禮恩派 (LEG) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the Third Quarter 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. And as a reminder, this conference is being recorded today, Thursday, October 16th of 2003.

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

Good morning. And thank you for taking part in our third quarter conference call. I am Dave DeSonier, the Vice President of Investor Relations. And with me today are Felix Wright, our Chairman and CEO, Dave Haffner, who is President and Chief Operating Officer, Karl Glassman, who is Executive Vice President and also heads the Residential Furnishings Segment, Matt Flanigan, our Chief Financial Officer, Bob Griffin, the President of our Fixture and Display Group, and Susan [McCoy] [ph], who is Director of Investor Relations.

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 . Dave Haffner will discuss the tactical plan we announced for our fixture and display businesses, and the market trends we’re seeing in our businesses along with factors impacting our earnings and margins. Then Felix will discuss the outlook for the fourth quarter and for 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 is copyrighted material. This call may not be transcribed, recorded, or broadcast without our express permission. A replay is available from the IR portion of Leggett’s web site.

In addition, I need to remind you that remarks 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 and the section in our 10-K entitled ‘forward-looking statements.’

I’ll now turn the call over to Felix Wright.

Thank you, Dave. And thank you all for joining this morning for our third quarter conference call.

As we announced yesterday, earnings for the quarter were 26 cents per share, in line with the guidance we issued on July 16th. This quarter’s earnings include a three cent charge for inventory obsolescence, a three cent impact from the weaker U.S. dollar, and two cents related to higher energy costs. Last year’s third quarter earnings of 29 cents included a four cent restructuring charge. Earnings benefited from higher sales and cost structure improvements, but these gains were mostly offset during the quarter by higher raw material costs, sales mix, and price competition.

Sales for the quarter were a record 1.16b, benefiting from the recently announced Spacemaster acquisition and a slight increase in same location sales. This quarter’s same location sales growth is a significant improvement from the five percent decline we saw in the second quarter. It’s important to note that this improvement is not viewed to an easy comp, with third quarter 2002 showing sales growth over 2001.

We saw same location sales growth in three of our five segments during the quarter. Sales trends improved in residential with increases in many of our businesses, including bedding and upholstered furniture components. Our aluminum segment showed slightly positive sales versus the third quarter of 2002. And, again, this quarter specialized products posted sales growth.

We continue to face significant challenges in our commercial segment. As we announced yesterday we’ve implemented a 12-month tactical plan to address some of the issues in our fixture and display businesses. Dave Haffner will discuss our plans further in his comments. Although the economy and our end markets continue to have a significant impact on our results we’re stepping up our focus on the factors that we can control.

And to discuss some of those factors that impacted the quarter, we took a $10m charge in the quarter for inventory reserves. This adjustment results from an intensive review of all inventories, but primarily relates to inventory in our fixture and display businesses that has not sold well due to prolonged market weaknesses. Most of this charge is not expected to recur. The weaker U.S. dollar continues to affect earnings, with the current quarter impact of about three cents. In particular, we’ve experienced margin pressure in certain Canadian operations that sell primarily in U.S. dollars. Higher energy costs continued with natural gas, prices remaining above last year’s levels for the third straight quarter. Earnings have been impacted by roughly two cents a quarter, and we expect this to continue in the fourth quarter. We have hedged about 60 percent of our natural gas requirements for the next nine months. And raw material prices have continued to increase, particularly in steel rod.

Increased raw material, energy, and other costs have affected margins all year. In order to recover some of these higher costs we have recently announced price increases for some of our products that will go into effect during the fourth quarter. We’re expecting some modest fourth quarter improvement in our residential and industrial segments as these price increases become effective.

Other highlights for the quarter include working capital, as a percentage of our annual sales, was 18.7 percent for the third quarter, just below our 19 percent target. A notable improvement compared to this year’s earlier quarters. As we’ve reminded you before, our working capital levels will vary from quarter to quarter with the seasonal trends of our businesses, but we remain committed to achieving our 19 percent target on average over time.

We ended the quarter with 473m of cash on the balance sheet, and our net debt to total capital was at a very favorable 24 percent. We raised our dividend this quarter to a current annual payout of 56 cents per share. Since 1971 we’ve grown dividends through 32 consecutive annual increases at a 15 percent compound annual growth rate. We know of no other Fortune 500 firm that has achieved as long a string of increases at the growth rate we have sustained.

