禮恩派 (LEG) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen. And thank you for standing by. Welcome to the Leggett & Platt Second Quarter 2003 Earnings 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 needs assistance at any time during the conference please press the star, followed by the zero for an operator. As a reminder, this conference is being recorded Thursday, July 17th of 2003.

At this time I'd like to turn the conference over to David DeSonier. Please go ahead, sir.

Good morning, and thank you for taking part in our Second Quarter Conference Call. I'm Dave DeSonier, the Vice President of Investor Relations.

And joining me today are the following: Felix Wright, Felix is Chairman and Chief Executive Officer; David Haffner, our President and Chief Operating Officer; Karl Glassman, Executive Vice President and Head of the Residential Furnishings Segment; and Matt Flanigan, our CFO. And finally, Susan McCoy, our Director of Investor Relations, is also here.

The agenda for the call is as follows: Felix will start with a brief summary of the major statements we made in yesterday's press release, and then he'll add some additional insight into our results. He will also comment on other highlights for the quarter. David Haffner will discuss the market trends we're seeing in our businesses, and factors impacting margins. Then Felix will discuss our outlook for the third quarter and the full year. And finally, the group will try to answer any questions you might have.

This conference is being recorded for Leggett & Platt, and it's 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 today concerning future expectations, events, objectives, strategies, trends, or results constitute forward-looking statements. Actual results or events may differ materially from such forward-looking statements due to a number of risks and uncertainties, and the company undertakes no obligation to update or revise these forward-looking statements.

For a summary of these risk factors and additional information concerning forward-looking statements please refer to yesterday's press release in the section in our 10-K entitled 'forward-looking statements.'

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

Thank you, Dave. And good morning. And thank you all for participating in our second quarter conference call.

As we announced yesterday, earnings for the second quarter came in at 24 cents per share in line with guidance we issued on June 17th. Sales excluding acquisitions and divestitures were down five percent compared to the second quarter of 2002. Improving trends in some of our businesses during June led to the better than anticipated sales for the quarter. Lower sales and production levels, higher energy costs, and a weak U.S. dollar all led to lower earnings versus the second quarter of last year.

This has been a very challenging quarter. Sales decreased on a year-over-year basis for the first time since early 2002, and we saw declines in four of our five segments. Consumer demand in items such as bedding, furniture, barbecue grills was weak during the quarter, and businesses including the retailers who buy the display pictures we produce continued what's approaching a three-year refrain from capital spending.

In addition to the lower sales many other factors also impacted our earnings this quarter. Higher energy costs continued, and forecasters expect natural gas prices to remain at high levels for the remainder of the year. Earnings per share were impacted by about two cents in the second quarter for higher natural gas and energy costs, and we expect this impact to continue for the balance of the year.

Production levels in our U.S. frame producing facilities and our wire drawing operations were reduced to respond to weak bedding demand. In aluminum soft demand for barbecue grills and industrial lighting also reduced utilization rates for the quarter. The weaker U.S. dollar impacted the quarter at many of our international operations. Our actual unit volume declines exceeded the reported sales dollar declines. We saw margin pressure in those foreign operations that sell primarily in U.S. dollars, and a significant part of this quarter's working capital increase is attributable to currency exchange. All of these factors contributed to the lower margins we reported this quarter.

Working capital as a percentage of annual sales was 20.9 percent for the second quarter. Inventories were higher in part due to the faster than expected ramp-up of the Sterling Rod Mill, but also from lower demand that prevented our wire operations from consuming some of the steel rod that had been purchased in the first quarter. This increase in inventory and working capital is temporary. We expect the inventories associated with the startup of the Rod Mill to be back in line by early fourth quarter as that facility comes fully online and we reduce our purchases from outside sources. As we've reminded you before our working capital levels will vary from quarter-to-quarter, but we remain committed to achieving our 19 percent target on average over time.

On a more positive note, in June sales trends began to show some modest improvement. In our bedding operations we began to ramp-up production in June to respond to improving demand. These higher production levels result in improved internal demand for wire, which also benefit our wire drawing operations.

Production levels in our office furniture components facilities also saw modest improvement late in the quarter. David Haffner will further discuss these segment trends in his comments, but we are cautiously optimistic that the recent improvements will continue.

Other highlights for the quarter. During the quarter we acquired three companies. All are located in China, and they should add roughly 18m to our annual revenues. The first is a manufacturer of innerspring and bedding machinery. The second is a producer of small electric motors, primarily used in power lumbar systems. And the third is a producer of upholstered furniture components. This third acquisition expands the position we established earlier this year with the start-up of our first furniture mechanism plant in China.

Last week we announced the fourth largest acquisition in our history. We purchased from bankruptcy the assets of RHC Spacemaster, one of the top manufacturers of retail store fixtures, for an initial purchase price of 46m. We purchased the receivables, inventory, and fixed assets, and assumed no liabilities in the transaction. As we build a normal level of accounts payable, our working capital should be reduced by an estimated 18m, lowering our total investment. We anticipate incremental revenues of approximately 100m to 120m per year, and expect earnings to roughly break-even during the first 12 months. This transaction presented a unique opportunity to acquire a significant amount of business at a very attractive price and will allow us to rationalize our total base of companies and improve our utilization rates.

