禮恩派 (LEG) 2002 Q1 法說會逐字稿

Good morning, ladies and Gentleman, and thank you for standing by. Welcome to the First Quarter 2002 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the formal presentation, instructions will be given for the question and answer session. If any one needs assistance at any time during the conference, please press the * followed by the 0 for an operator. As a remainder, this conference is being recorded Thursday, April 18, 2002. I would now like to turn the conference over to Mr. David DeSonier. Please go ahead, sir.

Good morning and thank you for taking part in Leggett & Platt’s First-Quarter Conference Call. I am David DeSonier, the Vice President of Investor Relations. Joining me today are Felix Wright, Leggett’s Chief Executive Officer, Dave Haffner, our Chief Operating Officer, Carl Glassman, Senior Vice President of Leggett and President of our Residential Furnishing Segment and Susan McCoy, who is our new Director of Investor Relations.

Susan will work for me and she will share responsibility for all aspects of our IR activities. She brings a wealth of skills to this position including significant knowledge of Leggett’s Operations, a Bachelors Degree in Accounting, CPA certification and 15 years of experience with Leggett in a variety of roles, including external financial reporting and M&A due diligence. The agenda for today’s call is as follows: Felix will summarize overall results for the quarter, Dave Haffner will then give a more detailed review of what is occurring in the operating segments and following that Felix will review the outlook for 2002 in the second-quarter.

Finally the group will be available to try to answer any questions you might have. I would like to remind you that this call is being recorded for Leggett & Platt and is copyrighted material. This call may not be recorded or rebroadcast without our express permission. CCBN is web-casting this call and a replay is available from the IR portion of Leggett’s website. In addition, I need to remind you that remarks made today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements.

Actual results or events may differ materially from such forward-looking statements due to a number of risks and uncertainties and the company undertakes no obligation to update or revise these forward-looking statements. For a summary of these risks factors and additional information concerning forward-looking statements, please refer to yesterday’s press release and the section in our 2001 10K, entitled forward-looking statements.

Dave, thank you so much and thank you for joining us again this morning for our conference call. Before I get started, I want to make a couple of statements about -- it was in our annual report that a number you have probably already got, but the transitions that are taking place in management and that Dave Haffner will become our President and Chief Operating Officer in May at our stockholders meeting and Carl Glassman will become our Executive Vice President, will still continue to be President of our residential furnishings business and Harry Cornell will become our Chairman Emeritus. And I will become Chairman and Chief Executive officer. So Carl and Dave will be permanent members of our quarterly conference calls as we go forward, but we still from time-to-time will have -- certain segment management will joint us in those calls.

Now if we could turn to the first-quarter, we would like to note the results were at the upper end of the range of guidance we issued on January 30th. Our residential furnishing segment and the automotive part of specialized product segment are showing signs of improvement, reflecting better conditions in the consumer side of the economy. On the other hand, the industrial and capital goods sectors of the economy which encompass our commercial furnishing segments and parts of our aluminum products and specialized product segments are still undergoing some continued market weakness. Some of the highlights for the quarter include the following: Quarterly earnings grew significantly with EPS up 22 percent compared to last year’s first quarter. Despite lower sales both EBITDA margin and net margin were up by 100 basis points from a year ago. We achieved our record first-quarter cash flow from operations of 108 million. At quarters end, our working capital excluding cash was lower by 155 million or 17 percent compared to the first-quarter of 2001. At 18.9 percent our first-quarter annualized sales, we achieved our 19 percent target for working capital as a percent of sales. We continue to make progress on our tactical plan and it’s effect continues to show up in our earnings. As promised, we are fixing or eliminating problem operations, reducing spending for capital on acquisitions and using a portion of our cash flow to repurchase shares of Leggett stock. Capital spending was 25 million, consistent with our budget of about 130 million for the full year and in line with out tactical plan objectives. In the first quarter, we purchased about 740,000 shares of stock at an average price of about $24.10 cents per share. Over the last six quarters, we have repurchased 5.5 million shares primarily to offset shares issued in employee programs. Our balance sheet remains strong. At the end of the first-quarter long-term debt, netted cash was 27 percent of total capitalization down from 35 percent one year ago. We are financially well situated to capitalize on the improving economy.