Early in the quarter we announced the acquisition of RHC Spacemaster, a manufacturer of retail store fixtures, with annual revenues expected of 100m to 120m this is the fourth largest acquisition in our history. During the quarter we also acquired one small textile fibers operation that will add about 7m in revenues to our residential furnishings segment.

We continued with the ramp-up of our Sterling rod mill, and are very pleased with the performance of this business. Sterling is performing at forecast, posting positive earnings during the quarter.

And with those comments, I’ll now turn it over to Dave Haffner.

Thank you, Felix. And good morning, everyone. My comments will discuss recent market trends in our various businesses, along with some of the major factors impacting our EBIT and EBIT margins.

First, however, I’d like to comment on the fixture and display group tactical plan we discussed in yesterday’s press release. The store fixture industry has experienced an unprecedented three-year decline in demand as retailers continued to defer new store openings and refurbishments. In the last two years four of our top 10 competitors have declared bankruptcy as reduced demand has led to significant pricing competition. Though the economy has had a major impact on our businesses we should be performing better than we are.

We are stepping up scrutiny of under performing profit centers within our fixture and display group. It has taken longer and been harder to get our arms around these operations than we anticipated. Additional attention, including my expanded personal involvement, will focus on increasing margins by improving manufacturing efficiencies, monitoring standard costs, and eliminating variances, better controlling inventory, and enhancing staff competency and bench strength.

Opportunities to further consolidate facilities will receive significant consideration. Some of the potential consolidations result from our recent acquisition of RHC Spacemaster. We expect these moves to be implemented over the next 12 months as part of this group specific tactical plan.

And finally, as part of our overall initiative to strengthen group management we’re very pleased to announce the recent hiring of Robert, or Bob, [Hayes] [ph] into the position of Executive Vice President of Fixtures and Displays. Bob brings in excess of 25 years of applicable experience in engineering, operations and project management, product development, and marketing. Bob Hayes will report directly to Bob [Griffin] [ph], President of the Fixture and Display Group.

Now turning to segment trends, in residential furnishings total sales increased 4.8 percent or 4.2 percent excluding the benefit of acquisitions. During the quarter we saw a better than normal seasonal pickup in our residential businesses. Bedding sales were up slightly in the quarter versus 2002, continuing the trend that began developing late in the second quarter. Upholstered furniture component sales were strong again this quarter showing positive comparisons against last year’s solid results. Sales in our fashion bed operations were up significantly, and strong demand for carpet cushion also continued in this most recent quarter. The segment’s EBIT increased eight percent, and EBIT margin improved to 9.6 percent. Higher sales in the absence of last year’s restructuring costs benefited EBIT, but these gains were partially offset by impacts from foreign currency, sales mix, and higher raw material and energy costs.

In commercial fixture and components total sales increased 9.1 percent. Sales generated by the recently acquired Spacemaster operations more than offset a 3.7 percent decline in same location sales. The segment’s EBIT declined 51 percent, and EBIT margins dropped to 3.4 percent. Lower same location sales, the $8m in inventory obsolescence charges, and the impacts from foreign currency were the major contributors. These reductions were partially offset by the absence of last year’s restructuring charge.

As I mentioned earlier, the market conditions for our fixture and display businesses has been very difficult over the past three years. We have not yet seen broad signs of improvement, however, some of our customers have continued planning major store expansions with some of that volume coming in the fourth quarter of this year. When the economy improves there could be significant new spending in response to pent-up demand. In addition, the bankruptcies on the part of some of our competitors continue to create opportunity for us to pick-up additional market share.

Turning to office and contract, for almost two-and-a-half years we 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, and that trend continued in the third quarter.

In our aluminum products segment total sales decreased 6.8 percent due to the past year’s divestitures. Same location sales were slightly positive at two-tenths of one percent. The segment’s EBIT improved, and the EBIT margins increased to four percent due to the absence of last year’s restructuring costs, slightly offset by higher energy costs. Although we’re not seeing any broad signs of improved demand in many of the markets that we serve here, we continue to manage the factors within our control. During the past several quarters we’ve been aggressively gaining market share, and pursuing new markets. Our sales of components for motorcycles and small engines remain strong, and new programs are expected to continue ramping up over the balance of this year and into next year. The benefit of these market share gains have been reflected in this past year’s results, and we are set to benefit even further from these efforts in future quarters.