In June we issued another $150m of debt, following on the heels of our first quarter $200m debt offering. The latest issuance was for 15-year notes at a 4.4 percent coupon. With this financing we are continuing to extend our maturities at very favorable long-term rates. We will use the proceeds for general corporate purposes, which may include the repayment of existing debt, stock repurchases, and the financing of future acquisitions.

And with these comments, I'll turn the call over to David Haffner.

Thank you, Felix. And good morning, everyone. I'd like to spend the next few minutes discussing recent market trends in our various businesses, and also some of the major factors impacting our EBIT and EBIT margins.

In Residential Furnishings total sales decreased 3.9 percent, or 4.3 percent excluding the benefit of acquisitions. The segment's EBIT decreased 24 percent, and EBIT margin dropped to 8.9 percent. Lower sales, lower production levels at our U.S. spring facilities, higher energy costs, the weak U.S. dollar, and the absence of last year's partial reversal of a Canadian lumbar duty accrual are the major factors that contributed to the EBIT decline.

Although some of the energy and currency impact will continue into the third quarter we anticipate third quarter margins to benefit from better utilization rates at our spring producing facilities.

Bedding demand was extremely weak early in the quarter, beginning early to mid June and continuing through the first few weeks of July we have begun to see improvement in demand. Our inventory levels are appropriate. Incoming order volume has increased, and we have begun producing at higher levels than we ran during the second quarter.

Upholstered furniture component sales softened slightly during the second quarter against strong sales in 2002. Early July indicators showed some demand improvement for recliner and seating hardware as furniture manufacturers come out of their summer shutdowns. We continue to believe there is a significant pent-up demand for furniture and bedding as consumers have yet to fully furnish homes purchased during the past few years.

In Commercial Fixturing and Components total sales decreased 5.8 percent. The segment's EBIT declined 55 percent, and EBIT margins dropped to 2.9 percent, mostly due to the sales decline, inventory adjustments, and several smaller factors. Our fixture and display businesses continue to face very difficult market conditions as evidenced by a number of bankruptcies of some of our competitors. As Felix mentioned, last week's acquisition of RHC Spacemaster, which was one of the recent casualties.

Retailers have been postponing spending on new store construction and remodeling projects for close to three years, awaiting clear improvement in consumer sentiment. We have not yet seen any broad signs of improvement, however, some of our customers have continued to plan major store expansions with some of those programs in line to benefit our last half results.

We are not expecting a significant overall pickup in these markets before 2004. When the economy improves, however, there could be significant new spending in response to pent-up demand. In addition, the bankruptcies on the part of some of our competitors continues to create opportunity for us to pick-up additional market share. For almost two-and-one-half years we have continued to see demand for office furniture components decline. Although still at very depressed levels, around mid June we began to finally see some modest improvement.

Over in our Aluminum Products segment total sales decreased 15.2 percent but were significantly impacted by the past year's divestitures. Same location sales were down 7.7 percent. The segment's EBIT declined 36 percent, and EBIT margins dropped to 7.8 percent, primarily on lower sales and higher energy costs. Following four quarters of positive year-over-year comparisons sales dropped this quarter mainly on end market weakness for barbecue grills, industrial lighting, telecom, some electronics, and large truck engines.

On a positive note, we have continued to increase share with certain important customers and pursue new markets. Our sales of components for motorcycles and small engines remain very strong. Third quarter is typically the seasonal low for our Aluminum business, largely due to decline in demand for barbecue grills late in the summer.

And although we're not seeing any broad signs of improved demand in our other markets we continue to manage the factors within our control. During the past several quarters we have been aggressively gaining market share. The benefit of those share gains has been reflected in our recent quarter results, and we are set to benefit further from these efforts. Several new programs will continue to ramp-up as we move through the last half of this year, and others are due to start in 2004, all of which will benefit our sales and earnings.

In Industrial Materials total sales declined 14.1 percent with acquisitions and divestitures mostly offsetting. EBIT was down 54 percent, and EBIT margins dropped to 5.3 percent. This EBIT decline resulted from lower sales and production levels, and higher energy costs. In the second quarter our Sterling Rod Mill operated at roughly break-even, which was in line with our expectations as the startup continues to progress according to plan.

Unit volumes decreased in both wire and tubing. The decline in wire sales reflects the weakness in bedding demand we experienced during most of the quarter, as well as ongoing declines in the other markets we serve. However, as bedding demand improved late in the quarter and through early July the improvements we saw in residential carried over to our wire drawing operations. Our tubing businesses are seeing some declines due to softening in automotive units and also in market declines for ATVs and the accessories to go with ATVs.

Finally, in Specialized Products total sales increased eight percent. EBIT was down slightly, and EBIT margins declined to 12.2 percent. Currency rate changes account for a large share of the revenue increase with the remainder coming from market share gains and new product placements in our Automotive businesses. The impacts of currency rate changes and other items more than offset the benefit from sales gains resulting in the EBIT decline.

