, and Electrical Products Group's operating margins were 14.8%. Our Tools equity earnings were $14.5 million or $0.09 a share, slightly ahead of our guidance last quarter, and our free cash flow was negative $26.5 million, of course, impacted by our revenue growth and continued investment in the core. If you remember in 2009, where our revenues were down 22%, we had free cash flow of $723 million or 14% of sales, and we had taken our working capital down 23%. So not surprising to see our core up 16%, increased investment in R&D, SG&A and CapEx up, not a surprise to see us go negative on the cash flow side.

If you turn to Page 3 to talk about revenue trends, again really nice coming out of the fourth quarter at 14%, delivering 16% core in the first. But again, up against some pretty easy comps of the first quarter last year. A real positive, though, is we're $83 million or roughly 6% of record revenue, which is the first quarter again of 2008, and sequentially from the fourth quarter to the first quarter, about flat and again, most of you know that our first quarter is usually our weakest quarter. So clearly, our investments in the core over the last several years are paying dividends, but of course, we're also being helped by a nice recovery in the end markets.

If you turn to Page 4, industrial and MRO remains strong. Our industrial production climbed 6% in the quarter. And in fact, the utilization increased to 77.4% but is still 3% below the 25-year average of 80.6%. And last week, you saw some really strong numbers on the oil services industry, the truck build industry, the hydraulics manufacturers and other industrials. Commercial markets continue to be resilient even at depressed levels. Vacancy rates are improving, quotation activity is way up, and we continue to see strong demand in energy efficiency and retrofit projects.

Our new LED products are driving record vitality index at our Lighting business. And again last week, some positive news from the HVAC, elevator and other commercial construction-related industries.

Utility markets continue to maintain momentum from the back half of 2010, with strength across all product lines and all geographies. We expect the strength to continue for most of 2011. And lastly, residential markets remain at depressed levels, with really no evidence of a near-term recovery. Recent estimates call for us returning to roughly 1 million starts, not to resume until probably 2013.

So in summary, despite continued weakness in residential and nonresidential construction, we continue to show exceptional core growth and are investing in new technologies in new markets that we think will sustain our momentum well into the future.

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