In industrial materials total sales declined 10.3 percent, with a recent divestiture adding to an 8.1 percent decline in same location sales. The segment’s sales declined this quarter primarily from reduced wire sales. As we’ve consolidated some of our recent acquisitions during this past year we purged some of the lower margined accounts that those companies had historically supplied.

Tubing sales also declined, primarily due to weak end market demand for all terrain vehicles and other products. EBIT was down 24 percent and EBIT margins dropped to 7.1 percent. The EBIT decline results primarily from lower sales and higher raw material and energy costs. These factors were partially offset by favorable results at our new Sterling rod mill, which continues to progress very well, and is operating at forecast.

In specialized products total sales grew 6.2 percent, reflecting the benefit of two small acquisitions and a same location sales increase of 5.3 percent. Currency rate changes account for a large share of the revenue increase. Additional improvements came from market share gains and new product placements in our automotive businesses, as well as growth in machinery sales. EBIT dropped 26 percent, and EBIT margins declined to 9.3 percent. The benefit from the sales gains were more than offset by currency rate changes, a modest inventory charge, and other factors.

And with those comments, I’ll turn the call back to Felix.

Thank you, Dave.

We’d like to talk now about the outlook for the balance of 2003. We typically see a seasonal decline in sales heading into the fourth quarter. Over the last three years fourth quarter sales have been between $90m and $120m lower than third quarter, and for this fourth quarter we’re forecasting a sequential sales decline of $80m to $130m. Sales are expected to be between 1.03b and 1.08b for the fourth quarter, yielding year-on-year organic growth between negative one and positive four.

We expect earnings of 21 to 26 cents per share for the fourth quarter. For the full year we forecast same location sales growth between zero and negative one, compared to the full year of 2002, and earnings per share of 96 cents to $1.01 per share.

And with those comments, I am going to turn the call back over to Dave DeSonier. And we’ll try to answer any questions that you all may have.

Okay, that concludes our prepared remarks. We appreciate your attention, and as Felix said, we’ll try to answer your questions. In order to allow everyone an opportunity to participate we request that you ask your single best question, and then voluntarily yield to the next participant. If you have additional questions please reenter the queue, and we will answer as many questions as you have.

Dustin, we’re ready for the q and a.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. (Caller Instructions.)

Our first question comes from Margaret Whelan. Please state your company name, followed by your question.

Good morning, folks.

Hi, Margaret.

Hi, Margaret.

It’s Margaret at UBS, as you know. I hate the one question rule, but let me do this. Can you – you’ve done a terrific job over the last couple of years of managing what you can control. It seems that business is starting to improve and strengthen a little bit in most of the markets. We know you’re doing all the right stuff internally. Will you go through each of the five segments and tell us what you think the kind of normalized operating margin is going to be?

Okay. This is Dave DeSonier. Normalized operating margins, let me do EBIT margins, Margaret.

Okay.

By segment. In residential I’d say we should get back to the historical roughly thirteenish percent. In commercial we think that it will be slightly better than the corporate average, and so 13 to 15 percent. Aluminum, as you know, we’ve had a 10 percent target. We think we can do maybe a little better than that. Specialized, it would probably be somewhere around that same – I’m trying to look at a set of figures we’ve got. Specialized would probably be 11 to 12 percent on average. It moves around more than some of the others. And then, industrial probably about in that same range as specialized.

Okay. And what do you think is the timing on that, just given what you’re seeing in the markets right now.

If you can tell us when the economy is going to improve we can tell you when we’ll hit those margins.

Well, it sounds like it is improving, though.

Yes, it is, Margaret. And I think that if we can get that continued improvement going through the first and second quarters of next year, the wind ought to be to our back a lot better when we hit that third and fourth quarter of next year. And then, obviously, with some of the things we’re going to be doing in our commercial segment we’re going to be – we ought to be headed in the right direction. I don’t think I can give you a date as to when we’re going to attain all of this. But we’re sure going to be in the right direction.

