禮恩派 (LEG) 2002 Q3 法說會逐字稿

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Good morning ladies and gentlemen, and welcome to the third quarter 2002 earnings conference call. Following today's presentation, introduction will be given for the question and answer session. If you need assistance, please press the star followed by zero. This is being recorded October 17, 2002. I will now turn it over to David Desonier.

Good morning and thank you for taking part in our third quarter conference call. I'm David Desonier Vice President of Investor Relations. With us are Felix Wright,Chairman and Chief Executive Officer,

, President and Chief Operating Officer Karl Glassman Executive Vice President. Jack Crusa, who for the first time is joining us Jack is Senior Vice President of Leggett. He heads both our industrial materials segment and the automotive business in the specialized product segment. And Susan McCoy is here. She's ourDirector of Investor Relations. The agenda is as follows: Felix will assume rise overall results for the quarter. David Haffner will then give a more detailed review about what's happening in our operating segments. Following that Felix will review the outlook for the 4th quarter 2002 and beyond that. Finally the group will try to answer any questions you have. I would like to remind you that this call is being recorded for Leggett and Platt and is copyrighted. The call may not be transcribed or broadcast without our permission. A replay is available from the IR portion of Leggett's website. Remarks today regarding future expectations, results or events, objectives, strategies, trends or results, constitute forward looking statements.Actual results may differ from forward looking statements due to certain number of risks and uncertainties and the company undertakes no responsibility to update this. For a summary of these risk factors and additional information please refer to yesterday's press release and the section in our 2001 10K entitled Forward Looking Statements. Now I'll turn the call to Felix Wright.

Thank you Dave and thank you all for joining us and thank you for those of you at the furniture market for joining us. Before we speak about the financial results for the quarter, we would like to comment about some important events that occurred in the quarter, for the 31st consecutive year we increased our dividend. Although this year was smaller, the result of lower earnings driven by continued economic softness our shareholders have benefited from average annual increases of 15% over the past three decades. Our guideline for dividend payout is approximately one third, the moving three year earnings average. Although we are currently at about 40% pay out, we expect to turn to 30-35% target as earnings recovered. We would also like to mention the company was one of those required by the S.E.C.. to have the CEO and CFO certify recently issued financial statements. Mike Globber and I filed the required certifications well in advance of the August 15th deadline. We are pleased to see investors again scrutinizing factors at which Leggett has always ranked high. Leggett has consistently focused on GAAP based earnings results andmaintained clear financial statements and conservative pension assumptions. Our board is consisted of a majority of independent directors and employee and management stock ownership continues to be significant. Continues in the range of 20-25%. We take very seriously the trust our shareholders place in our company and we will continue to operate with the same conservative and ethical business principles that have earned us that trust throughout our long history of sustained and profitable growth. Now let's turn to the quarter's results. Earnings came in two cents ahead of the updated guidance we issued on September 11th. A penny of the improvement was from slightly stronger than expected sales, the other penny was from slightly lower than expected restructuring charges which was $10 million vs.our projections of 11-13. Some of the highlights for the quarter include the following. Sales grew 6.1% this quarter. Organic sales increased 2.6%. This was the second consecutive quarter of organic growth following 7 quarters of decline. E.P.S. grew 4% compared to last year's third quarter. We took $10 million in restructuring charges during the quarter related to the sale or closing of 5 facilities. This reduced our E.P.S. by about 4 cents. Trade sales at 1.12 billion were the second highest on record. Just shy of the all time high set in the third quarter of 2000. Working capital was better than our target of 19% of sales for the third straight quarter. Compared to last year, working capital excluding cash and maturing debt securities was 4% even though sales were up. Cash increased to 189 million in the quarter. Capital spending was about $30 million and we expect the year to come in around $120 million. In the third quarter, We purchased 1.3 million shares of stock at an average price of $21.75 per share. (ph) Finally, debt, net of cash was 26% of total kept. This was down from 30% one year ago. Our strong financial position leaves us well situated to capitalize on an improving economy. Net earnings at 29 cents per share were up one penny from last year's third quarter earnings. Organic sales growth increased earnings 3 cents, and a 2 cent benefit came from the elimination of goodwill amortization The gains were offset by about 4 cents in restructuring charges.

With that I will turn it over to David Haffner who will discuss the various operation segments in more detail.

Thank you Felix.