Finally, we again faired very well in the Fortune Magazine rankings, which were released just last week. Out of the 500 firms, we ranked 91st in 10-year earnings per share growth, 74th in 10-year total return to shareholders And through -- though last year was a difficult year in many aspects, we still ranked 132nd in return on assets for 2001. Sales continue to be down, but it does appear that the decline is lessening. As you know, historically we generate about 3 to 6 percent average internal sales growth excluding acquisitions. Two years ago on the first-quarter of 2000, internal sales growth was running strong at a positive 5.2 percent. From there, growth rates began a steady decline that continued for five quarters bottoming at negative 12 in the second quarter of 2001. Sales growth continued to be negative for the following three quarters, but the rate of decline lessened somewhat with the most recent quarter posting a 6.7 percent decline in organic sales. Despite lower sales, first quarter's net earnings at 28 cents per share were up 5 cents or 22 percent from last year’s first-quarter earnings. The 6.7 percent decline in same location sales reduced earnings by about 7 cents per share. This was more than offset by improved cost structure, lower energy and interest expense and reduced amortization. And with that introduction I will turn the call over to David Haffner who will discuss the various operating segments in more detail.

Thank you, Felix. I plan to talk about the following topics. First, I will briefly address acquisition activity and sales growth. Then I will discuss factors affecting overall operating results followed by a review of what is occurring in each segment and I will close with a brief update on the tactical plan. Regarding acquisitions in the first quarter, we acquired two businesses. Both are in the residential furnishing segment, both are based in the UK, and both are engaged in the production of innersprings for bedding. Annual revenue from these two acquisitions should be about $16 million. We expect the pace of acquisitions this year to be roughly similar to what it was in 2001. Although we have purposely reduced the acquisition pace for a while, we are getting to look at a number of opportunities. Turning to sales by segment, trade sales for the quarter were down 2.9 percent versus first quarter last year. Sales growth from acquisitions was more than offset by organic sales decline of 6.7 percent as Felix mentioned. This decline in sales resulted in a reduction in EBITDA of about $21 million. We are seeing improving sales trends in our residential and aluminum segments. Residential posted organic growth, albeit slight, for the first time since the third quarter of the year 2000, and the decline in aluminum sales was much lower than we have seen for several quarters. On the other hand, the sales declines in our commercial furnishing segment continued. However, we believe these declines will begin to significantly abate in the second quarter.

Now turning to operating results. Overall EBITDA increased about $8 million or 9 percent from $89.6 million in the first quarter of 2001 to $97.4 million this year. Company wide EBITDA margin increased from 8.5 percent in the first quarter of last year to 9.5 percent this year. Compared to the first quarter of last year, here are the major components of the $8 million EBITDA increase. On the negative side, lower organic sales reduced EBITDA by $21 million. Favorable items that more than offset the sales decline include approximately $8 million from cost reduction improvement and reduced overhead.

Another positive 8 million from reduced energy cost and improved energy utilization. A positive $6 million from elimination of goodwill amortization and a positive $6 million from a broad mix of non-reoccurring and another items. In residential furnishings, total sales increased 1.8 percent versus the first quarter of last year. With same location sales up 0.2 percent. EBITDA increased $15.9 million or 35 percent. EBITDA margin was also up significantly from 8.7 percent one year ago to a 11.5 percent this quarter. Organic sales increased for the first time in more than a year reflecting a positive trend in the consumer sector of the economy. Upholstered furniture component sales are strong with growth in the low double digits. This is tempered by relatively flat sales in bedding components and in our other residential businesses. The segments EBITDA increased over $10 million from increased production and overhead absorption, improved cost structure, lowered energy costs, and reduced amortization. Finally, there was about a $4 million benefit to EBITDA from non-reoccurring items. Looking forward, we will experience rising raw material costs related to import piece and duties for sheet steel, lumber, and steel rod starting in the second quarter. We have begun notifying costumers that we will have to increase our prices to reflect the higher cost we are experiencing. In commercial furnishings, total sales declined by 17.7 percent in the quarter with increases from acquisitions more than offset by a 23 percent decline in same location sales. EBITDA decreased 6.1 million and EBITDA margin decreased from 6 percent last year to 4.3 percent this year. Same location sales declined $57 million and more than account for the EBITDA decline. Business conditions in the office and contract furniture markets continued to be extremely weak with sales at major office furniture manufacturers off as much as one third. We do not expect improvement in this business until later this year at the earliest. In addition, continued weakness and reduced fixture purchases from retailers contributed to reduced sales in the quarter. The EBITDA impact of the sales decline was partially offset by improved cost structure, lower energy cost and reduced amortization. Going forward, new business placements and store fixtures and displays and easing comps should significantly reduce the sales decline this segment has experienced for the last two quarters. In our aluminum segment, for the quarter, total sales declined 2.5 percent. There were no acquisitions in the prior 12 months. EBITDA decreased to $3.2 million and EBITDA margin decreased from 7 percent last year to 4.7 percent in this year’s first quarter. The $3 million decrease in same location sales resulted in about a $1 million drop in EBITDA, but this was fully offset by reduced amortization and lower energy cost. In addition, write off of obsolete inventory and nonproductive equipment reduced EBITDA by $3.3 million this past quarter. During the quarter, we restructured the management of the segment and we are very confident in the team we have in place. Regarding industrial materials, total sales increased 14.4 percent due to a third quarter acquisition. Organic growth was modestly positive at two-tenths of 1 percent, but significantly improved over previous quarters. EBITDA increased $2.3 million due to absence of non-recurring cost experienced last year. In specialized products, total sales for the quarter decreased 10.2 percent due to a 10.4 percent decrease in same location sales. Organic sales grew in the automotive businesses reflecting improvement in the consumer sector of the economy. On the other hand, organic sales declined in our machinery businesses reflecting the weakness in the capital goods and industrial sectors of the economy. Though EBITDA decreased $500,000, EBITDA margin increased from 9.8 percent last year to 10.4 percent this year as reduced costs. offset the earnings impact of the sales decline. Finally, Lipo (phonetic) and inner segment eliminations led to a net $600,000 reduction in EBITDA versus the first quarter of last year.

