禮恩派 (LEG) 2002 Q2 法說會逐字稿

Ladies and gentlemen, please continue to stand by for the second quarter, 2002 earnings conference call will begin momentarily. Please do not disconnect and continue to stand by. Thank you.

Good morning ladies and gentlemen and thank you for standing by. Welcome to the second 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 anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, Thursday July 18 of 2002.

I would now like to turn the conference over to Mr. Dave DeSonier. Please go ahead sir.

Good morning and thank you for taking part in our call today. I'm Dave DeSonier, the Vice President of Investor Relations. And joining me today are Felix Wright, Leggett's Chairman and Chief Executive Officer; Dave Haffner, our President and Chief Operating Officer; Karl Glassman, our Executive Vice President; and Susan McCoy, our Director of Investor Relations.

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 our operating segments, following that Felix will review the outlook for 2002 and for the third quarter and finally the group will try to answer any questions you might have.

I need to remind you that this call is being recorded for Leggett and Platt and is copyrighted material. This call may not be transcribed, recorded or broadcast without our express permission. A replay is available from the IR portion of Leggett's Web site. 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 statement due to a number a risks and uncertainties, and the company undertakes no obligation to update or revise these forward-looking statements. For a summary of these risk 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."

I'll now turn the call over to Felix Wright, our CEO.

Thanks Dave and thank you all for joining us this morning. Before we start talking about the quarter, there's a few general comments that I want to make. First, we're extremely disappointed and somewhat surprised to see the continuing stream of questionable behaviors and accounting practices at some of America's largest and very well-known firms. We feel strongly that this is a case of a few rotten apples spoiling the bunch. However, now that the bunch has been tainted, we believe it may take quite some time before investors regain the confidence they have so quickly lost due to the practices of a few firms. We're proud that our company has always been managed in a very conservative manner.

Before we start talking about the quarter, there's a few general comments that I want to make.

First, we're extremely disappointed and somewhat surprised to see the continuing stream of questionable behaviors in accounting practices in some of America's largest and very well known firms. We feel strongly that this is a case of a few rotten apples spoiling the bunch.

However, now that the bunch has been tainted, we believe it may take quite some time before investors regain the confidence they have so quickly lost due to the practices of a few firms. We are proud that our company has always been managed in a very conservative manner. Our financial statements are straightforward, relatively easy to understand, consistent and they don't have complex footnotes.

We've only recorded one special restructuring charge in 25 years. Preferring instead, to let restructuring and similar charges simply roll through the income statement. Our only other special charge was in 1996, and was related to the acquisition of Pace Industries.

If you've followed us for some time, you'll know that we try to reply candidly to your questions. We admit our mistakes. We try to give you as much data and information as we can, in as timely a manner as we can.

Because about 20 to 25 percent of the stock is closely held, shareholder and management interests are in sync. In the future, we will continue to run the business in the same conservative and ethical manner that we always have.

Secondly, I want you to know that we're basically at the end of our tactical plan. I don't know that we'll probably announce a firm termination of the plan, but we've accomplished the bulk of what we set out to do. For almost two years now, we've worked hard to rationalize plants and to close or sell operations that can't be improved.

In total, we've eliminated 22 facilities. Helping trim overhead and improve our cost structure. Though we expect to close or consolidate a couple of more plants by end of the year, for the most part, the rationalizations are complete.

As promised back in September 2000, we've also significantly reduced capital and acquisitions spending during this of economic downturn. As a result, our balance sheet is in great shape and we have plenty of cash on hand.

And finally, since the tactical plan, we've repurchased about 6.8 million shares of Leggett stock, mainly to offset stock issued in employee plans. Thirdly, as required by FAS142, we completed our review of assets for possible goodwill impairment. And have determined that the estimated fair value of each reporting unit exceeds its book value.

Accordingly, there is no impairment of assets and we will not be recording any expense for goodwill right now. And fourth, we have changed the name of the commercial furnishing segment to Commercial Fixturing and Components. We think this better reflects the fact that three quarters of this segment revenue comes from retail store fixtures and point of purchase displays with most of the remaining revenue coming from our traditional office and contract furniture components business.

Now lets turn to the quarter. We'd like to note the second quarter earnings were within the range of guidance we issued on April 17 and sales were just slightly higher than the range we forecast.

Some of the highlights for the quarter include the following. Sales grew 7.7 percent this quarter. Organic growths was 3.8 percent and was positive for the first time since the economy began its downturn two years ago.

Quarterly earnings grew significantly. With EPS of 40 percent, compared to last year's second quarter. Both EBIT margin and net margin were up by 140 basis points from a year ago. Trade sales at $1.12 billion were the second highest on record and only $15,000,000 shy of the all time high, set in the third quarter of 2000. At quarters end our working capital, excluding cash and current debt maturities, was lower by $53,000,000 or 6 percent compared to the second quarter of 2001. Capital spending was $30,000,000, consistent with our budget of $120 to $130,000,000 for the full year and in line with our tactical plan objectives.

In the second quarter we repurchased about $1.3 million shares of stock at an average price of about $26.00 per share and lastly, our balance sheet remains strong. At the end of the second quarter debt net of cash was 25 -- 27 percent of total capitalization, down from 32 percent one year ago. We are financially well situated to capitalize on the improving economy. Net earnings, at 35 cents per share, were up 10 cents from last year's second quarter earnings. The organic sales growth increased earnings by about four cents per share and the remaining gains came from lower interest expense, elimination of goodwill amortization and reduced restructuring cost. With that introduction I'll turn the call over to Dave who will discuss the various operating segments in more detail, Dave.

