禮恩派 (LEG) 2003 Q1 法說會逐字稿

Good morning, ladies and Gentlemen, and thank you all for standing by. Welcome to the mid quarter update conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone requires assistance at any time during today's conference, please press the star followed by the zero for an operator. As a reminder, this conference is being recorded today, Wednesday June 18, 2003. I would like to now turn the conference over to Ms. Susan McCoy. Please go ahead, ma'am.

Good morning, and thanks for taking part in Leggett & Platt's mid quarter conference call. I am Susan McCoy, Director of Investor Relations, sitting in for David DeSonier who is out of the office this week. Joining me today are Felix Wright, Leggett's Chairman and CEO; Karl Glassman, Executive Vice President and Head of the Residential Furnishings segment; and Matt Flanigan our CFO, David Haffner is also out of the office this week, so he won't be joining us on the call.

We will start this call with a brief preview of our current business trends and the guidance we issued yesterday. Following that we will be open to any questions you might have. This conference is being recorded for Leggett & Platt and is copyrighted material. This call may not be transcribed, recorded or broadcast without our expressed permission. A replay is available from the IR portion of Leggett's website. In addition, I need to remind you that remarks 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 a number of risks and uncertainties, and the company undertakes no obligation to update or revise these forward-looking statements. For a summary of the risk factors and additional information concerning forward-looking statements please refer to yesterday's press release and the section in our 10-K titled forward-looking statements. I will now turn the call over Felix Wright.

Thank you Susan and thank you all for joining us this morning. Sorry to have to have mid conference calls, but anyway Dave Haffner, as Susan mentioned is out of the office on a long-planned trip, it is not the fact that he just trying to bail out on Karl and me, but he is away for the week. Our remarks are going to be brief and we are going to concentrate primarily in trying to not only give you what has happened from the financial standpoint, but also as much visibility as we've got in the end markets, because that's the biggest thing that's driving us at this point.

But as you all know, yesterday we issued the revised guidance for the second quarter and the full year. Second quarter sales are coming in below our previous guidance. Through the first 10 weeks of the quarter we saw sales decline in residential, commercial, aluminum and industrial segments, and small increases in our specialized segment. We continued to gain market share, but the total volume is down due to soft end-market demand. High energy cost continued in the quarter, and were having a greater impact on our earnings than we expected. Although the second quarter hasn't seen the same highs that occurred in March, energy cost have remained above our expected levels. These cost increases, affect all of our businesses, but impact our residential, aluminum and industrial segments the most. Other factors are also impacting our earnings.

Asset utilization in our spring producing facilities has been reduced further than initially expected as market demand remains weak, and we take steps to bring our inventories down. In aluminum, soft grill demand this quarter have reduced utilization. Other factors including sales mix, delays and passing along raw material prices, and a weaker US dollar are also expected to impact the quarter’s earnings. Our prior guidance for the quarter suggested earnings would be about $0.27 per share, if sales were down 6%. From the prior $0.27 estimate the quarter sales declines, lowers earnings by about a penny, higher energy cost reduces earnings by about a penny. And the reminder of the change is related to the other factors that I mentioned previously which is about $0.02. With the preliminary look at second quarter results, we now feel our full year sales expectation range is negative two to plus two, down from previous guidance of flat to plus four. We still anticipate $0.05 to $0.10 of earnings improvement from our recent restructuring and cost reduction efforts. However that benefit is being offset by higher energy cost, sales mix, lower plant utilization, and various other factors that we've mentioned. Therefore our new full year earnings guidance is $1.05 to $1.20 per share.

As we look into the last half of the year, any improvements in consumer confidence and employment levels should drive consumer spending on big-ticket items helping many of our businesses. On the other hand continued higher energy prices would have a negative effect on spending, as consumers have to pay more for gasoline and electricity. We need to see the strength from the consumer as well as improvement in business capital spending. We are going to take this time to try to update you as to what we see in the end markets and what really is going on in each one of our segments. So I am going to ask Karl to address the residential segment first. Karl.

Thank you Felix. Demand for bedding has been weak throughout most of this year and we continue to run negative to 2002 comps. During the second quarter, we had approximately 15% of our US spring manufacturing capacity shut down to respond to extremely weak demand and keep our inventory levels in line. Typically in the second quarter, we've run flat out, building for third quarter shipments. As we move into what's normally a seasonally strong third quarter, we will be facing easier 2002 comps. So we may begin to see some improvements in year-over-year trends. Upholstered furniture sales have begun to soften slightly against strong sales in 2002. We are seeing the normal seasonal pattern of lower sales in the later part of the second quarter. But we are still performing better than industry estimates. On a positive note, our new Chinese mechanism facility that began operations in the first quarter is performing well and is well ahead of plan for the year. We continue to believe that there's considerable pent up demand for furniture and bedding given the strength of housing over the past few years. Demand for carpet cushion has been strong following housing strength. Unlike furniture and bedding this is a less deferrable item since carpeting goes in immediately when new homes are built.