Okay, and Sterling, and the kind of fixtures business – what exactly are you going to be doing there over the next couple of quarters? Should we expect more charges or one-time items?

In the Sterling …

Fixtures.

Nothing there, that’s nothing but positive.

Okay.

In the fixtures side of the business there could be some modest, don’t anticipate any major – you know, we had some consolidations that we were looking at when we made the RH Spacemaster acquisition. Those will be rolled together as Dave does his entire tactical plan, and so there will be some consolidations, but don’t expect any major write-offs in that segment either at this point.

Okay, thanks very much.

Margaret, let me correct one thing.

Yes.

In residential we’ll probably be 11 to 12 in margins.

And not 13?

Corporate will probably be the 12 to 13.

Corporate will be 12 to 13. Okay, it sounds good. Thanks, guys.

Thank you. Our next question comes from Budd Bugatch. Please state your company name, followed by your question.

Good morning. Budd Bugatch with Raymond James.

Hi, Budd.

Good morning, Felix. Good morning, David, and David.

Hi, Budd.

I guess my question, and let me try to go at it this way. You’ve told us in the past that you’ve got the 50-cent potential earnings power for half a billion dollars worth of capacity in this quarter, and I was surprised that you came in at the low end of the earnings expectation and at the high end of the sales expectation. And so we didn’t see that kind of leverage. I know that we’ve got the inventory issue, which is a one-time issue. The currency issue may or may not be one-time. And the energy is certainly not one-time. Do you still have that same earnings power? And what’s the likelihood of getting that? That’s essentially over, I guess, an 11 percent internal growth rate to get there.

Budd, this is Dave DeSonier. As you pointed out, there were several factors that hit us in the quarter. They don’t really change that leverage, but they’re masking it. And there’s a little bit of price competition going on. And so while we’re in the downturn you may not get all of that incremental margin. But in general, we still expect that 10m is roughly a penny. You may need better economy to see the full extent of that, but it’s being masked, as you said, by the inventory, the little bit higher currency impact than we had expected, a little bit of product mix in the quarter.

And so when do we unmask that man?

Budd, this is Felix. There’s some of that unmasking, has got to take part as to when, as we stated, we’re passing through some material increases, and it’s been historical in this company that when we pass through material increases is at the same time that we are able to go back in and pick-up past labor increases, or past energy increases that are permanent in nature, or whatever that they are.

So as we’re starting to do that in the tail end of this fourth quarter and early into the next quarter of next year, that will be taking some of that mass back off of some of those things that have almost become of a permanent nature. And that we’ve got to pass through. And so that’s going to be part of it.

Well, just two things on that, Felix, and I’ll yield. One, price competition is not something new, and a matter of fact, if anything, particularly during periods of downturns in the past you all have been the leader in that category, if I may.

And secondly, with your market strength in a number of areas, you’ve always, you have historically said you were going to pass through price increases more rapidly so that they are more coincident to the cost increases you impact. And so something sounds different. Am I missing something?

Budd, I tell you what, I think this three years that we’ve been involved in, or this longer economic downturn has changed that a little bit because we’ve had customers and everything that we’ve needed to be more aggressive in trying to help in their business models, as well as being very aggressive in market share, and et cetera.

And so I think that we have had a different period this time of a longer extension rather than us being able for whether it’s market share or whatever to step-up and maybe do some of those things, that we’ve chose not to because we had a customer out there that needed our help, and long-term we think it made more sense than trying to wind-up and be able maybe at a given quarter or a given six months or a year to do something with margins.

But I do think that we certainly are comfortable that we’ll get back there. Our customers are getting stronger. Their top line is getting stronger, and I think that that’s where you begin to see now that we are beginning to move some of those materials back through, and pick-up those other factors I mentioned.

So the real question is just when?

I’m sorry.

The question is when will you be able to see that?

Oh, Budd. I think that, again, back to Margaret’s question. We’re into the – you’re going to start seeing it in the first quarter, but you’re into the middle of next year and the third quarter when you see that starting to go through the system.

Okay, thanks, Felix.

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

Good morning. It’s Laura Champine from Morgan Keegan.

Hi, Laura.

Hi, Laura.

