Cooper Industries PLC. Earnings Call Nuggets: Leverage, EPG
Nicholas Heymann – William Blair: I was curious if you could spend a little bit more time investigating this incremental leverage of 32% I know that some of that was attributable to excluding the environmental charge. But there also were dilutions associated with acquisitions. I was curious how you see that basically improving as the year progresses as well as whether or not there were any unusual year-over-year elements with regards to price increases from the last year that weren’t sustainable this year?
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Kirk S. Hachigian – Chairman, President and CEO: What I would say look, if you go back over to the last seven, eight years, I think pretty consistently our performance has been to be able to get the kind of leverage north of 20%, 25% odd percent of the core. So our base model is material inflation with offsets on productivity and sourcing activities, but being able to offset that inflation through pricing with leading brands and specified technical products to the customer base. Our distribution is aligned with us on taking price increases when necessary to the marketplace. Then we have put together and assembled this core productivity program across the Company for many years, and we shoot for somewhere between 4% and 5% core productivity on labor et cetera to offset labor inflation and overhead inflation on utility costs and such. I’d say last year was unusual. We didn’t execute well on some things and they kind of caught us. We had intentionally stepped up some spending on R&D and global investments on the sales force. You combine that with a couple of businesses that didn’t pull price effectively and some bad transfers to some work in some factory lost productivity opportunities, it just didn’t print very well. So I think as you should come back to this quarter, I think it’s going to be more of a traditional kind of a performance for us. Now the SG&A and the R&D levels, we ought to be able get base cost productivity out of those as we grow revenue. I think the productivity programs across the board, everybody had a solid first quarter, not terrific but solid, and I think if you look at the material price economics, we did a terrific job in the first quarter netting that out and not having any pollution in the margin on that side. Dave, do you anything else to add?
David A. Barta – SVP and CFO: No I think as I mentioned in my comments, as we look forward, certainly some concerns around (material) inflation. Everyone knows on a market basis first quarter was pretty good for everybody to deal in the commodities and materials we do but as we look forward certainly pressures in freight a lot of that due to fuel costs, some of the steel producers have come out with the increases, we will see if those stock or not. We are seeing again some petroleum based materials plastics, resins and so forth. So that’s certainly something we are I would say somewhat cautious around. Certainly I think we are better positioned this year to anticipate that and react as we need to with pricing but again those are some things that as we look forward we were certainly concerned about. And then lastly I think good job by the teams in terms of price disciplines but if you start seeing some of these markets contract a bit oftentimes that’s where things get a little more competitive in terms of project and just base business in those tough markets.
Nicholas Heymann – William Blair: And as a follow-up question, I just was curious. You are generating cash. You have a very underleveraged balance sheet. How does your, acquisition opportunities look, you focused on smaller, I mean relatively accretive opportunities or buy back? How does it look to be able to make sure that you just don’t accumulate cash? You know that could be dilutive to your overall return on capital.
Kirk S. Hachigian – Chairman, President and CEO: Yes. So we think the size and scale, Nick, I mean that’s been a big theme of ours. This year if you look at our estimates on the revenue side we ought to get back up to record revenues on the electrical side. But we have spent the better part of six to nine months getting a very productive pipeline of deals, both of them have an international flavor to them and most of them are pretty lined up with the 12 growth platforms that we have talked about historically. Several of them are a little bit larger so that would be a positive for us to try to scale up a little bit quicker with some larger deals. And so I’d say it is better, a couple close to the finish line, but it’s tough, I mean sometimes you end up with an environmental issue, sometimes you end up with some different things that kind of bubble up the last minute. So we are focused on sort of the size and scale issue and levering up and that’s why we prefer to use our capital at this point.
Jeffrey Sprague – Vertical Research: I was wondering if you could shed a little more light on what’s going on in EPG on the price side, Dave? From your granular walk, it looks like as opposed to ESS’s total, toughest (indiscernible) than price there, I am sure volume is part of that equation, but if you could give us a little color on what you’re seeing there, the ability to get some pricing maybe in lighting, is that how they are trending, kind of a general (way of the land) in EPG, if you could?
David A. Barta – SVP and CFO: I would say, the good news is all of the business, not any outliers, all the businesses did a pretty good job of offsetting any material pressures they had. So, we don’t have any glaring issues. If you know, last year we had a couple of our businesses that – one in each segment that kind of let things get away from and actually two of them in the EPG segment. So I would say a much better job. The difficulty out there as you know that segment is certainly more exposed to commercial and residential. So, as Kirk mentioned, we certainly see some encouraging trends it’s obviously slow. The lighting business is still well off its peak level as all lighting businesses are in this environment. So the ability to really try to improve margins through pricing is just tough. You don’t have the volume push. You certainly have one good thing, we have great customers, but they are all very disciplined and they are seeing the tough end markets too, though tougher discussion. So that situation is till the volume comes back I would say probably this is not going to expand margins. I think our hope there is to continue to offset any inflationary pressures we have.
Kirk S. Hachigian – Chairman, President and CEO: Also Jeff when you think about those factories their utilization is way low versus what they can run through and so you just don’t get the absorption of the overhead and the productivity on the fixed cost side until we get those volumes up. So the dilemma is you want to take out capacity at this point in the cycle, and the answer is not, we want to be able to serve the market when it comes back. So we have a lot of stranded capacity in the lighting business, wiring device business that we think is going to come back and we are going to be able to be patient and waiting on it.
Jeffrey Sprague – Vertical Research: Then speaking of capacity, so the $27 million investment for Bussmann is that industrial Bussmann, electronic Bussmann can you give us some color on what’s going on there?
Kirk S. Hachigian – Chairman, President and CEO: It’s a bunch of new products on the electronic side, consumer electronic that type of space, they’ve been working on, but this is again where we put the R&D in, and we expect that R&D to produce for us a pipeline of new products with new customers, and that’s exactly what they’ve done and so it’s different kinds of products that need different kinds of equipment, we’ve got some blanket orders on some of these source. So we feel pretty confident on being able to move the volume once we get the production ramped up. So it’s just a huge opportunity for us and we’d be pulls if not funded so it’s exactly what we want them to do and they have done a nice job with it.
Jeffrey Sprague – Vertical Research: So we should think consumer electronics handsets that sort of thing?
Kirk S. Hachigian – Chairman, President and CEO: That’s sort of stuff, it’s all sort of base production its different kind of customers across that space, I don’t want to talk too much about it because when it gets out there for a little while we’ll talk more about it but its products around that core that we’ve been doing which is the over voltage protection and we had about $130 million, $140 million, $150 million of business, there. It was our interest in layered a year ago in that same space. And so what we’ve done is just poured more money into the core new product opportunities for us.
Jeffrey Sprague – Vertical Research: Then just finally, could you elaborate a little bit on what you are seeing in AMI demand response? You said it was light versus the tough comp, but in general, what’s the activity level like for that space looking into the rest of the year?
Kirk S. Hachigian – Chairman, President and CEO: It’s a tale of two worlds. It’s almost like a dumb bell, I mean on one half, you have a lot of slowness Jeff on the AMI side, and in particular where we are is on the power line carrier technology, that really slowed down and you’ve seen a lot of the peers in that space report some pretty tough numbers. Then on the distribution automation on the substation side, the Self Healing Grid side, booming, up magnitudes of 4x, 5x year-over-year. The problem is our demand response in our AMI business is just larger and so that drops little bit. The other one jumps a bunch. It’s just the math doesn’t work out. So, we are slightly down year-over-year, but a lot of good activity going on and so we are really happy about this space.