On the commercial side of the business, retailers continue to postpone projects. Display fixtures or capital items to our customers and recovery is not likely to occur until retailers see sustained strength in consumer spending and improvements in their earnings. There has been a considerable shake up in this industry as many of our weaker competitors have failed. Our market position is good. We are the only one-stop solution for our customers. We see significant pent up demand created by three years of reduced, delayed, and unprecedented spending by retailers. We will benefit from our market leading position when broad based retailer spending returns. Office and contract businesses are still seeing significant market weakness and recovery in this industry is not expected in the near future. From the aluminum segment during the quarter, our sales have been significantly affected by the declines in grill volume. The second quarter is seasonally the highest for grill sales. The industry has seen declines this year, as consumers seem to be deferring this discretionary purchase. Last year the major retailers were very promotional with this category but we've seen much less activity this year. We're seeing declines in some of our other major markets, which are industrial lighting, telecom, electronics, and large truck engines. Businesses, utilities, and municipalities continue to limit spending on capital items.

On a positive note we continue to increase share with important customers and pursue new markets. Our sales for components for motorcycles and small engines continued to be very strong. New programs in the major appliance markets continued to be very promising. We are positioned to service this industry through our Mexican facilities and we will see continued growth through the balance of 2003 and well into 2004.

From the industrial segment side, more than half of our wire sales are related to the bedding industry either through sales to our own spring plants or our bedding customers. That industry's demand is off significantly this year hence it’s affecting the industrial segment. Our wire businesses also served capital goods markets, which are still down. We are also happy to say that our new Sterling rod mill which began operations in the first quarter of this year is running ahead of plan and will be running slightly better than breakeven for the quarter. Tubing is seeing declines due to softening in automotive units and also in-market declines for ATVs and accessories. The ATV industry is facing very tough comps from 2002. Last year military contracts were being supplied in an equipment build up in preparation for the war in Iraq.

In the specialized segment, automotive market is softening as expected, but the industry clients are being offset by new programs that we are participating in. The segment's growth expected for the second quarter continues to be driven by our automotive business. In the machinery part of that specialized segment, we're seeing some strengthening in our backlog for the last half of the year and that's both through the quilting and the bedding end of our business as well as the digital printers that you all know that we are often involved in. I think that probably gives you a feel as to what we see our visibility from our in-markets and what's happening in the segments at this point and with those comments, we'll be happy to take your questions. We will turn it back over to Susan McCoy.

That concludes our prepared remarks. We thank you for your attention and we'll be glad to answer your questions. Wendy, we're ready to begin the Q&A.

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question today, please press the star followed by the one on your push button phone. If you would like to decline from the polling process, please press the star followed by the two. You will hear a three tone prompt acknowledging your selection, and if you are using speaker equipment you will need to lift the handset before pressing the numbers. One moment please for the first question. Our first question comes from Budd Bugatch, please state your company name followed by your question.

Good morning. This is Brian Gordon sitting in for Budd who is on the road from Raymond James. My question this morning would be in regards to where you guys are for inventory right now and what sort of targets for working capital improvement do you think is possible by the end of the year given the current demand situations?

Brian this is Felix and that's one of the things that obviously has affected current earnings in the quarter, we are into [inaudible] throughput through the assets. We really started trying to curtail things, as improvements didn't take place as we had anticipated and that is ongoing as we speak. Our inventory levels and working capital levels as you know at the end of the first quarter were higher than we wanted them to be in our targets. I believe that as we wind up the end of the second quarter, they are still going to be and about that same range for the end of the second quarter. However, with the way that we have got our production plant at this point as we enter the tail end of the third quarter and into the early into the fourth quarter, we anticipate our working capital being down into that same 19% range of sales that we wound up last year. We think that we can get there based on whether we have got our production planed and etc. So, shouldn't be any problem, shouldn't have to run at any lower production levels than what that we're running now unless that we have misread some markets and etc. Because that's one of the things that we don't just sit here and continue to run after. We think that we see a trend that's of sales that's not where it is.

Thank you very much.

Thank you. Our next question comes from Joel Havard. Please state your company name followed by your question.

BB&T Capital markets. Good morning guys. Good morning Susan.

Hi Joel.

Karl, wondered if you could help us get a handle on, maybe the near-term, intermediate term implications of the bedding business both in the core, your part of it in the residential and then maybe what's the machinery side of it's telling us over in specialized. I'm asking that question in the context of Culp recently saying that they've had a decent, not gang busters but a turn in their bedding business. And then looking at the Sealy and Simmons numbers, which were both pretty good for Q1.