Let me speak for just a few minutes about our continuing efforts to improve operating performance and I apologize for being somewhat repetitive to my comments from previous conference calls. Since we initiated the tactical plan back in September of 2000, we have announced the sale closure or consolidation of 20 plants. Excluding acquisitions by December 2001, we have reduced full-time equipment headcount by about 3700 people. Consistent with improving trends in some businesses, we have hired back about 600 full-time equivalent employees in the first quarter. We are trying to retain as much of the workforce talent as we practically can during this time of downturn. We have reorganized the management structure of the commercial fixtures and displaced group. We have reduced aluminum overhead by over $8 million annually and we just recently made a change in senior management of that segment.

We have slowed the pace of acquisitions compared to 1999 and 2000, but we continued to proceed. We expect the pace of acquisitions for the time being to be roughly the same as it was last year. We continue to apply a variety of continuous improvement techniques as we havc done for some time and these efforts are yielding incremental improvements. We also continue in our efforts to control working capital. Over the past 12 months, receivables and inventory both declined while payables increased. At quarter’s end, working capital excluding cash, was just under 19 percent of annualized sales down from 22 percent of sales one year ago. And with that review I will turn the call back over to Felix.

Thank you Dave. We would like to talk now about the outlook for the rest of the year. In general, we feel the consumer side of the economy has turned the corner and we are optimistic, but not certain that the industrial and capital goods side of the economy will follow suit. Our recovery has begun in several of our business units and we are hopeful that all of our businesses with the possible exception office and contract components will have move off-bottom by the end of the year. On the other hand to present a balanced picture, we should mention that the escalation of the conflict in the Middle East, the possible run up of all prices, the likelihood of interest rate increases later in this year could take some wind out of the sails of this most recent economic improvement. Because of the uncertainty surrounding the economy for the balance of the year, even though we came here on the high-end of our earnings guidance for the first-quarter, we have left our full-year EPS guidance unchanged at 115 to 135 per share. This equates to full- year organic sales growth between 0 and plus 5. With that background for the full-year, here are the assumptions we used to arrive at our second-quarter earnings forecast. In good economic times, we have historically seen about a $50 million pickup in sales from first to second-quarter. We don’t know exactly what the economy will bring us in the second quarter, so we have used in our model a range of $30 to $80 million in sales growth from first to second-quarter. This sequential sales increase yields year-over-year organic sales growth between negative 2 and positive 3 for the second quarter. Second-quarter earnings should be higher than first quarter are as follows: 3 to 8 cents improvement for the sequential sales increase. Approximately 1 cent lower for some anticipated restructuring charges. So this yields an earnings range of 30 to 35 cents for the second quarter. As mentioned in the press release, starting in the second quarter we are experiencing some rising raw material cost in sheet steel, lumber, steel rod and aluminum. These cost increases are mainly the result of government-imposed tariffs and duties and will have an impact on all of our operating segments. As you may know, we typically pass along raw material cost increases and decreases to our customers, and many of our long-term customers have been through a variety of raw material cost cycles with us. Though there is some times some lag between the time we see the raw material cost increase and the time we ultimately implement a price increase for our products, we are already working with customers to pass through the higher cost we are experiencing. As we have mentioned before, when sales begin to accelerate we will benefit from our operating leverage. We can take on significant additional sales volume without the need for increased overhead or expansion capital until we reach full-plant utilization and assuming roughly the same mix of products every 10 million in additional same location sales should add about one penny to earnings per share.