Although the automotive market is softening, as expected, the industry declines are being offset by new programs. And in our machinery operations we're seeing some strengthening in our backlog for the last half sales.

With those comments, I'll turn the call back over to you, Felix.

Thank you, Dave.

We'd like to talk now about the outlook for 2003. Market demand and its impact on sales revenue remains the biggest lever affecting Leggett's earnings. We typically benefit from seasonal sales improvements in the third quarter. Over the last three years third quarter sales have been between $5m and $35m higher than the second quarter. Based on recent moderate firming of sales for the third quarter the company is anticipating between $10m and $60m of sequential organic sales improvement.

In addition, we expect about $30m in sequential sales growth from our recent acquisition of RHC Spacemaster. These estimates result in a third quarter sales range of $1.09b to $1.14b, or year-over-year same location growth of flat to a negative 5. These sales should yield earnings of 26 to 31 cents per share for the third quarter.

Our full-year guidance assumes further strengthening through the second half with record fourth quarter revenues of plus 4 to plus 9 sales growth, and fourth quarter earnings slightly below third quarter levels. Given these assumptions for the full year we are expecting same location sales growth between negative 1 to positive 1, and earnings per share of $1 to $1.10 per share.

That concludes all of our prepared remarks. We thank you for your attention, and now we'll be glad to try to answer any questions that you may have.

Dave.

Okay, Operator, we're ready.

Thank you, sir. (Caller Instructions.)

Our first question comes from [Jason Putman] [ph]. Please state your company affiliation, followed by your question.

Hi, good morning, guys.

Hi, Jason Putman.

Hi, Jason Putman.

I guess the first question just relates to the guidance. I look at your third quarter guidance, zero to down five. And then the fourth quarter goes up, you know, up four, to up nine. And it just seems like a pretty big ramp-up. Is there anything that you have in terms of comps, or what makes the big improvement? Is it just the pent-up demand that you've been talking about?

Well, part of it, fourth quarter sales we are assuming are going to be roughly the same as third, maybe down a little. And then it's just the comps from third to fourth quarter change quite a bit. And so the organic numbers are just a result of what the sales were last year.

So what we think is going to occur is in the third quarter we'll see between $10m and $60m of sales growth sequentially, and then in the fourth quarter we think we'll back off of that a little bit. But that still requires, you know, improvement from the trends we saw beginning mid June. And if that doesn't occur then as you're kind of alluding to, fourth quarter sales will probably be weaker than what we forecast.

Okay. A second question really relates - I just wanted to spend a little bit of time on the Commercial Furnishings segment. You know, first on the RHC Spacemaster acquisition it seems like you got a pretty good deal. But in terms of the industry, you know, is this - once this industry comes back what are the, you know, the big competitive advantages that, you know, Leggett now has with the scale, or whatever else it might be that's going to prevent, you know, companies from coming out of the woodwork when demand gets better?

Well, Jason Putman, this is Dave Haffner. I know that you've heard us say this time and time again when we talk about the one-stop type shop. But it really is true, we've got more in our arsenal, and this RHC Spacemaster acquisition gives us even some more products that we haven't had. And we're able to amalgamate a lot of those activities in a way that we're going to be better prepared to produce those products at a lower cost than anybody else.

So even though there'll be additional demand for products as the economy improves there will continue to be pressure from a pricing perspective. Obviously, Leggett has got a lot of financial strength behind it. It's a good business model. We know what these profit centers can generate when there's an adequate amount of demand. And that the price we paid for Spacemaster, it was an excellent opportunity.

And Jason Putman, I think also throughput through assets has been one thing that's been a problem to the fixturing industry because of the way the capital has been deployed, or the way it's been regionalized, et cetera. And if we're able to rationalize these facilities through this consolidation, and the throughput through the assets is much better we should be the low cost producer and the low cost provider.

The barrier of entry is significant for some of these businesses, Jason. And I know you realize that. And so it's one thing to say 'other people might jump in,' but it takes a pretty significant bite to do so.

Okay, and then in terms of margins. You know, obviously, these segments struggled for some time now. But when you see demand come back, and also as you've discussed with some capacity coming out through bankruptcy, and you know, you're doing some consolidation yourself, where do these margin levels go to? Can they get back to, you know, over 10 percent like we saw, you know, three or four years ago? Or is that a pie-in-the-sky?

That's very realistic. Those EBIT margins should get back into that 12 to 13 percent range.

Okay. Thanks a lot guys.

Thanks.

Thank you, sir. Our next question comes from Budd Bugatch with Raymond James. Please go ahead with your question.

Good morning.

Hi, Budd.

Hello, Budd.

Let's just talk a little bit about - can you walk me again through the markets? Where you're seeing pockets of strength, and where you're not seeing pockets of strength? I want to make sure, you know, I haven't heard you be cautiously optimistic. I haven't heard you be optimistic in a long time, and even cautiously optimistic! And so I want to make sure that I know where you're seeing changes, and what will lead you to believe that the changes are for real as opposed to a [head fake]?