Thank you Felix and good morning everyone. I plan to talk about these three topics, first I'll briefly address acquisition activity and sales growth, then I'll discuss factors affecting overall operating results, followed by a review of what is occurring in each segment and I'll close with a brief update on the tactical plan. Relative to acquisitions, in the second quarter we acquired the assets of two businesses and both are in the industrial material segment. The first is a wire mill that we acquired from , annual revenue from this plant should be about $35,000,000, this brings our total wire production to about 900,000 tons per year and furthers our position as North America's leading producer of drawn steel wire.

The second acquisition was a portion of the assets of North Western Steel and Wire in , Illinois. Specifically, we bought the melt furnace, caster and rod mill. With these assets we will produce, beginning in the first quarter of 2003, about one half of our internal needs for steel rod. Due to the bankruptcy of Northwestern we were able to acquire these assets at a very attractive price. All of the rod we produce will be used internally within the industrial material segment, so you won't see an increase in our annual revenues. We will benefit from having a consistent and high quality source of steel rod with sufficient volume to meet about half of our needs. High quality rod is crucial to maintaining the consistency and quality of the wire that we produce. We expect the pace of acquisitions this year to be roughly similar to what it was in 2001, when we completed 10 acquisitions and added about $160,000,000 to revenue. We continue to get to look at a number of good opportunities and as we come to the ending phases of the tactical plan you may see the acquisition pace begin to accelerate.

Turning to sales, as Felix mentioned, trade sales were up 7.7 percent verses second quarter last year. For the first time in two years we say organic sales growth in the majority of our segments. Those sales in the commercial segment were still down, the decrease lessened dramatically from greater than 20 percent each of the two prior quarters to just 7.6 percent decline in the second quarter, in part due to easier comps. In dollar volume trade sales grew by $80,000,000, with the bulk of the increase coming from these three segments. Almost half of the growth or $37,000,000 increased $23 million, or 24 percent, from $95.5 million in the second quarter of 2001 to $118.3 million this year. Company-wide, EBIT margin increased from 9.2 percent in the second quarter in 2001 to 10.6 percent this year.

Versus the second quarter of last year, here are the major components of the $23 million EBIT increase: organic sales increased EBIT by about $12 million, EBIT increased $6 million due to the elimination of goodwill amortization, lower restructuring costs contributed $3 million to EBIT, and the remaining $2 million came from non-recurring items and other expenses.

In residential furnishings, total sales increased 7.5 percent versus the second quarter of last year, with same location sales up 6.2 percent. EBIT increased $13.7 million, or 29 percent. EBIT margin was also up significantly from 9.2 percent one year ago to 11.1 percent this quarter.

Most of the EBIT increases are due to higher organic sales. Upholstered furniture component sales posted growth of about 20 percent. This was tempered by relatively flat sales in bedding components. Additionally, nearly $4 million of the EBIT increase is related to a one-time benefit from the reversal of an import duty on Canadian wood.

Looking forward, we are experiencing rising raw material costs related to import fees and duties for sheet steel, lumber and steel rod. We continue to work with customers to pass along the higher costs we're experiencing.

In commercial and components, total sales declined by 2.7 percent in the quarter with increases from acquisition more than offset by a 7.6 percent decline in same location sales. EBIT was equal to that of last year despite the sales decline. EBIT margin increased slightly from 5.9 percent last year to 6.1 percent this year.

As expected the decline in organic sales lessened significantly from the 20 percent declines seen in the prior three quarters. In round numbers store fixture and displace sales were off about 5 percent, and office and contract furniture component sales were down about 15 percent. Overall organic sales declined $19 million impacting EBIT by about $6 million. The EBIT impact by the sales decline was essentially offset by absence of last year's restructuring cost in the elimination of goodwill amortization.

Business conditions in the office and contract furniture markets continue to be extremely weak, with sales at major office furniture manufacturers off as much as a third. We do not expect improvement in this business unit until early next year.

Looking ahead, third quarter is seasonally the strongest quarter for store fixtures and displays. Sequentially, we are expecting stronger sales and significantly higher EBIT for the third quarter.

In aluminum, for the quarter, total sales increased 13.5 percent. There were no acquisitions in the prior 12 months. EBIT increased $6.5 million, or 80 percent. EBIT margin increased from 6.5 percent last year to 10.3 percent in this year's second quarter. The increase in EBIT is primarily due to higher sales which resulted primarily from market share gains and to a lesser extent, from improvement in some consumer sectors in the economy.

Going forward, the third quarter is seasonally the weakest quarter for the aluminum sales, and we expect our typical approximate 30 million sequential reduction in sales for the third quarter.

In industrial materials, total sales increased 25 percent, largely due to a third quarter acquisition. Organic growth was relatively strong at 7.1 percent, significantly improved over previous quarters. Platt with a gain from increased sales offset by higher steel costs. Specialized products. Total sales for the quarter in specialized products increased 5.8 percent solely from organic growth since there were no acquisitions in the prior twelve months. Sales grew in the automotive businesses, reflecting gains in market share.