I plan to talk about these three topics.First I'll briefly address acquisition activity and then I will comment on restructuring activity during the quarter and finally I'll discuss factors affecting overall operating results followed by a review of what is occurring in each segment. In the second quarter we acquired assets of three businesses. The first was in the aluminum segment. We completed the purchase of the remaining 49% interest in a die casting joint venture in Mexico that we have operated since acquiring Pace Industries in 1996. The second, in the industrial materials segment, was purchase of the assets of North American Wire Products. This is a wire drawing operation that produces wire for mechanical spring applications and other specialty wire. And the third was in the automotive side of the specialized products segment. We purchased the assests of a small operation engaged in the production of neumatic and mechanical lumbar support systems for automotive seating. In our September 11th press release, we mentioned the possible acquisition of Foemex Carpet underlay operations. That deal was called off earlier this month. We frequently tell our investors we will pursue growth that will be profitable and will earn an attractive return on investment. We are patient and disciplined in our approach to acquisition looking for good opportunities to build shareholder value. We are not afraid to walk away from a deal. We expect this year's pace of acquisitions to be slightly below what it was in 2001. So far this year we have completed seven acquisitions that should add about $60 million to revenue. We continue to look at good number of opportunities and expect the pace to accelerate into next year. During the quarter, we announced the sale or closure of five facilities, 3 in aluminum and one each in commercial and one in residential. In August, we sold our remaining aluminum smelting operation and one of our aluminum tool and die operations. We are pursuing a possible sale of one of our die casting operations and are currently in advanced stages of negotiations in that transaction. We also announced idling of fixture facility in Ohio that serves Telecom industry and the closing of a facility in fibers division of our residential (inaudible) segment . We incurred approximately $10 million primarily not cash in restructuring charges associated with these decisions. This brings to 27, the total number of sales, consolidations or closings that have occurred in the last two years as a part of our continued focus of cost structure improvement. Last quarter we said we were nearing the end of our tactical plan and the majority of our plant rationalizations have occured. With as many facilities and operations as we had, it's reasonable to assume we will occasionally rationalize that facility base if we see compelling savings or if the economic environment induces us to do so. Turning to sales, as Felix mentioned trade sales were up 6.1%vs. third quarter last year. For the second consequitive quarter we saw organic sales growth in the majority of our segments, decline in commercial segments are lessening significantly from more than 20% 6 months ago to 3.8% this quarter, in part due to easing comps. Overall EBIT -- increased slightly from $99.2 million in third quarter of last year to 103 million this year. Compared to the third quarter last year here are the major components of the EBIT increase. Organic sales growth increased EBIT by $8 million. EBIT increased 6 million to the elimination of goodwill amortization and EBIT decreased $10 million due to higher restructuring costs and remaining change comes from other items. In residential furnishings total sales increased 3.6% vs. the 3rd quarter of last year, with same location sales up 2.5%.

EBIT increased $6.5 million or 15%. The EBIT increase is partly due to higher organic sales and the upholstered furniture sales component grew 12%; but this was tempered by mostly flat sales in most of the business units within the segment. About $3 million of the EBIT increase is related to the nonrecurrence of last year's Canadian lumber duty. Other improvements came from operating and amortization expenses. These gains were reduced by approximately $4 million for restructuring. Margin pressure from higher raw material costs in steel, lumber and chemicals also had an unfavorable impact on the quarter. In commercial fixturing and components, total sales increased by 8/10ths of 1% in the quarter. With increases from acquisitions mostly offset by 3.8% reduction in same location sales. EBIT was down 6.7 million or 24%. The EBIT impact from the same location sales decline was offset by lower operating expenses and amortization. Restructuring reduced EBIT by about $3 million. Remaining decline for the quarter reflects margin compression brought about by both higher material costs and pricing pressure in fixture and displayed (ph) businesses.

Business conditions remain weak with retailers and brand product manufactures continuing to postpone spending on fixtures and displays. Third quarter is typically a seasonally stronger quarter. And fourth quarter down as most new store openings and remodeling projects are completed in advance of the holiday season. In addition, demand is extremely weak in the office and contract furniture end markets and we're not expecting improvement in the near future.

Over in aluminum, total sales increased 6%. Organic growth was 7.9% and partly offset by the divesiture of two businesses including our remaining smelters I mentioned before. Ebit decreased $2.9 million or 57%. The sales increase that resulted for market share gains benefited EBIT by roughly $3 million. This increase was offset by $3 million in restructuring cost during the quarter. EBIT was also reduced by temporary start up inefficiencies with some of the business and higher raw material costs. In industrial materials, total sales increased 21.2%, reflecting the benefit of 3 acquisitions in organic sales growth of 6%. E bit was flat with last year with gains from higher sales of fset by increasing steel costs and start up cost by the sterling steel rod mill. In the fourth quarter we're expecting the startup costs associated with the rod mill to to be around $4 million. In specialized products, total sales increased 11.5%, primarily from organic growth. This increase reflects strong performance of automotive businesses benefiting from robust demand and market penetration. Sales for the machinery business were also up from prior year. EBIT increased $6.6 million primarily from higher sales and improved cost structure. Finally lipo and intersegment elimination slid to a net $ 2.8 million reduction in EBIT, versus third quarter of last year. I know Felix has spoken about our working capital improvement but I would like to reiterate that the entire operating team is highly focused on both working capital and capital expenditure deployment. We will continue that focus in the corresponding discipline we have developed in the tough economic times, with that review I'll turn it to Felix.