Budd, this is Karl Glassman. The thing that causes our optimism is frankly an increase in order activity. That what we experienced starting mid June was a pickup specifically in bedding, where the negative variance to historic numbers was lessened week after week. And we're starting to hear some strength at the retail level, and at the bedding manufacturing level. And furniture stayed and continues to stay very, very strong for us up against some very difficult comps of last year. And so the reason for the optimism is the order entry, and we're running our plants.

Okay, and so that's in the consumer side, Karl.

Right.

That's right.

The residential bedding, the furniture side?

Which carries on over to the industrial side, Budd. Because once we do that then we get to turn these wire mills on, hence the rod mills, and et cetera. And so it does carry over and catch both those ...

Sure, it's got the industrial ...

Now, Dave or Matt may want to allude to what we're seeing from the Office side.

Yes, Budd. I know you follow that very closely, as well. And we are optimistic based upon what we've seen. It's been so bad.

Yes, is it a lot of up and downs along - it looks like up to me, or is it ...?

Well, I mean that relativity is there, but it's similar to what Karl said. We saw a few weeks ago some significant improvement in our order book in a couple of our major facilities that service virtually everyone. And what's interesting, and this is probably going to be a follow-on question, it's interesting is that it's just not the low end, it's not just the mid range. We're seeing it across-the-board. And so will it last? Don't know, Budd. But it's so much better than it was.

Now that's in Commercial and Office. David, is that because you had some new wins there? You were looking for some new customers in that? Or is it because you're seeing better from existing customers.

No, it's the latter, it's the latter. Now we've picked up a little bit of business from some competition, but really it's from existing customers on existing SKUs.

Okay. Now let's go into - I know the fixturing side, it just depends on what retailers do. And that's another issue. And you're not seeing it there yet, but you are positioning yourself better in that market, right?

That is correct.

What about in Aluminum? That's one that surprised me with the negative year-over-year. And I know grills were a sore spot.

Yeah, grills and industrial lighting were pretty depressed. Of course, we're - one thing to remember is that we had what was an unusually robust barbecue grill season last year, which we enjoyed and appreciated it. But that makes that comp a little bit difficult this year.

The real strength spots over in Aluminum are a highly reputed motorcycle customer of ours, as well as ...

Well, they just had great numbers, and, you know, it looks like their production schedule are actually going up again, right?

Yes, and we're getting ready to commission - we're commissioning as we speak over the next few weeks, that one whole new plant expansion to accommodate castings just for that customer. And so that's a good thing. Also, gasoline engines, non-diesel engine demand is pretty good. Most of those end products are yard tractors, and tillers, and things, generators, things like that. And so those two areas are pretty strong.

And is there any hope, are you going to have any remnants of the grill season? Or is that done for this year, and we have to wait for next year?

It's pretty well done this year, it's pretty well done.

Okay. And last is Specialty. That had good results, does that continue?

We're - yes, we expect that to continue to have good performance. I mentioned this in the Automotive part of my comments, but even though automotive demand for total auto units is softening we're getting placements, Budd, of a lot of those seat suspensions and lumbars where we hadn't had it before. So.

Yeah, that's what I'm worried about. I'm worried about the fact that the auto guys look like they're bringing production down to get inventories in better balance.

Yeah, well, I mean there's going to be that offset. But when we can put a lumbar in a chassis that didn't offer a lumbar before that one chassis can represent hundreds of thousands of units.

But why is that so long tailed - I thought they were out literally several years in advance on that stuff. And is your stuff bought that close in?

Well, we've got relatively new product, and it's - they make a decision out long, and then they finalize it as we get closer to the model change. So I don't know the answer to the first part of your question.

All right, well, I'm not going to violate much more of the DeSonier rule. I asked a big question, and so thank you very much.

Thanks, Budd.

Thank you, sir. Our next question comes from Margaret Whelan with UBS Warburg. Please go ahead with your question.

Good morning, guys.

Hi, Margaret.

Hi, Margaret.

And I've got three questions. The first one is I guess I'm a little disappointed that the margins aren't picking up a little bit based on all the cost cutting you've done over the last couple of years, and the fact that we were impressed that you ran it for the P&L. But we thought about a lot of the margin split even if you didn't get the sales recovery, and recognizing that there's a lot of moving parts and a lot of things working against you. But can you actually quantify on any of the benefits that you've had in the margins over the last two quarters, based on cost cutting you've done over the last few years?

We think we can, Margaret. But it's - I guess there's one - it's hard to put a pencil to that and get it to the penny. But you point out, and you're correct, there's a lot of things working against us. Energy costs probably this year are going to cost us 10 cents for the full year, or something close to that. Currency may be, you know, for the full year on the order of a nickel. I mean maybe that's a little high, but something like that. Low production rates has hit us with overhead absorption. And so there's a whole bunch of those things stacking up.

Yes, we think we've seen some improvement from the cost structure, but it's buried by all these other factors. And, you know, maybe it's on the order of one or two pennies a quarter but that's really hard to pencil out and show you definitively that's what we're seeing.

Okay, that kind of leads into my second question, which is the capacity utilization. Could you go through each of the five business units and give an idea of where it is now? And whether or not we might see any cost cutting over the next couple of quarters if we don't see a recovery? And the return on capital is so low now, as well.