And finally as we look beyond 2001, the future for Leggett looks very bright. We are making progress on our tactical plan, we are generating significant amounts of cash, our balance sheet remains very strong. We feel very well situated to capitalize on improving business conditions in all our markets as they materialize. With this Dave, I will turn it back to you.

That concludes our prepared remarks. We thank you for your attention and we will be glad to try to answer any of your questions. We will conduct the Q&A in the same manner that we typically do in order to allow everyone an opportunity to participate. We request that you ask your best single question and then voluntarily yield to the next participant. If you have additional questions please reenter the cue and we will answer all the questions you may have.

My question relates to the potential for operating margin improvement, it was pretty significant and impressive in the residential area with not all cylinders firing as you say bedding and other parts of the residential industry were not yet moving ahead. At 11.5 percent that is a pretty good performance; however, where do you think those operating margins can get you. What is the appropriate delta (phonetic)?

Yeah, Budd you are relating primarily just to the residential part of the business. Obviously, there is room for some more improvement there, but what you are seeing in us moving to that level even though the bedding sales worked that much better, our productivity going through our plants was much better compared to the first-quarter of 2001, because at that point we had a lot of machinery shut down, a lot of inventory reduction going on and we have gotten that to the level that has allowed us to run some of those machines so we did have some improvement in margins even though it did not go through part of the sales standpoint, but Carl and Dave -- Carl do you want to make a comment to Budd’s question?

Budd, we continue to expect that we will see improvement. The second-quarter performance will, our expectation is that it will exceed the second quarter of 2001 significantly. Can we continue with that 11.5 percent level? Most probably not -- that won't repeat the benefit of the $4 million one time income. We certainly will repeat the benefit of the elimination of the goodwill expense amortization. As Felix said production runs full out. We expect sales to continue to improve, but to repeat, that number is going to be a challenge. That is our expectation. We expect to see margin improvement over time. The challenge that we face is passing through these increasing raw material costs and the little bit of lag that we experience through that process.

And Bud, this is David from a broader corporate perspective, and I understand your question was specific to residential. We do anticipate that we are going to see improving margins. Now, mind you, commercial furnishings and aluminum margins for that first-quarter were pretty anemic and those are relatively easy to improve upon for a number of reasons, but from a total corporate perspective we do anticipate we are going to see improving margins. THE CALLER The aluminum sector segment would have been my second question if David had let me get one in, but I’ll yield the floor.

Chris Winham. Please state your company name followed by your question.

It's Chris Winham with Goldman Sachs, good morning. My one question I’ll focus on the commercial side of the business. I know it is obviously very difficult to figure out you know what the right level of profitability is when sales are declining as rapidly as they are, but given that has been an area of focus for you and some investment before the real downturn, are you still comfortable that once you get market conditions back to, you know, a more normal level that you will able to get the margins and the returns out of that business that you anticipated?

The answer to the question, Chris, is yes. We are. And, in fact, we are seeing much better opportunity to quote and source in that business as we speak and I am speaking primarily from the fixturing side of that commercial furnishings right now, so we certainly feel like that that's -- we are going to be able to get the margins and returns back to where we want to once we can get the retailers to quit pushing back and start putting some things in place.

The other portion of that which is of relatively good size portion which is office and contract, Chris, you know that the answer to that question. That is still relatively tough and still off about a third and I think there has been a lot of things been written about that and we don’t anticipate much relief from that this year until we probably get over into sometime next year, so that is going to be a deterrent. But do we see the opportunity to get those margins back in that 13 to 15 percent operating margins. Yes we do -- and we think that we can certainly get there once the volume comes back.

Okay, thank you.

Joel Havard (phonetic). Please state your company name followed by your question.

BB&T Capital Markets. Morning guys. This is going to be a total departure from the tone of the conversation we have been having in the last three quarters, but what sort of operating leverage opportunity can we talk about as this volume does start to come back across the industry. I believe, and it sounds like you guys are almost willing to admit it, that things have turned the corner and business is starting to get better. Have we cut too much on -- can you lever back up from the production side without incurring a lot of additional cost. I'll let you answer that as generally as you would like.