I’m going to cheat and ask a compound question. It’s still unclear to me why with accelerating demand trends in your biggest segments that you’re guiding down Q4 revenues and earnings at all? And so if you could go into that, that would be great. And also, has there ever been an inventory charge that Leggett has taken similar to the one you’re taking now? And are those entirely discontinued product lines?

This is Dave DeSonier. I’ll tackle the fourth quarter question. We were very bullish a quarter ago when we gave that forecast. Even in the press release I think we said something like, you know, ‘if trends continue and we didn’t say if all cylinders hit, but that was the thought, then we could set some record sales in the fourth quarter.’ And our guidance was four to nine percent sales growth in the fourth quarter. But we’re still not hitting on every cylinder, and so we’ve backed off about $50m in the sales forecast for fourth quarter. And that’s what’s brought the earnings guidance back down a little bit.

And then the inventory question.

Laura, this is Matt Flanigan. On the inventory, that is the largest that we’ve had. And it touches on both obsolete inventory, but also some slow moving inventory, as well. There’s a mix in there. We certainly intend to hope to come back and sell some of that inventory, but we’re conservative in the valuation of it right now, for sure.

And can you give me a percentage of that inventory related to the Spacemaster acquisition, the inventory write-off?

None of that was related to Spacemaster.

We did that due diligence pretty carefully, Laura, as we approached the closing of that transaction.

But Laura, we can tell you that $8m of that inventory write-down was in the fixturing part of the business.

And I guess the biggest question to me, and I’ll shut-up after this, is why – it sounds like you’re interested in acquiring more companies in the fixturing space. So if Leggett is having trouble executing in fixturings, and it’s unclear to me that you can ever generate the return on invested capital in this segment that you have in other businesses, why make a large acquisition and potentially other acquisitions in this segment at this time?

Laura, we understand that we’re not meeting our return on investment expectations in this business. The consolidation opportunities are real, we think. This particular acquisition, RHC Spacemaster, represented some very significant if not compelling opportunities, not the least of which was very good pricing on the acquisition. It also gave us some critical pieces to a bigger puzzle, if you will, from a geographic and manufacturing perspective. Now I know that’s easy to say, and everybody wants to see the execution of this plan. And all I’ll add to that is that we’re stepping that up, as I said.

Bob, I don’t know if you want to add anything to it? Bob Griffin?

Now the acquisition of Spacemaster, as we’ve said before, was one that many years ago we thought made sense. The pricing of it is extremely compelling. There are significant consolidation opportunities that accrue to us, not only moving Spacemaster into existing operations but going the other way, Leggett into Spacemaster opportunities.

With regard to future acquisitions I’d say from our point of view you’re right, we need to get our hands around what we have at this point in time. The opportunities, though, as they come up, as this one did was very compelling.

With regard to whether we will get to those returns going forward, and you’re very skeptical, I appreciate that. And I can tell you I do believe we will get back to those returns, and the only thing I can tell you is we need to show you that.

Laura, I think this. Sometimes when you have an industry that’s in disarray, and then obviously we haven’t managed our assets in the way that we should, et cetera. But when there’s an opportunity for a consolidation, this retail environment, we don’t need to have any more space built. We just need to have them continue to refurbish and do the things that they’re doing to their stores.

There’s going to be a demand out there, and if we do our job in filling that demand for a number of those products we should have the opportunity for this segment, not only to be the biggest organic growth percentage wise that we’ve got without any external acquisitions, but we certainly ought to be able to get back to reasonable margins. So, but like I say, we’ve got to demonstrate it, improve it, and the proof of the pudding is in the eating. And I rest assure you’re going to be looking at a different situation within 10 or 12 months.

All right, great. Thank you.

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

AG Edwards. And with Dave DeSonier’s indulgence I’d like to follow my usual offbeat train of thought, and ask what may not be my best shot question. It relates to working capital. And you’re to be congratulated on that performance even if a good part of it is due to a discretionary inventory write-down. But I am wondering if you have things screwed down so tightly and disciplined so firmly in place that you may have to stall on the up side if demand does, indeed, turn-up sharply?