Karl, do you have a feel for Residential? You know, because that's a broad range of products.

Margaret, Residential varies so much by business type. We're certainly better utilized on the bedding, U.S. spring operations now than we were when we last spoke, a month ago today. That number probably is in the mid 70 range. Furniture is higher than that. You know, the furniture business continues to be very, very strong. As a matter of fact, we've come out of the gates in early July stronger than we expected.

Can you put a number on it? Is it up?

Oh, boy!

It's not above 80.

No, oh, no. No, I would say it's in the very high 70s though.

Okay.

And on Commercial, this is just an estimate, and we really need to go back and get a definitive answer for you, Margaret. But Commercial is under 70 percent utilized in total. That's not just fixtures and displays, that's all of Commercial. Aluminum is probably closer to 65 percent. Industrial materials depressed this this quarter. I don't know off the top of my head what that is. We need to get to you. And Specialized is a little bit non-sensical in that it - we can't predict what those orders are there. And we can add capacity pretty quickly. And so Specialized is going to be pretty high, and Automotive. And ...

And machine probably in the mid 60s.

Okay, so I guess you're just waiting for the sales recovery. There's not going to be any more cost cutting or consolidation? Except maybe in Fixtures where you're doing the acquisition?

Well, there's always going to be cost cutting, and anywhere we can rationalize reduction in overheads we'll do so, Margaret, to the extent practical.

But Margaret - this is Felix - but as far as you anticipate that we're about to take much more plants offline, and do some things like that, we do not anticipate doing that. As Dave said, there may be some fine-tuning and something could happen in one segment versus another segment. But don't expect us right now, unless we see something that gets a lot worse than where we are now, that we're going to take another, some more facilities offline.

Okay. And then what about, when you talk about market share gains how do you actually quantify them? Or how do you get a sense that you're gaining share? Because some of the businesses are just so fragmented, especially in fixtures.

Well, we have very, very good relationships with each of those customers. We know what they buy, who they've purchased it from in the past. We know how we fare in request for quotes, or request for proposals, and so it's a relatively straightforward analysis, Margaret. When, even with viable competitors that don't drop out due to bankruptcy if we're able to win business over that they've had in the past even though the market may be shrinking our market share goes up. And so I know that's academic, but that's how we do it.

And from the Residential side, Margaret, obviously we deal with the major players. Some of them being vertical, and et cetera. And so it's pretty easy for us to see what's going on there with those people.

And then even in the Aluminum business, when we're trying to wind-up and attack an industry such as the appliance industry, and either take-away from people there that have been vertical and do a lot of that business, or whether they've been buying components from the outside and we're taking some of that over.

And so I don't think there's any doubt about it that we're picking up market share across all of our business segments. Part of it is through development, part of it's through the fact of just a change. Part of it is through the bankruptcies that are going on, et cetera, that's that becoming available to us. But it's a broad range of reasons why we're doing it.

Okay. And then just lastly, you're probably paying attention to some of the [woods], the Cape Good manufacturers of residential furniture are going to try and compete with Asia, or go to Congress and lobby that maybe the Asian manufacturers are dumping product or illegally pricing it. Do you have any thoughts on that, if it was or whether or not it could be proved? Or whether or not you would see it then in Europe at some point, on the upholstery side? Or have you thought about it at all?

Yes, we've thought about it. We certainly have been following it through our active involvement in AFMA. We're going through a somewhat similar process through the American Innerspring Manufacturers Association, and trying to look at and very close to filing a claim there as regards to the dumping of Chinese innersprings.

My caution, though, to our people and to the wood producers and that claim of dumping is specific to the bedroom furniture side of case goods, as you well know, is competition is competition. Unfair competition should try to be dealt with, and that is a political, there are political solutions, but they are political. And I believe that those manufacturers would be misguided to look to the United States Government to protect them. The fact that it's right or wrong ...

Is irrelevant.

Yes, it really is.

Yeah.

And there are plenty of industries in the United States that are waiting for Government protection, and it just - you know, the coat hanger industry has gone offshore, making a similar claim, and actually proved, and the ITC agreed that there was dumping. And so our strategy differs a little bit, and that's to be active on the U.S. side but to be involved on the Chinese, or wherever around the world as the situation applies.

You've got to work both sides of it. Low cost production is the key. If I was a wood furniture manufacturer in this country I would be looking at what are my strengths? My strengths are lead-time, you know, you're closer to your customer, they've got to focus, they've got to be the low cost producer. They've got to look at those solutions, trying to please Mrs. Consumer at a quicker rate than they have historically.

And so we're involved, we're interested, but - boy! We're sure not willing to bet that that's the solution.

That that's going to help. Okay, thanks very much, guys.

Margaret, can I answer one more issue on your margin compression?

Sure.

Steel cost increases have impacted us pretty dramatically in the first half.

Yeah.

And we are now starting, and this hits industrial, and then therefore into the residential side, we're starting to go through this conversion where we're using lower cost yield today, it started in June.

Okay.

Than we were June year ago. And so you should expect improved margins from us in the second half because of our now using lower cost steel that we have now bought forward.

Great. Dave, do you have a basis point? Or an earnings number, a penny number on that? Just from the field? Have you thought about it?