On the other hand, organic sales declined slightly in our machinery businesses, reflecting the weakness in the capital goods and industrial sectors of the economy. EBIT increased 3.5 million dollars and EBIT margin increased from 11.2 percent last year to 13.6 percent this year. Finally, and intersegment eliminations led to a net 1 million dollar reduction in EBIT versus the second quarter of last year.

Now, if I may speak for a minute about our continuing efforts to improve operating performance. As Felix mentioned, we're nearing the end of the formal tactical plan under which we've announced the sale, closure or consolidation of 22 facilities. We're still working on plans for consolidation of a few additional plants and we expect to complete those efforts by year-end or shortly thereafter. It is possible that we can see roughly 5 million dollars in additional restructuring costs by the end of the year. As we've always done, we continue to apply a variety of continuous improvement techniques, and theses efforts are yielding incremental improvements as we go.

We continue in our efforts to control working capital. As you know, that's been a very high priority for us here. At quarter's end, working capital, excluding cash, was 16.6 percent of annualized sales, down from 21 percent of sales one year ago. In part, this decline is due to the amount of long-term debt coming due within the next 12 months. Though even after netting out current maturities of long-term debt against cash, working capital, excluding cash, was just 18.5 percent of sales, making this the second consecutive quarter we've been below our 19 percent target. And with that review, I'd like to turn the call back to Felix.

Thank you, Dave. We'd like to talk now about the outlook for the rest of the year. In general, though the consumer side of the economy has been improving, we remain cautious as consumer confidence continues to be under pressure. Also, we're still waiting for the industrial and capital goods sectors of the economy to show signs of recovery. We're seeing improvement in several of our business units and we're hopeful that all of our businesses, with the possible exception of office furniture and components, will have moved off bottom by the end of the year. We are nearing our EPS guidance for the full year, but staying within our original January estimate which was 115 to 135. With the first six months behind us, we're trimming a nickel off each end of the range, resulting in new guidance of 120 to 130 for the full year EPS.

We are assuming that the economy does not significantly weaken in the second half of the year and are planning on a 1 to 4 percent organic sales growth for the full year. With that background, here are the assumptions we used to arrive at our third quarter earnings forecast. Sequentially, we expect sales to be roughly flat with the second quarter. In the segments, we expect aluminum sales to be about 30 million lower than in the second quarter, but this should be offset by higher sales in both the residential and commercial segments. Sequentially, we will be about a penny lower in the third quarter because of nonrecurrence of the second quarter's wood duty reversal and we will likely be down another penny or so due to delays in passing along higher raw material cost. Taken together, these assumptions yield an earnings range of 31 to 36 cents for the third quarter.

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 our earnings per share.

And finally, as we look beyond 2002, the future for Leggett looks bright. We're making progress on the items under our control, we're gaining market share, we continue to generate significant amounts of cash, and our balance sheet remains strong. We feel very well situated to capitalize on the improving conditions in all of our markets as they materialize.

With those comments, Dave I'll turn it back over to you.

That concludes our prepared remarks. We appreciate your attention and will be glad to try to answer you questions. We will conduct the Q&A in the same manner that we usually do. In order to allow everyone an opportunity to participate, we request you ask your best single question and then voluntarily yield to the next participant. If you have additional questions, please re-enter the queue, and we will try to answer all the questions you have. , we're ready to begin the Q&A session.

Thank you sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. If you have a question, please press the star followed by the one on your push-button phone. If you would like to decline from the calling process, press the star followed by the two. You will here a three-toned prompt acknowledging your selection. Your questions will be pulled in the order they are received. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment please for the first question.

The first question is from . Please state your company name, followed by your question.

Bud Bugash with Raymond James. Good morning Felix and David. My question really has to go with the aluminum segment, which really showed, I thought, terrific growth. And I would love - and improvement. Would you give us some feeling of what's going on in there? Is there additional customer base? David, that was a project that I think you had undertaken. If you could kind of maybe give us a more detailed description of what's happened in the management of that division? And how sustainable our the double-digit margins going forward? So if you could give us a full rundown of that division, that would be helpful.

Sure Bud. We have made significant progress in adding customers to that segment. As you know, the primary problems that we've had there are associated with top line. We need tonnage to go through those capital facilities. But we have made significant advances in adding customers. In fact, a significant portion of the incremental sales came from new customers in some new industries. So we're very pleased with that. The team's done a great job there.

Relative to the maintenance of the double-digit margins, I continue to feel, as I've said historically, that we will eventually get those margins back up into that 10 to 12 percent on average on average. As you know Bud, historically we have a substantial amount of variance, quarter by quarter. But we've made such significant progress in improving the efficiency of the facilities that we've got, consolidating the assets that we have and increasing the priority on incremental volume, that I expect us to reach that goal easily sometime next year. Now the third quarter, as you know, is not likely to be a 10 percent quarter, but a lot of very good things are happening there and I'm proud of that team.

Relative to management, we've made those changes that have been announced. I continue to spend a good bit of time with that team and am very proud with what they're doing. In fact, I was there yesterday with them.

Just make sure that I understand, David, I mean the new customers - one of the issue of that division has been that you've had seasonal customers. Where there's been kind of a, you know, a need to have a lot of activity compressed into a few months. And I'm curious, of these new customers, is that continuing in business on a more annualized rate?

Yes. That's right bud. What we're - course we look at any business, whether it be seasonal or not, but ideally and strategically we're attempting to fill that unused capacity with customers and volume that is not seasonal.