Okay Joel, in the first quarter, we told you during that conference call that our unit sales were up in the high single-digits. So, let's call it 9 to 10. Second quarter my current forecast, or our forecast, is in the 7% range. We are seeing the normal seasonal pickup in bedding shipments. But it's a normal trend. As you know that the bedding business is cyclical or seasonal, and that variance to the prior year is lessening but albeit at too slow a rate to give us much comfort. That's why the adjustment in our productive capacity. What we see in the second half was a pretty significant drop off in '02 after the fourth of July. Thus we are up again significantly easier comps going into the second half. And at this point with our limited visibility, we expect to exceed those comps. We have ourselves positioned from a manufacturing standpoint and that we have our inventories in line, in fact some of our manufacturing guys, they started pressuring me a little bit to start to run some machinery again. Certainly the bias is to run as opposed to further curtail. So, things are getting positive from that standpoint.

Well call me the eternal optimist; my concern is that you guys scale back a bit too much in the summer. We get hit with a good spike in demand in the fall, and you're all of a sudden caught. You're costs are impacting, because you having to run too much OT.

You are starting to sound like one of our guys, Joel. It is an issue. As you know, we run this business not on a quarter-to-quarter basis, but on a long-term basis based on the information that we have in our hand. And as we talk to our customers, they certainly are not indicating to us that they expect a gangbuster second half. If based on where we are today and current levels, if we were to run 5 to 10% even ahead of last year sales, we could handle that reasonably well with just adding shifts, working complete hours. I would love to have that problem.

Okay.

But we are well positioned. I'm very, very comfortable with where we are from an inventory-planning standpoint. All that really happened to us is we expected flat sales this year; we didn't get them in the first six weeks of the year. We had a terrible President's day, we adjusted and now we are paying the piper for the adjustment, and that's the way we are going to continue run things.

Fair enough. Matt I've got you scheduled repay something like $70 - $75m of--- Q2, Q3, and Q4 does that jive with what you are looking at?

Yeah. Joel you're consistent because, I know you are tracking that closely as we are to second quarter we will have paid about $31m, third quarter $23m, fourth quarter of ’03 $21m.

Okay. All right that's all I've got right now. Thanks guys.

Thanks Joel.

Thank you. Our next question comes from Michael Braig. Please state your company name followed by your question.

Good morning everyone. A.G. Edwards.

Hi Michael.

Hi Mike.

On the industrial side, if I heard the comments correctly the implication was that the internal supply as well as perhaps some external on the bedding side was primarily responsible for the big double-digit decline. Can you characterize what the outside non-residential shipments would have declined without that impact and are you certain that there is no price decline that somehow slipped into your comp numbers?

Mike, this is Felix and you are correct that the internal usage in the bedding and the furniture components to some degree has been the big driver on the loss of sales. However, we are involved in a lot of markets that our industrial springs, some goes into [farm] machineries, some winds up into different industry and etc and obviously those industries have been off significantly and have affected that wire business that's been coming out of those wire mills. There has been almost no deflation that has affected that. In fact, there has been a little bit of rod adjustment that has been put forth in some of those markets and some of those products. Not to any huge degree but there has been some because we have had some rod movement. That rod movement has stabilized at this point and we are not anticipating any further movement in that but price has been very little, Mike. Our own internal use has been a huge part of it because when we shut down 15% of that machinery in that is in that bedding end of the business, we're making a huge inventory adjustment and hence it gets over into that industrial side of the business also.

Okay. Thank you.

All right.

Thank you. Our next question comes from Laura Champine. Please state your company name followed by your question.

Morgan Keegan. Good morning.

Hi Laura.

Good morning Laura.

I know it's difficult to parse out but can you tell how much of the current weakness in sales is related to in-markets and how much is related to an inventory correction at your manufacturer customers?

It varies across segments, Laura, and the biggest thing that we have got some inventory correction going on would be in the residential part of the business that Karl has tried to address. As he said when we are looking for flat business in the first part of this year and then wind up with the first eight or ten weeks or twelve weeks that we were off at 8% or 9% in pieces and then we really had to put the brakes on. We are producing less today than we are selling and we have been in that mode for probably since third or fourth week of March Karl?

Yes. Correct.

Probably third or fourth week of March is where we've been Laura. So till that really heard from the throughput through the assets but obviously we are going to make sure those inventories in the proper deal. But Laura if you jump from there and I took you to aluminum or I took you to commercial fixturing or I took you to office and contract and etc. we're running most businesses today at about the demand level. It's what we are doing and not having to depress any production, to correct any inventories.

Okay.

Laura I think your question may have been more specific to our customer's inventory level?

Right. Is it weakness because furniture brands and Laz-y-boy are trying to work off inventories that are too high as well?

We don't believe so. Both of them and a number of other residential furnishings customers have talked about their inventories. But we believe those inventory issues are case good related and are a component of trying to give this blended mix right of import versus domestic productive capacity. We are not hearing of inventory issues as it relates to upholstery and as you know the bedding supply chain is just so short there just frankly isn't any inventory in the system. There also was some public comment by some of our large good furniture customers that they were going to plan for extended shut downs in the month of July. We are being told that that is case-good oriented and not upholstery. We do not expect shutdowns, the normal July shutdown to be anything other than what is standard.