No, you'd have to let me look at it and get back to you.

Okay, okay, great. Thank you, Karl.

Yes.

Thanks, guys.

Thank you, ma'am. Our next question comes from Joel Havard with BB&T Capital Markets. Please go ahead with your question.

Thank you. Good morning, guys.

Good morning, Joel.

Good morning, Joel.

We've all heard talk about the pretty good bounce on Memorial Day, maybe July 4th. Builds have been pretty positive, too. How much of the boost you guys have seen moving up the supply chain here in the summer do you think may be a function of the product manufacturers reloading inventories that they may have let ride down to a little bit below what they've [inaudible] versus how much may be attributable to something more sustained?

Well, Joel, what we believe that we're experiencing on the furniture hardware side of things is exactly what you suspected, in that it looks like June inventories were lessened to a greater degree than the furniture manufacturers forecasted. And so when they came back from their fourth of July shutdown they have been last week, and early this, ordering at a greater rate than they historically do in July.

Sustainability, one thing that we learned through first, Memorial Day and then the fourth of July promotional periods is those that promote have been able to entice the consumer into stores. And it looks like there has been good sell through. It certainly has impacted bedding positively, also. And so we believe that it's sustainable. That the seasonality that are normal in those two businesses, specific to those two businesses, will in fact take place. We're seeing it in our numbers. About a month ago wise analysts talked about optimism, and I think you were right a month ago. We're starting to see it.

Well, I'll keep holding my breath!

Joel, this is Dave. With regard to office and contract, we deal with our customers on a JIT basis. And then some of those customers across town in Grand Rapids, and we deliver to several times a day. That supply chain has been really compressed over the last few years. And so even though I guess I'll hold my breath with you I, too, think that that's true in takeout. I don't think that's inventory build.

Well, this goes back to Budd's line about you guys showing some sort of optimism here. I'm not sure how to deal with this!

Matt, real quick, you and Dave both helped us here lately on the debt side. I just wanted to make sure that we understand that, you've got a little bit more repayment due over the second half. And then it looks like about 120 next year. I don't think anybody would have any questions about the cash flow implications there. But looking from '04 to '05 between now and then where do you think you all will have to reload some of that 375 that comes due? Or have the last two slugs of new debt really already taken care of that for you?

Yeah, that's a good question, Joe. It's 350 that comes due in the first quarter of '05. That's the big hunk that starts rolling around the corner. And for the time being we feel really good about having laid the 200m down in March, and then another 150 just last month. And it's ironic is where rates have gone just in the last 30 days, if we were doing another 150m, or that same issue today it'd be 60 basis points more expensive all things being equal with where Greenspan has moved the market with his comments. But you would likely not see us put any more debt down in the next 12 to 14, 18 months because we feel real good about essentially having pre-funded that maturity rolling in.

Right.

In '05. And they're pretty modest maturities, as you know, between now and that big issue coming due.

Right. And so with nearly the - well, essentially the dollar-for-dollar replacement you don't see the need in a recovering environment to add-on more necessarily yet?

Not at this time. Of course, as you know, we're so Leggett, it's a terrific job of funding it's own growth, to a great extent with good earnings, and working capital management, and what have you. And we're poised to benefit from that up tick when it happens. And fund a lot of that growth internally, as you would expect.

All right, great. Thanks, guys. Good luck.

Thank you. Our next question comes from Laura Champine with Morgan Keegan and Company. Please go ahead with your question.

Good morning.

Hi, Laura.

Hi, Laura.

Can you quantify the inventory that you acquired in the acquisition of Spacemaster, and also the additional inventory that you're carrying with regard to the Sterling ramp-up?

Dave, do you want to cover the Sterling?

Yes, I've got the Sterling, if I can find that page.

While Dave is looking for that, Laura, I'll try to quantify the Spacemaster deal. We - the inventories that we purchased there, and obviously, we took those inventories Saturday and Sunday of this last week and so we'll have a better feel of that. But we bought those inventories at a level to where that we're not going to have any risk associated with the shipments. And we'll be making out of those over this next, pardon me, quarter or two here, and we'll be - those will be good and usable. And a big part of their shipping is third and early fourth quarter, and that's what those inventories that we purchased were for.

They had been run-down, obviously, they were in bankruptcy, they were in a cash crunch. They had run some of the raw material inventories down to some lower levels than they should have been to operate with. We're dealing with that as we speak this week and the next week, to try to ramp the productions back-up in some of those facilities. And so I don't anticipate any problem with inventories in the RHC Spacemaster acquisition.

Dave, do you want to comment on Sterling.

Yeah, on Sterling, at the end of period six we had $7.4m worth of inventory. And incidentally that represented 14 percent of the inventory gain year-over-year. Of course, we had zero the year before. That will not represent the ultimate inventory we'll have at Sterling as we continue to ramp-up, and in fact, I was talking last night on this subject. This morning I was talking to Felix on this subject. And it's an estimate at this point, but I suspect we'll run somewhere in the neighborhood of $11m or $12m worth of inventory on yearly sales of $140m to $150m. And so it's a pretty swift exchange from scrap to billet it, to rod, to wire. And we have some very efficient inventory management through that facility. And so it will have to be a lot smaller percentage, if you will, as a percentage of sales to an average.