Ideally it would be a counter-seasonal to barbeque grills and others, but the business that we're bringing on is not subject to the same sort of swings that barbeque grills are.

OK. Thank you very much.

You're welcome.

Thank you. The next question is from . Please state your company name followed by your question.

Hi. Jason Putman with First Boston. First of all, congratulations on a great quarter gentleman.

Thank you Jason.

My question relates to the sales and really the earnings guidance. You trimmed down the range to 120 to 130 for the year, but looking at your internal sales projects. If I recall correctly, previously you were forecasting, I think, a negative five to flat internal sales for the year.

And now the range is plus one to plus four. So it seems that the internal sales range has gone up pretty substantially and yet the, you know, the earnings range has not. Is that just a result of the increased raw materials costs or is there something I'm missing?

No, we weren't - , this is Dave DeSonier, we were zero to plus five before. So we just narrowed - we narrowed a percent to make it one to four percent now.

OK. I was - must have looked at my numbers wrong then. So, what - lets just talk then briefly about the moving parts. What type of impact are the raw material costs going to have overall, or is this relatively small since you can pass them along to your customers?

It's relatively small. We think, going from second to third quarter, we think it might be a penny and we didn't add it all up in all the pieces but in second quarter, my guess is maybe it was a penny or maybe two at the most. Most of it's being passed through.

Yes, and Jason this is Felix. The hot roll and cold roll is still the huge significant portions. It doesn't mean that wire rods are not effected also, but as has been publicized by not only us, by everybody else, but hot roll and cold roll is where that has been the biggest impact.

But as Dave said, we're getting those through the system and it's just such a magnitude this time that may take that quarter to get it through there, rather than quicker than we have done in the past.

OK. Thanks a lot.

Thank you. The next question is from . Please state your company name followed by your question.

Good morning, it's , UBS.

Hi .

Hi .

Good morning. Congratulations on a great quarter.

Thank you.

Would you give us a break down in the residential segment between bedding and upholstery right now and the trend in those two businesses over the last few months and then into July as well?

We'll let Karl do that, please, .

Thanks Karl.

, it's been a little bit of a bumpy road. It's been an interesting one that somewhat contrasts history in that upholstery continues to be very, very strong. As you know that there is a seasonal dip in upholstered furniture sales in the third quarter, which we're starting to see that normal softening, all be it, at higher levels than is normal so that business continues on a comp basis to be very good. Bedding has been a little bit of a challenge that the first quarter we saw some strength that started to dissipate during the second. It looks like the consensus was Memorial Day sales were difficult for the bedding retailers, thus manufacturers, thus component suppliers. The reports from fourth of July was a little more positive, so it's choppy but it certainly is following the normal season.

And is bedding a little stronger than upholstery then?

No, upholstery continues to be stronger ...

OK

than bedding ...

be stronger.

OK, thank you.

That upholstery, Margaret, is primarily at the middle and lower price points, so I don't believe we've got any movement in the upper price points.

And just as a follow on to that, what are you doing in China to -- maybe to generate some upholstery sales over there?

Were very proud of the sales that we do in China today, both out of export mechanism produced in the United States and in Australia that are sold into that market. But we've come to the realization that that market is continuing to expand, we're -- when I say proud, I believe we were a little ahead of the curve. We will be manufacturing mechanisms in China by the fourth quarter.

Thank you.

You're welcome.

Thank you, the next question is from . Please state your company name, followed by your question.

Yes, with and likewise, great quarter guys.

Thanks John.

Particularly on the working capital. My question, I guess, relates to -- kind of two fold, one, would you consider accelerating the stock repurchase plan above just being an offset to option and employee issuance and I think, David, you mentioned the -- kind of reaccelerating the acquisition plan and I think you mentioned it relative to 2000 and $160,000,000 of incremental revenues. Is that something we can look to begin to happen in the third quarter or is that an 03 target, help me with some clarity there.

No, that -- John this is , but you should see that for 02 and obviously it's been minor in the first two quarters, but I wouldn't be surprised to see that accelerate in the last half of 02 and then obviously we've got to see what 03 brings to us from an economic side and et cetera, but then the first part of your question -- obviously with the equity being driven down as the market has done lately, we certainly have to continue to relook our position as to where we can best spend the capital that the company has got at this point and obviously we -- the balance sheet is in excellent shape, so as we go through these quarters and see what the reaction of the market is we obviously think that the -- there's an overreaction in the market place today and it wouldn't -- we may try to capitalize on some of that as we look at what the opportunities are to utilize our cash.

, you said you'd wait to see what 03 brings. My recollection was you were going to, you know, tackle this tactical point and hold off on acquisitions. You're essentially saying now, we're complete with that. Your debt to cap's down, I would imagine there are a number of attractive targets available. Shouldn't we expect 03 to accelerate?

Yes, you should.

OK, great. Thank you much.

Thank you. The next question is from Joel Havard. Please state you company name followed by your question.

BB&T Capital Markets. Good morning, guys.

Good morning, Joel.

You are probably unused to getting this much congratulations, so I'll skip that. Dave Haffner, you might not have these numbers at your fingertips -- if you do, that's great -- but could you give us a sense of where capacity utilization stood at the end of Q2 in -- you know, by division -- by segment?

61.3 percent in aluminum. The rest I'll have - I don't have.