Thank you Dave. We would like to talk about the outlook for the fourth quarter. Economy and impact for the top line remains the largest driver of our earnings. There remains general uncertainty about whether in the near term the economy is poised to improve or head further to additional decline. Fourth quarter sales are typically lower than the 3rd quarter by $50-$120 million for seasonal factors. We are forecasting our 4th quarter sales between 1 billion and 1.05 billion. Which is 70-120 million below our third quarter. This range yields year over year organic growth of 2-7% consistent with the modest growth seen in the last two quarters. Our earnings per share for the fourth quarter is 21 to 26 cents. This results in full year earnings from 113 to 118 and assumes organic sales growth between 0-2% for the year. With that background, here are assumptions we used to arrive at our fourth quarter earnings forecast. Sequentially, we expect the sales decline of 70-120 million to take 7 to 12 cents out of earnings. The nonrecurrence of third quarters' restructuring will add 4 cents to earnings. We expect approximately about 4 million or about a penny for the startup costs for sterling rod mill. Taken together, these assumptions yield an earnings range of 21-26 cents for the fourth 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 product mix, every $10 million in additional same location sales should add about one penny to earnings per share. Finally as we look beyond 2002, the future of Leggett continues to look bright. We are making progress on the items under our control. We are gaining market share, we continue to generate significant amounts of cash and our balance sheet looks strong. We're very well poised to capital on improving business conditions in all our markets as they materialize. I'll turn it back to David Desonier.

That concludes our prepared remarks. We just completed an update to Leggett's fact book . If you do not have one and would like one, please e-mail us at invest@leggett.com -- I will now conduct q and a in the same manner we usually do. Ask your best single question and yield to the next participant. If you have another one enter it in queue. We're ready to begin the Q&A.

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, if you would like to decline from the polling process please press star followed by 2. Your questions will be polled in the order they are received and if using speaker equipment, please lift the hand set before pressing the numbers.

First question comes from John Ball.

Yes, John Ball with Wachovia Securities. Good quarter. I was wondering if in the residential segment you had a substantial gain and related to upholstery components, was that an account gain or across-the-board customer gain and additionally on the commercial side is the office segment significantly weaker year over- year than the retail?

John, this is Karl Glassman. I'll answer the residential question first. It was broad based that gain is not account specific. What we are experiencing is strength in the domestic market, but also strength in terms of style change in the European market that's helping those businesses. As it relate to the commercial side, Dave, why don't you.

Hi John, Dave Haffner here. In our office and contract segment, our performance is not down as much as retail in that segment. We've made some gains, we've played some products with some maker users and as such we're not off to the same degree the retail sales are off in that regard.

Thank you, And on that upholstery was there any loss of momentum as you went through the quarter in that business or was it pretty strong throughout the quarter?

John, we would normally experience seasonal slowness as the quarter starts to move on. We didn't see that to the same degree we historically have.

Great, thank you.

))))Operator: Next question is from Laura Champaigne. Please state your company name followed by your question.

Good morning. It's Laura Champaigne from Morgan Keegan. Could you, given the recent volatility in the capital markets, quantify your funded position in the defined benefit pension plan and talk about your comfort level with assumptions going forward and your expectations for pension expense next year?

Ya,this is David Desonier, we were 40 million over funded last year. We're just now starting to make the estimate formally for this year, but we think we will end up about $15 million over funded. Our assumptions have been, for several years now, an 8% rate of return and 6% discount rate, that's been for four or five years.

Great. Thanks, sounds like you've been conservative there too.

Very conservative and don't expect any charges next year.

Thank you.. The next question comes from Keith Hughes. Please state your company name and ask your question.

Scott Phillips on behalf of Keith From Sun Trust (inaudible) Humphrey. I'm looking at your commercial segment, notice some nice sequential increases going back through the quarters. I was wondering if we can get more detail. Is that mostly sequential increases in volume as well, just walk us through those improvements over the last couple of quarters that would be nice.

Are you talking from first to second to third to sales growth?

Yeah, you look at EBIT margin in that segment, we go from 4.3 to 6.1 to 7.7, I know the comps are easy on the sales side, are those margin improvements, slightly better sales or do you break out the improvements there?