Joel, I think that it probably was obvious and we tried to answer part of Budd’s question in the deal as to as to what made part of the big jump in margins in the residential side and obviously we were going back and using some of the productive capacity at production through the assets and really was a big help. But we think Joel, we probably got somewhere between $500 and $600 million worth of productive capacity sitting here that we don’t have to spend any big dollars. We've just have top bring some people back. We brought 600 people back in the first quarter and spread out across these various businesses. But we have just got to bring some people back so the operating leverage is still there and without us having to spend a lot of capital we just got to put people back in place to make some of those things happen.

So, we think the operating leverage is still there. We obviously have got a lot of operating leverage over in our commercial side of our business whether it be either in office and contract or be commercial furnishings. And we have used this period of time to rationalize all those facilities and probably take a lot of costs out of them, but there is still a lot of operating levers there, that once we can get some top line growth, we certainly have the opportunity to move these margins back and we haven’t -- that's one thing we haven’t done Joel. And I guess if anybody would want to criticize us -- we have not cut back so far from key skills and key people and etc., where that once this business does come back, that we are not going to be able to capitalize on it.

I'm not making this another question, I promise. But that means that without going back to those 20 plants I assume they are closed and gone. So, we don’t have to fire them back up. This really is a matter of, you know, an idle line in one of the remaining facilities, is that correct?

That is absolutely correct Joel. In fact, not only have we not cut too much, I think there are still a few more opportunities to consolidate and to improve and still accommodate that $500 to $600 million worth of capacity.

That’s very exciting guys. Thanks again. Congratulations.

The next question comes from John Baugh. Please state your company name followed by your question.

Yeah. Wachovia Securities. Congratulations on the appointments and great job on the Orient Capital. I guess my question is going to relate to the acquisition strategy. Can you refresh us first of all what the planned growth was on revenue through acquisition this year. In any thoughts as to next year. Or what are you looking for or waiting for to perhaps -- to juice that number up again. I am worried that you might get under levered with as much cash as you are generating right now.

Yeah. John, the acquisition opportunities, as Dave mentioned in part of his comments certainly are still very good. We are very gently taking the controls off of aluminum and commercial as to where we would be willing to look at opportunities in certain areas or locations as volume comes back to help us in those two businesses. But acquisitions in general, yeah, you may expect them to be at least equal to where they were last year and perhaps even better. We are already back, certainly looking at a number of acquisition opportunities. You do know we are patient. Sometimes in economic downturns, evaluations don’t move down as to meet for this economic times are -- especially if their owner operator entrepreneurial businesses. But you can expect our acquisition activities to continue to build momentum throughout the balance of 2002. And then the last of your question going into 2003, we would expect that our acquisition opportunities to still provide somewhere in that 8 to10 percent revenue growth as we go forward in these outer (phonetic) years and we believe amongst the five segments, we have an opportunity to add that on. And then obviously, as we have stated in the past, we are not ruling out the possibility that there might be a sixth segment added which might add some further fuel, but we have got plenty of room to grow in the five segments we have got, and you will see those acquisitions pickup and in year 2003 going forward.

So, to put some numbers on that, the '01 growth or acquisition was roughly what and then 02 would be slightly better than whatever that number is. What were those numbers?

In 2001, we purchased acquisitions that would add annual revenue of 160 million. You’ll see about half of that incremental this year. That is from 2001 acquisitions. And then from acquisitions we will make in 2002, you can probably plan on another $100 -- maybe $150 million of revenue.

Okay, and how much have you done year to date, David?

Very little. Just the two -- just the two that we spoke of..

Just the two that have been announced.

Yeah, and that’s about 16 million of revenue for the year.

Yeah, that’s all has been closed so far, John.

Okay. Thank you very much.

The next question comes from David MacGregor. Please state your company name followed by you question.

Midwest Research. Good morning. One of the rules of thumb that you’ve laid out for us that has been pretty helpful as the 10 million of same stores sales translating or mapping into 1 cent of earnings per share. I was just wondering if it is possible to get a similar type of rule of thumb or metric for your raw material prices, and it seems to be a broader concern right now with steel prices and lumber prices and everything else on their way up, and it looks like they're up -- they're going up by, you know, historically large increments. How do we think about the impact of the sensitivity of EPS to this?

David, it is a mixed bag, as we speak. The Canadians and Americans can’t make their mind up about this lumber situation and it seems like it wants to change every week and they've got us on hold on some of the duties now. And a week before last, they were implemented and -- but we have had horrendous increases in material costs in the lumber, besides the duties. And we are having the same thing and we have got hot roll and cold roll material that is substantially more aggressive pricing than we're planning -- wire rods at this point. They are under two different government duties, as we speak. So we are trying to fight our way through this thing.