Gotcha. And one last question. One of the things I talk about lot with Leggett is the 500m in excess capacity in revenues that could be supported in your current plans and I would imagine it's probably higher than 500m right now given production levels. Is it possible, maybe call me the eternal pessimist, but is it possible that some of that is over capacity particularly in commercial fixturings that you will likely have to cut down a lot?

Laura, at this point we certainly don't think so because that industry is in such a disarray. With so much productive capacity that's in the form of bankruptcy as we speak today, some of them at seven, some of them at eleven that obviously some of that capacity can come back on if somebody buys some of those bankrupt still. Maybe us, it maybe some of those and obviously we do, we roll them in their own facilities whether we've got the excess capacity. But as that industry comes back and there is more capital being spent, probably not for space but for renovations and uplifts (ph) etc. At this point whether we've got that business rationalized we do not believe that we've got any productive capacity there that will have to be taken offline or shut down on a permanent basis.

Right, thank you.

Thank you. Our next question comes from John Baugh. Please state your company name followed by your question.

Wachovia Securities. Good morning. I wanted to follow up with Karl in the residential US mechanism sales. You were down I think for the residential category 6%, then you said I think bedding was off in the 7% range. That would imply that upholstery mechanism were down slightly less. Can you refresh my memory what Q1 was in the upholstery mechanism and are we better or worse than that and any recent trends you are seeing on the residential US mechanism side?

John, let me kind of fill it in -- what we also have in that segment - are businesses, fiber and foam and non-fashion fabric businesses [Inaudible] companies that supply furniture and bedding. So that, kind of, those sales dollars move with each one of those product categories. So, they are not spring specific or mechanism specific. So that gives you a little bit of the distortion that was causing you the problem. The recliner mechanism sales in the first quarter were slightly positive to a very, very strong '02. They are slightly negative and very slightly, the number is about 1%. We're pleased with where we are from a mechanism perspective that we believe that we continue to pick up market share and our blended US Chinese strategy continues to work. We believe that the industry may be off further than that, but the only part of our furniture business that challenges us at this point is the sleeper mechanism side. When we talk about mechanisms generally, we're talking the chair side, but the sleeper business continues to be depressed and that volume is off greater than that 2% to 3%, but it's a small portion of that home furnishings business unit.

So, with your foam and your fabric piece off, you know, more like the mid-single digits or something, what has been the trend there Q1 to Q2?

They correlate directly to the bedding or furniture numbers depending on which product. We are very diversified in the supply out of those commodities supply items. And they're consistent; they range on the furniture side of down 2% -- on the bedding side, 7-8% (ph) negative. Now, the exception to that John is, on foam is the carpet [Inaudible] , which continues to be extremely strong. We're picking up market share and that end market is stronger than bedding and furniture.

Okay. And there has been some noise about better Memorial Day sales. Do you sense any of that in your orders yet, with that or even to show up in your orders at this stage, or is it...?

We saw it and we appreciated those couple days of stronger sales. I'd think all that Memorial Day is a strong confirmation that there is pent-up demand in the industry, in that, those retailers that aggressively promoted sold product on that weekend; those that didn't had just terribly underperformed previous year comps. So the consumers out there, if the retailers go out and tried to attract through promotional activity - but we've shipped that product by now John.

Okay. And on the commercial side, maybe Felix, the 10% number, how would that break down between the retail and the contract furnishings and other?

John, that number is bigger than that in the office and contract part of the business that's somewhere in the 18 to 20 range and maybe a little bit less than that and then the office and contract is probably slightly less than that, excuse me, the commercial fixturing is slightly less than that.

Okay. When does those comparisons start to, I mean, I guess the office contract is going now for two or three straight years now. So every comparison is easier, but it should get easier, I would think that rate of decline would decelerate fairly dramatically.

That rate of decline should decelerate very dramatically and we still feel that from the fixturing side of the business that '04 is probably going to be a much better year both from capital deployment as obviously the comps get easier, but both from capital deployment and comps that '04 will be much better. I wish I could give you a better read on office and contract. I think that's still a tough read, but obviously the comps get easier John, so those certainly would be better.

And lastly, what kind of energy assumptions have you made as it relates to the guidance for the year?

Well, I'll tell you. We misread the energy deal as we talked to you all in the first quarter and we thought that was going to continue to trend down. It trended down a little bit. Then all of a sudden, boom, it is up over six bucks again. We have wound up and hedged about 45% of our needs for the balance of the year, but we're into the high fives where we hedged at. Gas currently is somewhat close to that level, still a tough call as to where inventories are going to come in. They had, that came in and surprised people and so the gas did jump down some, but who knows what is going to happen in this next rollup of inventories or what we're going to have. So I think we're still facing some relatively high energy for the rest of the year and that's the reason that we hedge what we did and if we see any chance that these inventories have moved in a different direction John, we are going to wind up and have to hedge some more of that. We just can't be as vulnerable as we were in that February-March period of this year and looking to $10 - $12 gas so - but in our guidance for the rest of the year, we have what we believe all of the energy surprises in that guidance that we had given you for the balance of the year.