Karl's in the room. Does he have something, maybe to add on residential, or ...

Residential is so diverse, and that utilization number varies by business unit and product category classification, but that low 60s is a good number.

Is that up from where you all finished Q1? You all were very low 60s then, as I recall.

Yes, slightly. I would put it at low 60s to mid.

In aluminum that we were ...

In utilization.

Yeah, utilization.

Yeah, aluminum sounds like it was up there.

It was up. We were about 56.8 or 57 percent, last quarter. We're just slightly over 61 percent right now, and of course that varies, as you know, Joel, by product mix, but ...

We'll want to for all these and we've got it broken down in, you know, at least a couple of categories for each division. Any broad number on commercial? I know that it's still tough. I know that they were both pretty low at the end of Q1. Did either side show improvement over Q2, or were they kind of flat?

Well, in fixturing, utilization is up. Of course, it's tough to determine specifically what your utilization capabilities are in those custom shops, but it's up because of the seasonality in demand. In contract it's not up at all.

OK. And, I'm flogging this same horse, but industrial with the new operations on line, particularly -- do you think you all are as good as you were at the end of Q1?

Yes. I would say so.

OK.

I would say so.

All right. Thanks.

You're welcome.

Thank you. The next question is from Keith Hughes. Please state your company name followed by your question.

It's Keith Hughes, SunTrust Robinson Humphrey. My question - related to a previous question on acquisitions -- if we get back in the acquisition market in a bigger way, would aluminum be back on the table for potential deals? I know we haven't done anything there in quite some time.

In a word, Keith, yes, and, for several reasons. We've gotten our arms around that business. We also know that many of our customers continue to either have need to go elsewhere outside the United States, or are planning to move some of their assembly -- manufacturing -- outside the United States. So, we're taking the approach that we're gonna open the tap a bit. In fact, I asked the guys yesterday to knock the dust off of some files. We'll be looking at potentials, both here in North America and elsewhere. We're not going to get terribly excited. We're gonna be very diligent and patient. We're gonna make sure that any additional capacity that we bring on via an acquisition jives with this revised strategic plan that we have for aluminum. But the answer is yes.

OK. Would, taken from the whole company view, if we get back in the acquisition game in a big way, would commercial still be primarily where most of the money is spent, as it's been the last couple of years, or would that shift in this new framework.

Keith, the thing that we've got to make sure we do, you know, it would tickle me to death if all of a sudden 3 or 4 percent of the external growth could come to organic growth. And we've still got some things in the commercial side that we need to fill up and utilize that capacity and asset that we've got in place and we'll talk about EBIT margins that will improve dramatically. So we're really going to have a focus on trying to grow organically, more than acquisitions. But, that doesn't mean to say that if the right opportunities come along in the commercial side of the business that we certainly are willing to continue to put capital in place to further grow that segment. There are still some geographic areas that we will need to do some things in the commercial part of the business and you'll continue to see us looking at that. But, we really need to focus and push on organic growth and move those percentages up much higher than where they are today.

O.K. You had talked a couple of quarters ago, in the fixtures business specifically, that the few mid-tier competitors are out there were very weak and that's understandable given what we've seen on your internal . Do you think we're going to see, is there a possibility to do a bigger acquisition there than we had seen or are those possibilities not gone away.

I don't think the possibilities have gone away. Obviously, there are no other public companies that are big competitors of ours. There are some nice big competitors there and there may be an opportunity come up, Keith, and if it is, obviously, we're ready to look at it.

O.K. Thank you.

Thank you. The next question is from Pam Singleton. Please state your company name followed by your question.

Merrill Lynch. Good morning everybody. I wish you would talk sort of in a general way. The economy is creating such challenges and it seems like maybe there are some consolidations going on, either from a customer standpoint or a competitor standpoint. I wonder if there isn't an opportunity for you to grow faster by capturing market share and if you've got longer runs to existing customers because you're pushing away competitors. What are the implications for your operating margins. And then I wish you'd talk a little bit about the new products, if you can.

Ma'am, let me take a little bit and then Karl can take part of it. But, overall, obviously, the consolidation, whether it be at our customer's level and then,obviously, it carries on over to some of the retail level, too. We are taking a lot of opportunity in trying to work with that larger customer, in trying to help them in whatever their strategy is, whether its combined offshore-onshore, however it is, to develop products, continue to help them market their brand-names and give them things that they can market their brand-names with, or give them new products that you're talking about, product developments that can help them do that. You know, and maybe that product's going to be manufactured in Asia, but it still needs to have something that's proprietary, hopefully that can help them keep their brand-name first and foremost. That they can use to market and to merchandise.

So there is a big move afoot from the residential side and us trying to work for those major customers to get that done. But I don't think that from a jeopardy standpoint or anything, that with this consolidation that's continuing to take place that it's any problems for Leggett. I think it's going to continue to be opportunities. And then - the other, some of the other industries, we're working very hard with some of the major players in office and contract, different areas to where it obviously their businesses are horrible as we speak and us trying to find ways to change a business model to where that they can be successful and we can help them be successful in all of those things. There have been major efforts along those lines. But Karl, you've got some other comments you'd like to make?