And so in the second quarter inventory built nine percent, revenues were down six percent, Sterling inventories weren't included on the balance sheet at the end of the second quarter - I am sorry. Sterling was, but that was a small ...

That's right.

Portion of it. Spacemaster is not included.

That's right.

And so what was the cause of the inventory build at the end of the quarter?

All right. 33 percent of the build was in our Wire Group, and as we had mentioned before, the Sterling - that's primarily rod, some wire, but primarily rod in our Wire Group, where we pre-bought and Sterling came on stronger, faster than we anticipated. And so $17.5m of the 53.6 year-over-year increase was in the Wire Group. And then we've got all that broken out by the various profit centers.

The Machinery and Technology Group represented 16 percent of that increase, and it's sort of across-the-board. A good bit of it had to do with our new digital printing equipment, as we ramp-up the production of those products for sale to 3M and other entities we're increasing inventory there. But also, for some new products that we've designed and developed out of our Jentschmann operation, same with Porter, same with Gribetz. And so that's sort of across-the-board. The Shukra represented nine percent of that total increase, and that has to do with new product placements. There's a $4.7m increase, all of it due to new product placements. And then the other big piece I already mentioned to you, Laura, was Sterling which represented 14 percent of that total.

Okay. Thanks.

You're welcome.

Thank you. Our next question comes from David MacGregor with Longbow Research. Please go ahead with your question.

Yes, good morning gentlemen.

Hi, David.

Hi, David.

I wonder if we could talk a little bit about China? Three acquisitions in the quarter in China, you're ramping some other facilities there. I guess I'm just trying to get an update? And also, you know, if you could maybe start talking a little bit about some of the performance targets you have for your investments over there? Thank you.

Karl, do you want to take those?

Yeah, we'll break-out - well, I'll talk about two of the three, and let Dave talk about the other, which is more Automotive related.

The first was a spring unit manufacturer that also manufactured some of his own machinery. We had interest in his machinery developments because of the low cost nature of that machinery. Primarily it was spring equipment and then some packaging equipment. We have then signed a supply agreement with that individual who will continue as a mattress manufacturer. And so we will sell innersprings to his mattress manufacturing facility. Some of the purchase price was actually in machinery credits. And so we will then sell quilting machinery to him. Just kind of our way of planting seeds in China, helping him grow his domestic mattress manufacturing facilities.

Now are there any - sorry to interrupt, but are there any benefits to the existing machinery business from this acquisition? Whether it's through a technology, or whether it's through some sort of a synergy?

It's low cost production and low cost parts sourcing. They will mill parts for our Chinese operations, and then we will also export a number of those parts to the United States and to Switzerland, and so 'yes.'

Okay, thank you.

Okay. On the last of those three, is in the Jiaxing Province. It is - that facility is adjacent to our Greenfield Hardware Facility that we opened in the first quarter of this year. They were actually a supplier of stamped parts. They were on a run rate when we made the acquisition on an annualized basis, we made the acquisition in April, of about $5m. About 20 percent of that volume was supplied to us, and so now it becomes somewhat of an inter-company sale. But they were at a fast growth rate.

And so that facility primarily will manufacture hardware mechanisms, possibly some bed frames. Bed frames for export to the United States. And then recliner hardware product that will stay in China, sold to our Chinese upholstered manufacturers who will then either leave that in China or export to the United States or other places.

As far as expectations of profitability, you know, certainly each one of these facilities - we do not handle acquisitions in China any differently than we do domestic acquisitions in terms of proforma results. These businesses are profitable, David.

And then, David, in Automotive, I know you know that we have been procuring for quite some time certain of our components for Shukra lumbars from China. And, in fact, the acquisition that we just made we assisted them years ago, well, actually, Shukra did before they were a part of Leggett, assisted them in becoming an entity. And we're a very, very large percentage of their total output. And so that was a pretty natural integration.

But on a larger note, it's interesting to point out that Asia is the fastest - we all know it's the fastest growing area in the world. And like vehicle assembly for all of Asia, not just China, was 17m units in 2002. Now only 3.2m of those were produced in China. But China is a - talk about an emerging market, it's a huge emerging market for vehicles.

We do not intend to become a broad supplier of a lot of different products into Automotive. We continue to plan to be niche oriented. And we'll produce the products for both our Western consumption, as well as the Eastern consumption from some of those new facilities that we're putting online. Very profitable businesses.

Now are you running China as a collection of cost centers, or are you actually booking revenues there?

We're booking revenues there.

And so could you talk about, I know you don't break this out, but could you give us a sense of scale? Where we are today, and you know, where you'd like to be by say, you know, the first of January 2005? The end of 2004?

Let's see if I've got that.

I don't have it handy here. We'll have to get back to you with it. We're just working on a white paper as we speak.

David, this is Matt. When you're talking scale, are you talking revenue size?

Yes, revenue size. And also I'd like to get a sense of, you know, how much more profitability, how much more profitable can sort of the components you're producing over there be than the components you're producing here? Obviously, I am trying to get a sense of, you know, earnings impact from these investments.