Thanks. Good luck.

Thank you.

Thank you. Our next question comes from Linda Bannister. Please state your company name followed by your question.

Edward Jones. Good morning. Felix on the commercial fixture side of the business, can you give us an indication of how much is due to a decline in volume, and how much of the decline is due to price deflation?

There is very little of it that is price deflation at all Linda. And the majority of it is just an unprecedented lack of capital deployment and lack of capital spending that going into that commercial side of the business. They have the ability to continue to look at a tremendous amount of programs, and then continue to push off and not place the final order until they think that they've seen a trend by the consumer that is increasing their retail sales and etc are better, you know Memorial Day they didn't do exactly what they think, so we now we wait for the 4th of July, and so we just continue to put those things off. We're looking at tremendous amount of things but there is very little of it that is price deflation, the majority of it is truly demand.

Thank you.

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

Yes good morning, Longbow Research. A few questions, first of all on the raw materials, Felix you had talked about an adjustments, I think it was the term you used in your rod prices. Can you give us a sense of what the actual difference would have been in your rod costs from the first quarter into the second quarter?

Dave, we saw some movement in rods and that probably is in the 12 to 15 --

First quarter to second quarter, it's probably in the, 10 to 12. We are lagging some fourth quarter.

That's right we're lagging from fourth quarter. And it appears that it has kind of stabilized there Dave is what has happened.

Okay thanks. Just a couple of other questions. Karl I know we talked in the past about the international side of your innerspring business is greater than about 25% of that business. Can you just talk a little bit about what's happening on the international side of your business?

Go around the globe real quick. China continues to be strong, that's Chinese domestic consumption. We are continuing to see growth in the 10% range. Brazil equally so, the continued conversion from polyurethane foam mattresses to innerspring mattresses. These are relatively small beds, but Brazil has performed extremely well this year. Where we've had a little bit of a disappointment in second quarter has been in Europe, that wonderfully strong first quarter, felt good about how we had improved and consolidated facilities, and the second quarter we are stuck a little bit strictly from a downturn in consumption and that the effect of the war, and then we just didn't see the rebound. The month of April in particular was very soft in Europe. The numbers from the topline have started to recover, but albeit at a lower rate. We continued to gain market share, we are continuing to be pleased with the conversion in Europe from commodity type springs to our proprietary designs.

Okay thanks. Impact of the acquisition program from this quarter's disappointment.

The acquisition program, as you know we announced those at the end of each quarter. So we won't be talking about them on this mid-quarter deal. But still about whether we were looking at more and more acquisitions, but not a lot of activity, still looking at a lot companies that haven't performed as well as they should have and that scares us. We try to buy good performing companies and in some times in periods like this it is tough to meet the evaluations between the buyer and the seller in some of those days. We are running about the same way where it was in the first quarter.

I am sorry, I didn't ask the question terribly well, but plans for acquisitions, pull backs as a result of this?

No, not at all.

Okay, just last question. Karl, if you could just give us an assessment of what's going on the bedding business at the retail level, I know there has been a lot of bankruptcies and closures, you talked about sort of a mixed promotional experience over the long weekend. Can you just give us a sense of what might be happening there, are people prepared to get little more promotional here to trying to effect an acceleration in business. What do inventories look like; just give us a quick rundown. I will appreciate it, thanks.

Yeah give you a, from a store stand point. The Furniture Today published an article on May 26, that is the listing of the top 100 furniture retailers in the country. And with that there is a component of bedding retailers. Of the top 10 bedding retailers they cited a number that spooked me a little bit and that there has been the shuttering of 211 retail stores or 12.1%. I believe that all happened in the fourth quarter of last year, the vast majority happened in the fourth quarter. So there are fewer storefronts out there. On a regional basis the people are starting to take advantage of that, we've seen a little pick up in the promotional activities, our bedding manufacturing customers, they've talked more aggressively recently of assistance in those activities. As it relates to inventory the one thing that I never worry about in the bedding industry is our customers' inventory levels that the inventory is all in our factories. It is not in retail stores, and it is not in bedding manufacturing facilities at all. “Mrs. Consumer” places an order at a furniture retailer today, she is probably going to be shipped that product this afternoon, and it will be replenished by the bedding manufacturer some time later in the week. So that chain is just as efficient as it could be.

Have you sensed that we are going to see a pickup in promotional activity at retail?

I believe we will, based on the success of Memorial Day.

I sure think that's going to happen, Dave.

Dave, as you know we are just starting to move into the season that historically, the bedding season is, starts to pick up in the latter part of July and then as its full steam starts to drop off a little bit, say mid-October some time runs into mid-November in a good year. The retailers know themselves who were successful in Memorial Day, and I think you would be surprised that some of the national firms that decided to pull back, and how poor their performance was in bedding as compared and contrasted to some of the local retailers who pushed hard on Memorial Day and have wonderful success stories. They are perfecting their strategies as we speak.

