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Cooper Industries Ltd. (CBE)

Q4 2010 Earnings Call Transcript

January 26, 2011 12:00 pm ET

Executives

Mark Doheny – Director, IR

Kirk Hachigian – Chairman and CEO

Dave Barta – SVP and CFO

Analysts

Bob Cornell – Barclays Capital

Jeff Sprague – Vertical Research Partners

Daniel Garrod – Citi Investment Research

Christopher Glynn – Oppenheimer

Rich Kwas – Wells Fargo Security

Eli Lustgarten – Longbow Securities

Nigel Coe – Deutsche Bank

Terry Darling – Goldman Sachs

Shannon O’Callaghan – Nomura

Julian Mitchell – Credit Suisse

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 Cooper Industries PLC Earnings Conference call. My name is Shanell and I will be your operator for today. At this time, all lines are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today’s call, Mr. Mark Doheny, Director of Investor Relations. Please proceed.

Mark Doheny

Thank you, operator. Welcome to the Cooper Industries’ Fourth Quarter 2010 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 www.cooperindustries.com.

As a reminder, comments made during this call may include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which are outside the control of the company and therefore, actual results may differ materially from those anticipated by Cooper.

A discussion of these factors may be found in the company’s Annual Report on Form 10-K and other recent SEC filings. In addition, comments made here may include non-GAAP financial measures. To the extent that they’ve 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 Mark. Good morning. 2010 closed out on a very positive note for Cooper Industries. Our full year revenues were up 5.4% with earnings up over 30% to $3.20 a share. Our second half core growth however was a spectacular strong and we exited with great momentum as we headed into 2011. I have a page on that in a second.

We ended the year with 39% of our sales outside the U.S. and 24% vitality index which is the percent of our sales from products introduced in the last three years. Both of these records are for Cooper Industries. We delivered our 10th consecutive year where our free cash flow exceeded reoccurring income and we have the strongest balance sheet in recent memory with over a billion dollars of cash on hand.

We closed the Tools joint venture mid way through the year allowing us to focus a 100% on our electrical platforms and we continue to fully fund our core growth initiatives. We took up our dividend 8% last February, we purchased our stock at attractive prices, and maintained a well funded pension program.

Of course none of this would have been possible without the commitment and dedication of our 28,000 employees worldwide. 2009, 2010 were probably the most challenging economies in the last 50 years and yet our company has never been in better shape positioned for faster core growth, increased international penetration, and introducing more exciting new products than at any time in our history.

Now if you turn the page 2 of our handout, Dave and I will give you specific comments on the fourth quarter performance and provide you our outlook for 2011. Our total electrical revenues for fourth quarter were 14.2%. Our fourth quarter core was up 14.1%. Energy and safety solutions was up 15, with the electrical products group up 13, just terrific, terrific growth numbers, the best in our company’s history.

Earnings per share were $0.85, up 12% from the fourth quarter last year, again the full year 2010 came in at $3.20 up 30%. Our operating margins came in at 14.3% for the electrical group excluding Tools, down 20 basis points. Energy and Safety solutions operating margins at 16.8 were up 90 basis points from prior year, and Electrical Products group margins were at 13.8, down a 120 basis points.

Price, material inflation and several one-time unusual items impacted our fourth quarter margins obviously and Dave will provide you details on these margins shortly. The full year cash flow was $607 million, 13% of sales. As I mentioned our 10th consecutive year where our free cash flow has been greater than our reoccurring income and our sixth consecutive year where we’ve had a percent of sales of free cash flow greater than 10%.

Tools equity income for the quarter was $0.07 right on the top end of range, we had given you $0.05 to $0.07 and revenues and performance at the Tools group has been very strong, I’m very happy with the first six months performance in the new joint venture.

For the full year upon revenue is 30% on earnings per share, again free cash flow at 13%. If you turn to page 3, you can see the momentum that we built in the second half of the

year starting down negative six and then ending the third and fourth quarters up eight and up 14 and an exit rate of 14% again the best in our history and providing great momentum as we head into 2011.

If you turn to page 4, I’ll make specific comments now in marketing and conditions, the industrial MRO business remains very strong, industrial production continued to grow at a solid pace with capacity utilization in the U.S. climbing the 76%, a nice recovery from 65% we saw in 2009 but still off the 30 year average of 80.6%.We continue to see good strength in most of our international industrial markets.

Commercial construction, commercial markets continued to improve up very depressed levels with office vacancy rates beginning to improve, the ABI numbers over 50 now, and some segments of the market starting to turn. We continue to see strength in international and energy efficiency products and solutions.

Our utility markets continue to maintain the momentum that we discussed in the third quarter with strong demand in just about all produce lines across all geographies. As you can see starting in the third quarter and continuing into the fourth quarter the impact of an improving utility market on our overall poor growth rates.

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