20 plus percent, we're talking about.

David ...

And whether they're big enough to move the needle, quite honestly?

This is Matt. And for your information if you would have read through this, but it's been awhile. On page 59 of the Annual that we put out back in March you'll see the break-down of sales activity by country. And as you well know, still a significant portion is North American oriented, but you'll start to see, obviously, with the three acquisitions just having been made, China, and that part of the world become more significant. But you'll see as of the end of the year the magnitude on a sales basis and an asset basis in our non-U.S. operations.

Okay. And an outlook, can you share with me what sense of growth we could see over there?

It'll be significantly greater than our corporate average growth, but we're starting from a very much smaller basis, of course.

Right.

It's not out of the question to see our growth, and I wouldn't want to be held to it, but in the 20 to 25 percent.

No doubt about it.

Okay. Just a second question, if I might. The $10m to $60m range on the revenue outlook seems a little broad, and I'm just wondering, it seems as though you're seeing encouraging signs in your order book in the bedding business. And also in the office furniture business. But it also seems as though there might be a fairly, in spite of all the optimism, or the cautious optimism, there might be a fairly high level of uncertainty around this. And I was wondering if you could talk a little bit about, you know, what's the difference between the scenario that gives you a 10 versus the scenario that gives you a 60?

If you could tell us what the consumer is going to do we could narrow that range.

Okay!

But, you know, we looked at the last three years, which are, I mean not a normal growing economy, and we saw 5m to 35m. You can go back into '98 and '99 and you might get into the 50, 60, 70m range. And so you're right, we purposefully chose a broad range because we don't know exactly what's coming. And so that growth gets us to, you know, roughly one to six percent growth over second quarter. I mean we freely admit it's uncertainty, because we don't know. And so we're trying to encompass all the possibilities.

Is there one business in particular that might represent a greater percentage of your uncertainty?

No, I'd say it's pretty much across-the-board driven by the economy and the consumer.

Okay. And then just finally on the Spacemaster, you talked about 30m in revenue for the upcoming quarter. What's the risk to that number?

Pretty small.

Yeah, I mean maybe it's 25 to 30, but ...

Yeah.

But it's 100m for the year at a minimum is what we think we'll get. Third quarter is typically a pretty good shipping quarter for them. So the 30m, we think it's relatively certain. But you have to remember that's not going to bring a lot of earnings with it for the first six to 12 months.

Understood. Are you keeping the Spacemaster salespeople?

The majority of them, 'yes.'

Okay, great. Thanks very much, guys.

Thank you, sir. Our next question comes from Keith Hughes with SunTrust Robinson Humphrey. Please go ahead with your question.

Thank you. Real quickly, on the upholstered furniture component producer in China, I mean you bought, is that making your components across-the-board, or is it just sleepers? Or just a little more detail there?

It was primarily, Keith, making recliner hardware. That was their primary business. But like many Chinese manufacturers they're diverse from there. It was well in excess of 50 percent of their production.

Okay. And just how big is that business?

It was on an annualized run rate of $5m.

Okay.

It will grow at Felix and Dave's 25 to 30 percent rate.

Yeah, and I assume there's going to be some capital investment you're going to be putting out there?

Actually, what we've done is we - in our capital forecast we had forecasted some presses into our startup Greenfield operation. Because of the history and the skill set in the acquired facility we literally shifted those capital forecasted spend into the newly acquired business. And so, basically, it will be a stamping operation. Our Greenfield operation will be the assembly side of the business. And so 'yes,' there'll be a capital infusion, but it was already forecasted.

All right, thank you.

Thank you, sir. Our next question comes from John Baugh with Wachovia Securities. Please go ahead with your question.

Thank you. Good morning. I'll be quick. I understand Spacemaster is going to be breakeven. I wonder if you could comment on the implications, though, through the rationalization for the Division? And I understand there are probably employee sensitivities, but is the - do you expect in the next 12 months a pickup from the consolidation because of the Spacemaster, and so Spacemaster alone is breakeven but if there's a benefit outside of that?

John, this is Felix. And the answer is 'yes,' there is. There will be rationalization. And you're right at this point we can't make all the comments, but there'll be everything from some plant consolidations, some plant closures. There will be certain operations will certainly be left open, and we'll run the way that they are. But as far as a return on our invested capital we expect that to certainly meet and exceed Leggett's corporate averages as of today, after we get through this first 12 months.

Okay. Thank you much.

Thank you, sir. Gentlemen, at this time we have no further questions. Please continue with any further statements.

Okay. We appreciate your participation. And we look forward to talking to you next quarter. Thanks.

Thank you, Management.

Ladies and gentlemen, at this time we will conclude today's teleconference presentation. We'd like to thank you for participating in the conference call. If you would like to listen to a replay of the conference please dial 303-590-3000. You will need to enter access code 544112. Once again, if you would like to listen to a replay of today's conference please dial 303-590-3000. You will need to enter the access code 544112.

We'd like to thank you for your participation on the conference. At this time we will conclude the conference call. And you may now disconnect. Thank you.