Obviously we’re giving our customers as best advice as we can. We have got hot roll and cold roll up as much as 22.5 percent. We have got rods that are up somewhere in the 10 percent range as we speak, and so, you know, you relate those down to, you know -- after our material is 50 percent of our cost, you know, you can get that down to where that there's a 6 to 10 percent -- depending on the product lines -- that we are going to wind up and have to pass through the system. But as Carl had mentioned, some of those, there might be some slight delays. Obviously, we are trying to work them through the system as best that we possibly can, but as far as giving you any kind of a metric or anything as to -- as to how -- when that those would be implemented to us versus when that we would get them implemented to our customer. It is a mixed bag and tough for us read at this point how to do that.

Are these raw material prices going up immediately or do you have a quantity of material under contract and your sensitivity or your exposure is later in the year in 03?

Dave, there is some of this steel that has been so bad this time, that even though we may have had some contracts, we are having people not honor them. And so, that has made it relatively tough. So, the majority of them, you’re going to start seeing them implemented within this second quarter, and there are certain parts of the steel right now, we can’t even give price quotations for third quarter on. So, some of the things, yes, we had some slight protection, but the majority of it -- to get more than a quarter at a time in a period like this, you just can’t hardly do it.

Your experience with the flow through sounds good, but should we be thinking about a one quarter or two-quarter lag before you can fully recover that. And in fact, maybe the question is, historically have you been able to fully recover or just recover a portion?

No, we usually are able to fully recover and I would anticipate that you shouldn’t think worse than a quarter lag on any of the materials.

Dave, this is Dave Haffner. I was going to add to Felix’s answer that the function is not so much the -- on EPS as a function of raw materials -- it is not so much the material price or escalation. It truly is the lag between when we get the cost increase and when we are able to pass it through, and I think it’ll be relatively modest because we have no choice, except to pass it through promptly.

Thanks very much.

The next question comes from Michael Braig (phonetic). Please state company name followed by your question.

Mike Braig of AG Edwards. Question, I guess which you may have answered implicitly in some of your prior comments. You’ve been on the tactical plan now for seven quarters. Initially it was defined as a relatively well-packaged program. Is that likely to stay in place or -- as a program or are pieces of it likely to end for individual sectors or individual initiatives as we simply go through the rolling process of seeing recovery in each sector?

Mike, this is Felix and I guess what -- maybe we've fallen in love with our technical plan is what's happened to us because of the success that we have had some of the things that we put -- we put forth. But the answer to your question is there will be certain portions of it, as far as plant rationalizations, plant consolidations, plant closings and some of those things that will end and we are close to that now. As Dave mentioned earlier, we’ve still got some other things that we are looking at very seriously. But, you know, whether it's called a tactical plan or whether it's called managing your business segments each quarter or each month or each day. That’s about what that is -- is us continuing to look at those as where we best utilize all these assets. Or obviously we are operating in world market too because sometimes things change and where we may have used to have made a part of a product a year, we might be making part of that product offshore or someplace else. So, there’ll be some of those that will continue. As far as, you know, our continuing to look at those finishes very close and either fixing what we’ve got or getting out, we probably -- you’ll find us trying to do a better job of trying to continue to prune our businesses as we go along and maybe in past history, we haven’t done as much pruning in some places as we have. But I think you will see us be much more aggressive in trying to do that to make sure that we are meeting the demands of our customers as well as this global economy that we are operating in. So, it is going to be a part of it continuing, but part of it will wear itself down as we go through this different business cycle, Mike.

Just as a followup, is it possible that some of the continuing considerations could end up in defining different layer, consolidating certain parts of what you currently define as discreet sectors?

Yes. I would say that that’s certainly a fair statement because I used the word pruning, but it maybe discreet sectors or whatever it is of products that we're in, that we may decide to put more emphasis on one sector than we have done another. And abdicate one small sector or one small part of another business. So, I would say that that's a possibility, Mike.

Okay. Thank you.

The next question comes Margaret Whelan. Please state your company name followed by your question.

Good morning folks. I am Margaret from UBS Warburg, as you know. Can we spend a little time on aluminum. I really don’t understand why your sales are down 2 percent, and you've taken up so much (indiscernible) in the last 12 months, but the margins are down (indiscernible) basis points? But, you know, I know you’ve got some personnel changes now. When are we going to see an improvement?