Dave, I would agree with Felix. That I certainly see it more as opportunity than anything. That our customers are trying to market their way out of this softness or choppiness let's call it. And we're having more frequent conversations as regards new programs. Programs into next year, products specific - so looking to us for product development and then the marketing services that go along with that. And we distinguish ourselves from our competitors both in product development and in marketing services support. So those conversations are more frequent. As our customers try to de-lever themselves, there's some opportunities for those that are backwardly integrated to look with new eyes at new programs and systems going forward. So it absolutely is opportunity.

And if I could just ask one more question, I'm wondering - you know when you talk about organic growth sector by sector, there seems to be some inflation, and I wonder if you could quantify that. Whether it's significant or whether you think in the future you'll say if organic is up three percent that price counted for X percent of that?

Ma'am, the big area is steel, obviously. And the biggest part of that at this point is hot roll and coal roll. However, rods, which hints as wire, is hot on its - behind it. And that's going to start hitting us harder in late third quarter and early fourth quarter we believe at this point, unless there's something else happening from the government's standpoint. But I think, Pam, right now there's some items of this hot roll and coal roll that have been as much as five to eight percent, because there have been some huge things that have happened to us there. There's been other in the steel area that's in the three to four, and that's primarily into the wire part of the business at this point. But then when you go over a number of the other raw materials, the wood is pretty much stabilized at this point, however, the forecasts are with the import things we've got now we may have some more inflation that may happen there. And Karl, that wood is probably at this point, inflation is ...

Inflation on wood is hard to deal with because of the complexity of the anti-Duke dumping and the duty. But from a raw material portion of that, it's in the low to mid teens, inflation. Then roll on top of that the anti-dumping, duty, which is 27.2 percent on square end boards, this is a complex explanation, which is about 50 percent of that. So certainly we're seeing inflation on the lumber side that is government controlled.

I know that Pam's interested in ...

Well I was just thinking in industrial materials. I the last section where you say you've grown 7.1 percent in the quarter. Does any of that represent your raising prices?

Very, very little.

OK, thanks.

Thank you. The next question is from David McGregor. Please state your company name followed by your question.

Yes, Midwest Research, good morning. Just on this material issue, I guess I had a couple of questions. I wonder if, you talked about the penny in the upcoming quarter. I was hoping maybe we could talk in terms of what's happening in prices versus what happened in terms of the past through experience.

So, I mean, if prices were going up by X percent. You would be able to pass through by that identical amount. There wouldn't be any impact to the PNL, obviously. So, I wondered if you could just talk about those two deltas? Or you mentioned in passing, Felix, that your pass through experience is a little slower than you've seen in the past, which is kind of why I raised the question. And I was just wondering if you could talk about that?

All right . And what, obviously, as those inflationary things have been happening, whether it be in wood or whether it be in steel and et cetera. We have been reacting and obviously keeping our customers informed as that's going on.

Some of those have already been put in place. Some of them where that there would be some delays, , was the only thing that I was talking to. It's not the fact that I have a concern now that we're not going to get the pass through.

It was purely a matter of maybe taking a quarter to get it totally implemented into the different products and not the fact that we weren't going to be able to pick it up at all. So when we talk to you about a penny possibility within that third quarter, what we're saying is that there may be some delays there that 30 days or 60 days or maybe some things that might have been 90 days before the full implementation of the impact of the total price increase on us.

Because obviously we've tried to mitigate some of it through our inventory and et cetera, but we couldn't get all of it done. It happened to fast in certain areas, and so - but I don't think at the end of the day, it's not going to be done. I think it's just purely a timing, , was what I was trying to refer to.

And , this Dave Haffner. We do have a small amount of our volume that has longer commitments, such as model year. And so you're unable to effect a change for a longer period of time. Tubing would be an example of that.

Now, as we approach the end of the calendar year, it's my understanding that you're hot rolled and cold rolled design annual agreements though there would be sort of a point of discontinuity going into the first quarter - calendar quarter of '03.

Does that mean that there's going to be another pass through challenge at that point?

There could be some, , but we're not - we don't have a lot of that on an annual deal. Some of the annual commitments that Dave may be talking about from the automotive side, that we may have some going to there, but that's a very minor portion of what we're talking about.

The majority of that hot roll and cold roll is quarter to quarter or six months to six months. So there won't be a big problem at the end of the year.

OK. Thanks. And then, just while I've got you on steel. I wonder if you could talk a little further about the Northwestern asset acquisition? It certainly looks like you were able to make that acquisition at a very attractive price.

And I'm wondering if - I think in the press release, you make reference to the fact that it'll be an '03 contributor. Can you talk a little bit about cost that might be incurred in the interim between now and the end of the year '02? And then what is the margin potential for that acquisition? What impact is that likely to have on your industrial materials margins in calendar '03?

The obviously, the acquisition is critical to us as stated today again. From being able to buy our manufacturer now for our own sale on a vertical basis, wire rods that are of the quality that we need to run through our different businesses that can perform will within our machinery and obviously perform well within the products that we manufacturer for our customers.

And you know, , better than most, that just replaces two bankrupt suppliers that we had two years back and the material that they were servicing us with. But buying something right is not the critical deal being able to bring it up and run it, but we have all the faith in the world that we can do that. We're well along with our schedule. Our schedule is, as we mentioned, that in the first quarter of 2003 we will start to bring the complex up by being able to melt from and then obviously take them into the rod mill to roll rods for Leggett's usage.