Mike, this is Dave Haffner. Absolutely accurate on the effect of the $10m write-down. We are pleased with the improvement in working capital management this quarter. And in a word, the answer to the last part is ‘no,’ we’re comfortable that we won’t stall.

One of the things that we continue to do is to refine the working capital management mechanism that we use internally. Of course, inventory is the biggest single element of that. And, in fact, we spent a good bit of time yesterday talking about this subject in a meeting as to how we continue to refine the budgeting. We actually budget our inventory as a percentage of sales at an operating level. And so it doesn’t mean that we would never miss a particular opportunity with a single customer, ‘no,’ but we won’t find ourselves short in our ability to service, Mike.

Does that inventory control effort work forward to dealing with vendors, and their ability to respond on the up side?

Yes. Now, it gets fuzzier, as you would expect as you get further away from our nucleus here. But ‘yes,’ we do that. We try to anticipate – we’ve got good relationships, obviously, with all of our big customers, and some of them, as you know, there are no inventory buffers in the system, such as automotive and other JIT type businesses. But even big parts of residential, there isn’t any inventory in the system. But we ask our customers what their plans are, and we actually go back to, which is kind of the antithesis of the question, to our vendors to make sure that as we run leaner that we can depend on them.

Okay, thank you.

Mike, Matt Flanigan wants to make one comment on the working capital.

Yes, Mike, good point on the inventory write-off. If that had not occurred we would have been essentially right at 19 percent on our working capital percentage. And so it’s certainly had an effect, but we’re pleased with the progress aside from the $10m write-down.

Okay, thank you.

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

Good morning. It’s actually [Sean Harrison] [ph] calling for David, with [Long Bow Research] [ph].

Hi, Sean.

Hi. Just getting back to the Fixtures and Displays Division. I mean from what I guess we can tell retail sales, the retail sales numbers are pretty good. We were just wondering maybe if something has changed, and maybe the retailers’ purchasing behaviors, or secondly, I guess what are you hearing right now in terms of this future buying plans from these retailers?

Yeah, this is Bob Griffin. In terms of the – what we’re seeing – what we have seen in 2003 from the retailers continues to be extreme caution in their capital expenditures. That doesn’t include all retailers, but in general, that is a fair statement.

There is, I will tell you that there is, and this does happen at this time of year in this industry, there is some bullishness on the part of retailers for 2004. And there is some euphoria with regard, if I can use that word, with regard to fixture purchases for 2004. I’ve seen this before during this last three years. And we are not, I am not anticipating, though, in 2004 that we’re going to have a recovery in capital expenditures on the part of these retailers for fixtures.

And I think part of the optimism out there, and why we’re seeing retail sales, is obviously we had that big, the tax cut, and the money that flowed back into the system there in 2003. I don’t see, that’s not going to recur in 2004. And so I’m very cautious about a retail recovery, at least from a capital goods standpoint, spending standpoint for 2004.

And I don’t think that we’ve seen a change in the mentality. Obviously, perhaps we don’t need retail space, but as far as if you take some of the retailers, they run so much volume through a high traffic store, they’re going to remodel it. Other retailers have other certain criteria that they have to go through when they remodel. Or we bring different views, or they come up with different views of how they want to merchandise something. And that’s where it triggers. I don’t believe we’ve had a mentality change, or anything that’s changed in the retail environment that says that they’re going to do things different in how that they present their goods to be sold.

No, that’s absolutely correct, Felix. There’s no question about that. And I can tell you in certain segments I see – there is a lot, this is an unprecedented turndown in this industry. And there is without question there’s a lot of pent-up demand. Even in the weakest segments of retail we’re seeing a lot of increased activity. And that’s in the soft goods end of it with the likes of The Limited, for instance, who has been very cautious in their spending over the years, has changed its attitudes. But again, it’s a question of whether in my mind, it’s a question of whether this goes across many segments, at least for 2004, and I am being very cautious.

Okay. I mean I guess if we were trying to maybe put a number to that, seeing that the mentality hasn’t changed, I mean is there like I guess a replacement cycle in terms of months or years that you look at, maybe post this downturn? And what it is, I guess, within the downturn right now?

Yeah, that varies across a lot of the different retail segments, because like it’s tough to call because you can take some of the big box retailers and Wal-Mart is going to run X millions or billions through one of these big box deals, and they’re going to refurbish it. And you’ve got others that, you know, maybe they push-out an extra year or two before they do it.