Thanks very much and good luck.

Thank you.

Thank you. Our next question comes from David Katz (ph) , please state your company followed by your question.

Hi guys. David Katz from Matrix Asset Advisors. Two questions. What is your level of confidence that you are not losing share and rather economic weakness that could cause greater than expected slowdown?

Certainly in a residential side, David, I'm absolutely convinced we are not losing share. But we're out, I guess being a cynic I ask that question frequently and we look at industry statistics. We are so close to our customers, we are doing regular survey where with our sales forces, their employed sales representatives, they are not independents. They're out in our customer's factories literally everyday. We have excellent relationships with our customers. I do not believe that we're losing share. As a matter of fact I think that we are better positioned now than we were a year ago and that our product development activity has been well placed with those customers.

And David, I believe we've probably got the best industry statistics that there is anywhere because of our position within the residential furnishings industry. But let me jump you from residential and take you over into commercial which from an office and contract or a fixturing part of the business we absolutely are picking up market share in those areas from our aluminum segment when we were moved into the appliance industry and we're taking market share or de-verticalization of some of these people that have been making components in sales, those are peer gains and peer markets that we're getting or whether it be what we're doing from the motorcycle business with Harley-Davidson and the preferred vendor for them, and go on from not only structural products into the aesthetic product with them. Those are market share gains, and then we'll jump over into some of the specialized products. We know, with the downsizing of the automotive production currently and the models that we're now picking up not only from the seating but the lumbar side that's peer market share gains as well as the new products they'll come out in the machinery H quilter we showed in the Interzum as well as the new digital printer that we have introduced through with 3M that they're having a great success with now. So, you know, we always look over our shoulder except we always continue to ask ourselves. But if we're losing any market share anywhere we don't know where it is.

Okay. Then the second part of that question. Sort of just looking at it a little differently, do you have any concerns that any other weaknesses coming from a shift for manufacturing to Asia from the United States?

There are certainly some shifts. And as Karl mentioned, we are ahead of schedule on our Chinese production not only from the residential bedding side but also the residential furnishing side that plan is ahead of schedule. We believe that we are right there in the ballgame that is more and more of that product might move in a finished form that we will be able to provide the components that would go into that. There are some articles that you may have read in Furniture Today relative to bedding and suggestions that maybe more of that in a finished form it's going to be moving from the majority of our customers today. I believe that they do not agree with that theory. However, again we're positioned that we're that if it should happen we think that we can capitalize on that. But we do not believe that that is a trend that is going to happen. As far as components coming in from China to go into the bedding industry, that is a very small percentage today primarily West Coast oriented. We don't see much more of a threat of that happening in that area.

David, I'm sorry Felix. What we're starting to hear actually from the Chinese suppliers as it relates to those shipments of innersprings in the United States that we are very carefully monitor all of the customs stats. On a monthly basis, we have a pretty good feel as to what's coming into this country by tracking specific HDS codes. And what we're finding in our contacts with our Chinese competitors is they are telling us that it's – they are finding things is more difficult with freight rates, you know, appreciating significantly on average of $1000 a container in the 60-70% range effective the first of May, and then also with some raw material increases in China that we may be losing some of our attractiveness.

And also David, if I can go to aluminum just for a second. There are some of those industries that have moved the appliance industry primarily, and I think there was somebody who wrote on that not too long ago, but the appliance industry really has moved into Mexico which is a huge advantage to us because with our two big aluminum facilities in Mexico, we are being able to capitalize on that appliance industry that's there and being able to produce a number of those product forms. So, it's always a threat, it's always something that we're continuing to look at. But our attitude is that if that component is need to be manufactured and whether it's in Mexico, whether it's in Taiwan, or whether it's in China, we want to have something there to try to manufacture that component for our customer and give them the quality and the proprietariness that they have had here in making those products here.

Okay. Thank you. And last question, just, what's your confidence level when the economy does pick up that you should be leveraged on the upside on the earnings side?

I believe that we feel very good about that at this point because our overall capacity is set there in place as that market has continued to pick up, we have no reason to believe that we haven't got that incremental margins to pick up with that organic sales that we are going to have.

Okay. Thank you.

Thank you. Our next question comes from Aaron Braun (ph) . Please state your company name followed by your question.

Yes. Willow Creek Capital. I wanted ask a couple of questions as it pertains to the revised guidance today and a couple of issues had already been raised. Specifically you had mentioned that a pick up in consumer confidence were important to your second half results. We have had a nice bounce in consumer confidence after the end of the war and I was wondering if that has translated into any improved end-market dynamics that you have seen and conversely if unemployment stays at these levels and consumer confidence doesn't rise from here, how that might impact things? Secondly, if interest rates go up from here and we've got a slowdown in amazing refy waves that we've seen, how that might impact some of the end markets? Thirdly, you mentioned parts of your energy exposure has been hedged out. But if you ask will it stay above five and where we're displaying the high twenties, how that might impact the second half? And fourth and finally that whenever you haven't mentioned this office products area and I was wondering if there's been any end-market changes or improvements there? So, those are the things I wanted to query you on.