Yes, Margaret, let us -- I want Dave to make a comment. I want to make the opening remarks. If we hadn't have had the 3.3 million write down, EBITDA margins would’ve been approximately the same that they were last year. A little over 7 percent, which still doesn’t meet our objective and you know that as we go forward. But Dave has really been involved so he should answer the question as to where we are headed in aluminum and what our opportunities are and what we are to going to look like six months from now.

Yeah, well back to the specific question, it really boils down to these one time non-reoccurring purges that we took this last quarter, the 3.3 million dollars, Margaret. That would’ve given us about a 7.5 percent if we had had that back into EBITDA. That would’ve given us about 7.5 percent margin.

But that’s still -- like that's only a 50 basis point improvement versus last year.

That is correct.

Despite the costs you’ve been telling us you’ve been taking out for the last 12 months.

Yeah. That’s correct. One of the things that we have done, too, is in order to compete as aggressively as we can, we are taking some business. It is still good margins, but not the margins that we anticipate we are going to be able to enjoy once the economy becomes more robust. So, there is some of that associated with reduced gross margin and contribution margin compared to what we think the full ultimate leverage is on the business. We need tonnage through those plants. We have got substantial overheads and so we're being a little more aggressive today than I think we’ll have to be six months or nine months from now.

What’s the utilization rate now versus six months ago or twelve months ago?

57 percent right now and 12 months ago it was modestly better than that.

So where do we need to get it to -- to get back double-digit operating margin target?

75 to 80 percent.

And do you think you’ll be there by year end?

On a run rate perspective, I think we have got a good shot at that.

Okay. And can I ask another question?

Please.

Can we talk a little bit about working cap? Can we keep it below 19 percent now? Is that a long-term target even though we go into December in the barbecue grill, the inventory bills and that kind of a thing?

Yeah. In fact, I am glad you asked that question, Margaret. Because the answer is yes it is a long-term target. In fact I would like to suggest that we can continue to rationalize that target down, but please don’t expect that we are going to be able to be at or below 19 percent every given quarter. On average, I believe that we’ll be able to keep it there or below, but depending upon the sales, the mix that we have, there are going to be quarters where it could be modestly above that 19 percent.

The next question comes from Ivy Zelman, Credit Suisse First Boston. Please state your company name followed by your question.

I wanted to ask about the -- I wanted to -- I would like you to elaborate on the re-structuring and management in both the aluminum area and in commercial fixtures. It seems to me that it’s been an ongoing process and I am wondering why now are we still seeing re-structuring of management after problems that began more than a year ago in both segments. I would have thought we would have done that already -- you would have done already. So, can you give us some perspective on why these changes are happening today and were they part of the reasons like in aluminum, for example, that we continue to see productivity -- lack of productivity improvement. I guess tonnage you mentioned is obviously part of it, but just on both segments and that is my question.

Yeah, Ivy, I will take a shot at part of it and then Dave can answer probably the rest of it. From the aluminum side, we had a segment hit there for both personal and health reasons that had resigned. And so, when we were refer to the re-structuring there, that’s what Dave has been involved in and as we stated, we are extremely happy with the -- that the management team there and the objectives that we’ve got set out as to what we are going to be doing to go on forward. But when we continue to say the management restructuring in the commercial fixturing side of the business, that really is an adding to and continuing to define the three parts that we’ve got that broken into, whether it be store fixtures, point of purchase and material handling and continuing to beef up the management within each one of those different parts of our commercial fixturing to help us accomplish our objectives and to better service our customers within those defined markets that we are trying to attack -- try to really be that source of one to those people.

So, in doing that, we’ve continued and maybe restructuring is -- it's further structuring is what it is. I guess, Ivy, rather than maybe an entire wholesale restructuring because we continued to add a lot of people. And in fact, within the last month, we’ve added a Vice President of sales and marketing for the fashion side of that entire business that we are going to put a lot of emphasis on that part of the business. We’ve continued to add product managers within each -- in a number of our major customers' facilities, which is a different deal than what we’ve done. We continue to add to offices, perhaps down in Dentonville (phonetic) that we service a major retailer. But it is more of a continuing adding to than it is a total restructuring. However, the aluminum deal and I will let Dave speak to that because that is a restructuring down there.

Okay, and before I do that -- the thing I would add on fixtures and display, Ivy, is that -- that’s a very complex -- and there are numerous entities involved there.

I guess the only thing I'd ask on commercial fixtures then is, to follow up, is that there has not been any of the various pieces that you’ve defined, any senior heads that have been replaced. If anything, you're just incrementally beefing up and there hasn’t been any major changes on the defined parts of those people running them?