The total venture, I think that we announce before, is -- will probably be about a $35,000,000 investment for Leggett, from a capital standpoint and that's the assets that we acquired plus all the improvements that were going to be bringing into the mill to bring it up to a first class operation. And we obviously expect that we should have a reasonable return on our invested capital that were going to have there and above all an above average quality material that we can run through our operations, so it'll take -- you know, those things are not brought back up overnight and we think that it'll probably take us the better part of next year to get it exactly where we want it to.

As far as charges, yes there will be charges as we go through the balance of this year and early next year, Dave, and those charges will ramp up greater in the fourth quarter and first quarter -- fourth quarter of this year and first quarter of next year and -- because this is a capital improvement project and we are going to be spending that additional $25 to $30,000,000 worth of capital over that next 9 months -- six to 9 months period and those will be hitting our capital expenditures as we go forward.

You mentioned that you would be using all this internally, it's my understanding you've got twice the melt capacity as opposed to the rolling capacity. Is there a revenue opportunity, perhaps as you get through 03, given what's going on in the market for steel products?

There very well could be, but we -- that is not in our game plan at all. We do not plan on entering the steel business, per say, to where we're at the whims of Government controls or the whims of imports and exports et cetera. The main objective and main business model is to make material for ourselves. Obviously that melt capacity is there, Dave, as you well know and if there are some times that it would make sense under contractual deals, that we know we could get an above average return for doing it, we'd look at it but that's not in our main objectives.

I think too, Dave, that you're aware that our business model or our plan contemplates running that electric arch furnace off of and that's a significant value for us, so it would -- we'd have to take all those incremental things into account, but if there's an opportunity certainly we'd look at it.

Yes, I thought the power deal was a pretty clever feature of the transaction, so congratulations. Thanks very much.

Thank you.

Thank you.

Thank you. The next question is from . Please state your company name, followed by your question.

of , good morning guys.

Hi Laura.

Hi Laura.

Got another uses of cash question, could you comment on your average cost of debt after the pay down in the quarter and also on the rational of paying down debt when you're already below the target leverage ratio?

Laura, there's -- the last portion, we don't have any debt that we have the ability to pay down, except what we have already taken down, I believe, at this point, Mike. There's no more in 2002.

What we paid down was like seven percent.

What we paid down it was about seven percent cost. But, there was -- was there 50 ...

75.

75 million of that? 75 million of that, , that we paid down. But we don't have the ability to pay down any more until we get into 2003, and then we get the opportunity to do that. So, obviously, there's about -- of our debt that's left, we've got about 45 percent that's floating, and about 55 that's fixed, is about where we are. And, so obviously, those floating rates are very good. Obviously at this point in time, you'd like to have a whole bunch more floating. But still, we don't think that's prudent either, so we've kept it about somewhere in that 55/45 percent, , to what we have done.

4.6 is about the average.

4.6 is the average cost now? The 4.6, , is the average cost.

Pretty good. Thanks, guys.

Thanks.

Thank you. The next question is from Michael Braig. Please state your company name followed by your question.

Mike Braig of AG Edwards. Question on the form of the cost : are you putting that in the form of price surcharges, or is there an attempt to roll it into a firmer and more durable list change?

You know, Mike, we're not using any surcharges at this point. Some back late last year in maybe the early part, we might have had a few deals that got into freight and some different things that were surcharges. But, everything now that we're doing is put in the form of a firm deal because, obviously, with what's happened -- whether it's the Canadians and the Americans that can't get together on wood, or whether it's from the governmental things from steel -- we have rolled those through the system. And obviously, if those things change in steel, we'll give it right back to those customers just like we put it in there. But, it's been put through in a firm arrangement.

OK. Thank you.

Thank you. The next question comes from Matt Collins. Please state your company name followed by your question.

Edward Jones. Good morning, guys.

Hi, Matt.

Hi. Over the last year you've been in a situation with pretty low inventories being held at your -- most of your customers are retail. Do you feel that's still the case today and are there any areas in particular that especially low or high, even for that matter, versus recently?

Matt, I really think that probably inventories -- probably in the last 14 to 16 months -- they've probably managed as well throughout the entire system, from us, through our manufacturer customers all the way to retail -- are probably managed as well as we've had them managed in a long, long period of time. Part of that, maybe, comes from better IT that we've gotten placed throughout the entire systems now, and I think it's -- I know we have done a much better job -- obviously it shows up in our working capital and a lot of other places. But our manufacturer customers, and then today at the retail level, I don't believe we have any inventory problems whatsoever.

OK. And can you also give an update on your Harley relationship? I mean, how big that business is today? What products you're supplying? Is there -- is there potential to grow your content supplied for each bike at this point? Are you getting all the share that you can get?

Matt, this is Dave Haffner. While we don't give specific dollar amounts by customer, that business does continue to grow, and because of the continuing improving relationship with Harley, we're contemplating making a substantial, incremental capacity adjustment in one of our facilities to accommodate a substantial amount more of their business. We are through the planning stages of that, the budgetary and estimate stages of that and we're waiting for a little bit of information out of Milwaukee. But, it looks very good for incremental business, especially next year.

Great. And one last. On your cap ex plan for this year, I think the last number was a hundred and thirty million, but your run rate's more like a hundred and ten, I think, after it first happened. And, maybe, do you have any plan yet for next year.