Okay Aaron, Felix. Consumer confidence, obviously we had not expected the blip after the war was over but I still think that the consumer certainly has an effect on them. -- The consumer confidence number as obviously we expected those to move up after the war was over. But there's a number of our businesses that the consumer confidence certainly has an effect on and has an effect on whether that we wind up and it's a deferrable purchase. We think that some of that's happened to us in the Barbeque grill industry, as we speak today we think some of it's happened in the set of bedding. That's a deferrable deal of whether it might be a chair or some other area. So we've still got unemployment, we've still got some families that were two-income families, now they are one. Some that are two that are worried about are they going to continue be two. I think that they still are, even though there's been a blip up. There's still that confidence out there as to what's happening? We've got a general economy that's down, we've got a cap of this deployment that's down, that has certainly affected a lot of jobs and so I think that still affected the psychology even though we got cheap money and a whole bunch of other things that people pulling the trigger and spending the dollars. And as Karl mentioned, in the Memorial Day sales the retailers that did a great job. They drove some business. But there were a lot of others that did a mediocre job that didn't drive any business and I think that that consumer wasn't motivated to go ahead and pull the trigger and do some of those things. So, I still think that the consumer is a big factor and we need to have some more consumer confidence need to get feeling more comfortable about what's going on and the employment rates and the whole ball of wax. As far as the interest rate part of the deal, yes if the interest rates would certainly have a substantial move up, that would have some effect on our business. We only think that for us the residential goals that is probably only 30% or 35% of the market that is controlled by new housing starts and obviously substantially higher interest rates would probably have some effect on that. But still we have to look at for that pent up demand is with the housing market being so strong over the last two or three years and very few people furnish a house the first year. It usually takes three years for them to do it. We think that we would have some demand that is built there even if interest rates did start to move in -- in some degree. The energy portion of your question; we do have all of that figured into our guidance for last half of the year with gas being in that $6 range as I mentioned we've got about 45% of our energy already hedged for the balance of the year. If we see some inventory problems or some further movement you will see us do some further hedging on that. But we have that figured into our guidance for the last part of the year. Then the fourth leg, if I have made my notes right was the office products area. And Matt would you like to address that?

You bet. Aaron, as you are probably well aware NEOCON is happening this week, which tended to be good whether on sentiment in the marketing. Erene from the team, our large team that's there in Chicago this very week, as you might expect there's some general optimism coming out of the show this year and that leads us to believe that the last half of this year and certainly as we roll into '04, will finally start to see some of the shipment trend lines flip over and it's been a long time coming, about three years of unprecedented declines in that industry. We are right now riding at shipment levels in office furniture that take us all way back to 1993-94. But we haven't seen a turnaround yet and as Felix mentioned earlier in his prepared comments we are not anticipating the near term rebound in that segment but I will tell you that the general sentiment is starting to be at least a little bit more optimistic than it has been in quite some time. But certainly our guidance has not anticipated any significant perk up, office and contracts, through the remainder of this year.

I always think that I would add to that is the new tax legislation should help us in that, as the consumer starts to get those $400 per child refund. Historically studies tell us that they don't save those dollars. They will spend those dollars. If there is pent up demand that $400 is the perfect fit into a number of our businesses, be they appliances or barbecues or a set of bedding or a sofa. So we are optimistic that we'll see some of those dollars.

That's great. Thanks for touching on those issues for us.

Thank you. Our next question comes from Richard Diamond (ph) . Please state your company name followed by your question.

Yes. Good morning. Inwood Capital Partners. Could you provide some more color on your motorcycle related businesses. There is some concern looking at monthly registrations etcetera, that the motorcycle dealer channel is getting full and you've addressed some of the strengths that you are seeing in your business with Harley, but could you provide some more granularity on whether the growth you're seeing is mostly market share, and when you look on it on a component-by-component basis, are you indeed seeing potentially decrease in production? Thank you.

Richard this is Felix, and I'll try to address that as best I can for you. Obviously we are picking up market share because of the preferred vendor status and things that we continue to do in a partnering relationship. However, it's our understanding that you may be seeing some trends that are downward somewhat from trends that were 15%, 16%, 17% growth levels. Maybe there are trends now that are 8%, 9%, or 10% growth levels. You probably are seeing that or at least that's what that we are being told. But as far as trend level dropping into a negative range or anything such as that, we are not seeing that at all or not being told that by any of our customers that are there and so I believe that not only are the pieces in the industry continuing to hold up in a positive level maybe even at a little bit of a lesser degree but still on a positive level. Then combine that with the market share gains that we are making, we are seeing extremely positive results from the motorcycle business.

Thank you very much.