Mostly seasonal sales improvement, typically pattern for commercial would be first, then you get better in the second and third and falls off in the . -- fourth quarter. And the margin is pretty much just following the sales increments sequentially.

That was really my question thanks.

This is Dave Haffner, I would add a lot of this effort we are putting forth in consolidating and using best practices is also starting to yield benefit.

)) Lot of concentration over in that commercial fixturing segment and it's beginning to show some fruit.

Is that where the most effort has been?

A lot has, there's been a lot in residential and there's been some in aluminum too. And there's the fixturing part of the commercial sales.

))Operator: Next question comes from Susan McLaurey, please state your company name followed by your question.

Hi, Susan McLaurey with U..S.B. Wall burg. Can you guys talk about your outlook for raw material prices?

)

Susan, this is Felix and I'll let Dave and Karl or even Jack Crusa address some of that but I think we have had substantial movement in hot role and cold role and in the rod side of the steel part of the business we have had some incalculables the urethane force for our business, we've had some in fibres, if you take all that, and obviously we haven't gotten all that through the system it's had some effect in our earnings within this quarter. I do believe the rate of incline has flattened and we're not seeing the movement that we've had and in fact, there may be a few places that we could have seen some slight easing , but nothing of huge magnitude. Looking at 2003 we don't see further escalation and depending on the economic environment, there could be decrease in raw materials. Dave or Jack?

What I would say too, Felix is everybody who supplies commodity products would love a price increase. We would love a price increase. Unfortunately it's a lot easier said than done especially when you have people who collectively put their leverage together which is something we've done this last year, especially and we will continue to focus that way. So I think, yes, we have suffered raw material price increases but if you compare to what the industry at large has experienced, I think we are doing better and will continue to focus on that regard. Jack Crusa is here, Senior Vice President of the company and looks after the industrial materials segment and buys very, very large percentage of our total raw materials, so Jack, would you like to comment?

Sure. The best feel we have today for continued impact of material is that we're over the hump. On flat roll steel, we sense a little bit of softening in the last couple of weeks. That would tell us that some of the demand is softening up and that's having an impact on the pricing. On the rod side, there was a final ruling on the counter veiling anti-dumping duties last week. That will have some impact on Mexico which is a good source. But timing of bringing our sterling steel online should help us out and we don't expect to see a major impact in the first part of next year at all.

Okay thank you.

))Operator: Thank you, the next question comes from -- Mr. Buddy,

Ar dens. Sorry if I missed this earlier in the presentation, I was a little late getting on the call. With regard to the fourth quarter impact as it spills over to '03 did you amend anything with regard to the '03 outlook, and if you haven't addressed it, I know there is going to be economic insolence in it, where do you think we should be headed with regard to changes and estimates?

This is Dave DeSonier. We haven't given any guidance on '03, so we didn't have anything to update on the '03 guidance and we likely won't do that for several weeks now at least, maybe not until the next conference call.

Well, does that suggest that you don't expect impact in Q1?

From what?

The continuation that's the reduction in Q4, I presume sequentially we would be looking at a lower number in Q1 coming off lower Q4 or am I not reading this correctly?

Lower sales?

Right.

I don't know if I would say that. You have to factor in seasonality. Fourth quarter is typically lower and then we come back on sales. We haven't looked at that or come to conclusion yet that we are ready to make any forecast.

I think the way we see it at this point, we are bumping along, but as Dave says, we have a lot of seasonal things which is normal for us to take that out and project it into the first quarter at this point is a still little bit of a tough call. I think we get another couple months under our belt and we'll have a better feel for what will be happening there.

Also we will be finalizing our operating budget, this is Dave Haffner. Each of the Unit Presidents and Presidents will be bringing forward their operating budgets so we will have a better feel. But David Desonier is correct, don't assume a trend first quarter from fourth because the seasonality will disallow that.

We've seen many $50 million improvement seasonally into the first quarter from the fourth. I haven't heard any economists yet forecasting great improvement in the first quarter.

Understood.

))Operator: Thank you. Ladies and gentlemen, if any additional questions please press the star followed by the one at this time. As a reminder if using a speaker equipment you will need to lift your hand set before pressing numbers. Please stand by for the next question. Once again, if you do have a question press the star followed by the one at this time. Gentlemen, there are no further questions, please continue.

Okay, you guys are letting us off pretty easy this quarter, we appreciate your attention we will talk to you in three months. Thank you. Thanks everybody.

))Operator: Ladies and gentlemen, this concludes the 2002 earnings conference call, we appreciate your participation, you may now disconnect.