We don't have our, this is Dave again. We don't have our capital plan put together for next year. The folks are working on it, are just commencing to work on it as we speak. We'll have that put together finally in September or October. But, I anticipate that we're going to spend possibly a bit more than the hundred twenty, hundred and thirty because of some of the asset purchases that we've made. Like Northwestern is a good example, or Sterling Steel is what we're calling that entity, where we did not have that in our plan. But, still, a hundred and twenty five, a hundred and thirty five million, somewhere in that range, we don't anticipate that we're going to be significantly outside that.

O.K. Thanks a lot.

You're welcome.

Thank you. And the next question is from Fred . Please state your company name followed by your question.

Thank you. I'll respect your one question request. Can you talk about the commercial fixture as it relates to the retail store demand and how that business is.

The commercial fixturing, Fred, is probably, as you can well imagine, one of the tougher deals to read because you can get stiff-armed very quick or you can get a call and all of a sudden somebody's got to have something tomorrow because somebody else did something in some retail environment or etcetera. But, basically, as we speak, we anticipate that third quarter volume will be good. A number of programs that we had in place are beginning to roll out as we speak in the commercial fixturing opportunities. And then as we go forward, we're continuing to get to look at a number of very good projects. I believe that our strategy that we have been trying to implement over the last couple of years of trying to be a bigger source to a retailer and consolidate their purchasing and etcetera, that strategy is being accepted and embraced more every year by the retail environment, as well as our strategy of being able to bring to them a combined Asian and U.S. manufactured products that have got cost containment, or meet their cost objectives for their fixturing and etcetera.

So, we're looking at a number of projects, obviously, no more retail space being built except certain retail customers are continuing to add space, you know, the WalMarts, the Kohl's and those kind of people. But, there's a lot of others we don't anticipate. But, the refurbishing is what we're involved in and what we can do a great job in. And we do think that as we enter 2003 and 2004, that that strategy continues to play out more and that our opportunities to look at more volume per customer will accelerate as we move out in this next 24 months.

Thank you. Ladies and gentlemen, if there are any additional questions, please press the star followed by the one at this time. As a reminder, if you are using speaker equipment, you will need to lift the headset before pressing the numbers. One moment please for the next question.

The next question is from . Please go ahead with your follow-up question.

Thanks. Would you talk a little bit about the trend in the furniture business over the last three-and-a-half months. And also, are you able to negotiate any better from prior relationships with those manufacturers, given the downtown?

As you know Margaret, the trend has been abysmal. And as I mentioned in the last conference call, Matt Flanagan, who is the president of that unit, and I personally have been to many of the customers, meeting with executive, not only their purchasing people, but their executives, to see what we might be able to do to assist in driving value into our joint propositions. Now I realize that's a very general comment, but we are getting good reception, we're investing things with those customers that maybe a couple years ago we wouldn't have been able to investigate with them, because of their internal capabilities.

And without naming names, we're soon to go back up to Michigan and talk about a strategic initiative on a new product, which is likely to represent a lower net cost for that customer and a higher utilization for us. So those are very general comments, but for sure, it's a sober, sober landscape in office and contract. And all of our customers, especially those that are heavily capitalized and vertically integrated are looking for ways to improve their returns for their shareholders. And Leggett is in an excellent position to do that, to provide that support. I personally have an interest in it, because I grew that part of the business for us years ago. It's challenging, but looks like a tremendous opportunity for us.

Just with respect to the trend, is it any better late June, early July than it was in the beginning of the quarter?

There's a mixed bag, but there was an uptick, especially in the low to middle price-point products with a couple of our major customers that participate in that area. So, hey, we'll take any relatively good news we can get.

All right. Thank you and good luck.

Thank you.

Thank you. The next question is from Bud Bugash. Please go ahead with your follow-up question.

Yes. About 30 days ago another public company, , issued a press release talking about a swap of some assets with you in the carpet side. I wondered, I think you had signed a letter of intent at that time. I wonder if you could update to whatever extent you're comfortable as to where that goes and where maybe the progress or the timing of it is?

Bud, obviously it was material to them as a public company. It was not material to us in our size. We are midway through the due diligence of the project that they announced, and we are pursuing that diligently. And like I say, we're at least midway through that due diligence as we speak.

It looks like a pretty clever move, Felix, can you kind of comment strategically on it?

Bud, strategically we feel like we have the capability of being a much larger producer of carpet underlay both from rebond, pure rubber and fiber and even some prime goods, to service the carpet industry.

And we are very small player in the flexible urethane, servicing a number of other issues and by being a small player we were best served at being out of that part of the market and being a major player in the other part of the market and concentrate our efforts both from a manufacturing, product development, et cetera.

And we do think it makes a very good strategic move for both our sales as well as home continuing their efforts in trying to be a much larger player from the flexible side.

And do you think it's gets done by the year-end if it gets done?

At this point, we sure hope so.

And has HSR been done?

It has been approved. We are out of HSR.

Thank you very much.

Thank you. Mr. DeSonier, there are no further questions at this time. Please continue.

OK. We appreciate you sticking with us. We know we're a little bit past the hour, and we'll see you next quarter. Thanks you very much.

Thank you.

Thank you. Ladies and gentlemen, this concludes the second quarter 2002 earnings conference call. If you would like to listen to a replay of today's conference call, please dial 303-590-3000 with access number 481466.

Once again, if you would like to listen to a replay of today's conference call, please dial 303-590-3000 with access number 481466. Thank you for participating. You may now disconnect.