Thank you. Ladies and gentlemen if there are any further questions today, please press the star followed by the one at this time. And as a reminder, if you are using speaker equipment please lift the handset before pressing the numbers. One moment please. Our next question comes from Alan [Zwickler] , please state your company name followed by your question.

Hi gentlemen.

Hi Alan.

What's going on the acquisition front? Can't get away without asking you that.

I knew you wouldn't Alan. Alan, still about the same activity that we talked to you about at the end of the first quarter call. Probably looking at a few more items in the database than maybe we had late last year. Again though lot of those businesses obviously have fallen on tough times like a lot of the other industries and so maybe the courtships are going to have to wind up and be a little longer before valuations can be reached and etcetera. But, the activity is pretty good and we're not ready to say that we're back to ‘98-‘99 levels. That's for darn sure, but we probably the forecast we gave you as far as acquisitions, additions for 2003 are probably in the same range as they were.

Okay. And just one last question. When you look through your businesses I wasn't quite clear when you talked about inventories. I guess they're a little bit higher than you would have liked, is that what you're implying here?

That's correct Alan. And they were at the end of the first quarter, which is not unusual. You're going to find our inventories a little tough at the end of the first quarters, and so maybe just a little bit higher at the end of the second quarter would be my guess right now. But, as far as us being able to run and manage these businesses at our target as far as working capital as a percent of sales, I still feel very comfortable we can do that. Another thing that's still impacting us Alan is over in the industrial side, and that's the bringing up of our Sterling rod mill and phazing out some of the other purchases we had and that is coming up faster than we had anticipated, which as we told you before has put a little pressure on some inventories there. But it may take us. That's when you don't just correct in two or three weeks. It may take us a quarter or quarter and a half to get that done, but we will get it done by the end of the third quarter.

And is the difference between the top-end of the guidance and the bottom-end simplistically a function of unit volume or is there anything else that has to go right or wrong at this point?

It's volume.

Thank you.

Okay. Thanks Alan.

Thank you. We do have a follow up question from David Macgregor. Please go ahead sir.

Yes. I was wondering if you could just walk us through the, sort of the updated view on the cash flow model. What's the assumption now about sources or uses of cash from working capital in 2003 and then maybe you could give us your latest thinking on what your CAPEX is likely to be?

David, I'll go through some of that. Let's see, we actually, let's see what I have that hasn’t been updated from previous guidance.

It has or has not?

Has not. The big items are still the same and this cash from operations, I can get back to you after this call and give those details. But in terms of other items we are still looking at about a 100m in expenditures for dividends. Our CAPEX is top end probably now looking like the 125m to 130m range. We started the year around 140, but we are not going to get there. That would have had to been driven by sales, and our sales are not going to be as high as what we were looking at early in the year.

Right.

We still got about a 100m in for acquisitions, and obviously that's the number which is really tough to forecast, you know as well as anybody that can vary a lot from quarter-to-quarter and depending on what opportunities materialize this year that, you may not get 100m, we may be a little lower, but we still have that much forecast. And then for stock repurchases we are still in the 75m to 80m range. And I can get back to you with the cash from operations, with the current guidance.

Okay. And then just quickly on the Sterling, looks that although the second quarter is doing a little bit better than the breakeven you had originally anticipated for 2Q. Does that mean we should take 3Q and 4Q assumptions up as well, or is this more just kind of a quarter-to-quarter shift?

No. I don't think you should David. We had thought if we broke it even in this second quarter that we would be doing great and it will be a little bit black in this second quarter. But I wouldn't change the model, the model shouldn't change that much.

Okay. Thanks a lot.

Thank you.

Thank you. The next question comes from Tyler Hughes; please state your company name followed by your question.

Yeah America First in Omaha, good morning.

Good morning Tyler.

I wondered if you could give me just the current cash level that you are carrying right now?

Hi Tyler, this is Matt. We are at approximately, and it moves around as you might imagine it day-to-day. But between 275m ish close to 300m, in that range.

Okay. So still very strong there?

Yes.

I apologize for this question. But could you remind me what that the new Chinese plant, what it's manufacturing?

There are, Tyler, four Chinese facilities, the newest is in the production of furniture mechanisms.

All right. Great and one follow-up. Or just may be comment because you said you won't comment too much in depth mid quarter on acquisitions, but I am curious to know maybe at the quarter if Formex has reconsidered their evaluation a little bit, I remember what you said about last time about how do you walked away, because there was a little too pricey, I wonder during this quarter, and since you quoted them back in September if they reconsidered at all?

Tyler, it was them that walked. Not us.

Okay.

And so obviously there, I would like to say it was them that walked not us.

Okay. And then one final question, I know we are all wanting to know is Felix how is that tomato crop growing this spring.

It is very good.

All right.

Come over in July.

Thank you for the call.

Thank you. At this time there are no further questions. Please continue.

Thank you for joining us today. We will talk to you after the quarter is up.

Thanks.

Ladies and gentlemen this does conclude the mid quarter update conference call. We would to thank you all for your participation today and you may now disconnect.