Yeah. We still have the same -- Bob Griffin is still our segment president and continues to do an excellent job in that regard and we are re-fortifying Bob with some additional people. There have been some changes down in division president and some unit management level, but Bob is still running that business for us. With regard to aluminum, really that one is just basically an untimely, unexpected retirement on Bob’s part -- on Bob Gaddys (phonetic) part. I am working very closely with the management, really on a weekly basis. I am physically down there usually, a day or so a week, and I feel extremely good about the team that we have there. There's really no management problems within that segment. The problem we’ve got there is tonnage and product mix and utilization of assets.

The next question comes from Richard Diamond. Please state your company name followed by your question.

Yes. I am with Inwood (phonetic) Capital Partners and could you address your business with Harley Davidson and what’s happening. I have noted, in prior calls, you’ve talked about your great success there.

Yeah and, Richard, this is Felix. Our business opportunities with Harley continue to grow each quarter. There are more parts that we are making for them this quarter than we did last quarter. I believe last quarter we did mention that we are in the process of starting to make some of the aesthetic parts as we will call them for them that in conjunction with some other platers (phonetic) and etc. We are the preferred supplier for the aluminum componentry that is going into the bikes so, the relationship is excellent. It continues grow and we look forward to future quarters in what we can do with Harley and that partnership arrangement we have.

CALL INSTRUCTIONS) David MacGregor.

I guess I have a three-part question here. Number one -- on the contract furnishings business, you'd mentioned that one of the larger OEM's were experiencing revenue decreases of as much as a third. And I guess I am wondering what it is going to take to get some of these vertically integrated OEM’s to outsource more of that business. It would seem that they'd be under an awful lot of pressure to do that now if they are ever going to entertain that thought at all. Secondly, maybe Carl for you on the bedding business, can you just talk about average sales prices and inventories in the channel right now. And then thirdly, on the aluminum business, is an asset sale imminent here or maybe you can just give us an update on what the plan might be for that. Thanks very much.

Okay, David, this is Dave Haffner, I will take the first one of those three. That is contract furniture and incidentally thanks for teeing the point up. It is something that I and Matt Flanagan (phonetic) who is president of our office and contract furniture group, spend a substantial amount of time -- not only talking about, but visiting with those maker users. We have had visits with three relatively large maker users that have been customers for a long time. And in fact, next week I have another one of those visits with Matt where we're talking at very high levels in their organization -- almost always above the purchasing level in the organization, at the CFO, COO or CEO level to talk about our business model, our unused capacity, some of our skill sets and how we might be able to represent better net costing for them, our customers or prospective incremental customers, even if it means acquiring certain of their assets.

And so, we are getting relatively good receptivity. Again these are all already customers of ours. And so we are looking at individual projects, individual pieces. It is something that we have a high priority on and we are getting more receptivity, David, than we have in the past. Yeah, okay let me jump down to your third one and that is, is there an imminent aluminum assets sale? The answer is no.

Dave, as it relates to the two-part bedding question that you have asked, that average unit selling prices as we are experiencing them are about flat. Pieces are up slightly. Our averaging and selling prices are really flat. Our customers averaging and selling price continue to appreciate at about 2 to 3 percentage points ahead of their unit sale levels. So -- which has been consistent in the bedding industry for the last three to four years. As relates to our inventories, they are significantly lower than they were a year ago today. That’s why this plant utilization that we made reference to earlier helped us so dramatically in the first quarter. We expect it will continue through the balance of the year as sales continue to improve. Our customers inventory truly in this industry is non-existent. They're on three and four-day shift schedules. There is no inventory in the system.

Okay, Dave, if I can just quickly go back to your observation on the outsourcing. In the electronics business, there has been an awful lot of outsourcing and the one of the models there has been that the manufacturing service providers have been purchasing plants from the larger OEM’s and purchasing the inventory and taking the people onto their payroll. As you talk to the CFOs and CEOs and the COOs, are they holding that up to you as a model of how they would like to do it?

In one particular case that has been discussed -- yes.

I am sorry, David, I was just going to flush that in by saying that -- and we are receptive to considering that. What we have to do is to really look at whether or not we can drive incremental value into the proposition. If we have to pay to high a price for assets and we’ve got capacity to produce similar product, if you will, and utilize this existing facility, it's a hard metric to make work, but we are considering any of those types of things up to and including entire facilities.

Thank you. And gentlemen at this time, there are no further questions.

Okay. That’s all we had. We appreciate your time and we'll talk to you next quarter. Thank you. Goodbye, everybody.