And so it’s tough to put a handle on years or quarters before that they wind-up and refurbish. And then sometimes it’s like a bunch of sheep. All of a sudden somebody does it in the part of a retail environment, and everybody else thinks they’ve got to follow or they’re going to miss out on the ability to sell their product. But it’s a tough answer to give you a year or a month, or a quarter.

Understandable. And finally, I guess upon, I guess the so-called euphoria you spoke of. Are you seeing any, I guess, or quantifiable volume benefit in the fourth quarter? I mean how much should we anticipate?

In the fourth quarter it’s – we’re seeing people sit on this. I am waiting for people to pull the trigger on, and we continue to, on programs for the fourth quarter. And, you know, we’re hopeful of that. It is not in our forecast for the fourth quarter. And that’s about the best answer I can give you, Sean, on that. There is an ability to pull back on these, they can be discretionary, and to pull back depending on what their retail sales are.

Yes, Sean. This is Dave Haffner. I’m just looking at our fourth quarter forecast by profit center. And in store fixtures. And we are anticipating a modest increase. This is before Spacemaster now. Spacemaster is going to bring a substantial amount of volume, somewhere in the neighborhood of 30m in the next quarter. But we’re anticipating compared to last year’s fourth quarter a modest, positive increase in overall sales in the fixture group.

All right, thank you.

Thank you. Our next question comes from Miss Ivy Zellman. Please state your company name, followed by your question.

Hi, everybody. Credit Suisse First Boston, Ivy Zellman. I read in the press release you talked about competitive pricing pressure that you’re faced with. And I apologize if you already addressed it, but realizing that, you know, you’re talking a lot about your cyclical weakness, and the unprecedented level of this downturn. I can’t help but wonder how much of your troubles are really secular? And I know I’ve spoken with Dave DeSonier about this, but if you can elaborate specifically on the deflationary pressures that you’re faced with, and how much of that you think is, you know, where you can pass it along? And you said your hopes of doing so, but many companies I know in the environment that we’re in today feel it’s secular pressures, and that it’s very unlikely that that’s going to change. Can Felix or anyone comment on that?

Well, we did talk a little bit, Ivy, about timing for passing along price increases. Felix also mentioned just briefly earlier that we’ve found ourselves being, I don’t know if the word is more lenient, but more supportive of our customer base than we have in the past, because our customers are under extraordinary pressure, too. I don’t know what the split is, how much of it is secular, or just timing.

We are going to experience some positive impact starting late fourth quarter because of price adjustments that have already been announced, and will be implemented over the next few weeks. That rolls into some substantial improvements next year as those things all kick-in.

Is that across the board in all your segments, or is that specifically in some categories?

I was just going to say that is primarily in our residential furnishings and industrial materials, Ivy.

Ivy, let me address the commercial deal for you, because this is a continuation of what I’ll call a ‘blended strategy’ in products that we’re running through that business. And we may be as much as 20 to 25 percent of that business today that we are importing to come up with a blended product that we wind-up and take to our customer to meet their pricing objectives, hence, meet our margin objectives also.

So as we take that strategy going forward we should be able to maintain and get back the margins that we need as we go through the years or the cycles, or the products, et cetera. In doing that in the commercial fixturing part of the business.

And so we feel comfortable that that can happen, and we have an entire purchasing group that operates, that services that part of the business, as well as the other parts of Leggett that does all the offshore purchasing, and then we wind-up and blend it with some of the local manufacturing also. And so I believe that that will certainly help us in the commercial side in taking the margins back where they need to be.

And then the 25 percent that you’re currently importing, those components, is that going to change likely? Or is that the right mix today?

Today it looks like it’s about the right mix, and – but we’re very conscious because if anything it’s got a tremendous amount of labor, or whatever, we’ll have to do something else. But today the mix feels pretty darn good.

And, again, I apologize, but can you review the capacity situation and then China for me, again? How much today you have that is actually shipped or providing for your customers out of China, and what the goals are anticipated? Increases that would be as a percent of total?

Of just our China production, Ivy?

Yeah, China production, and what segments it’s serving today as a percent of the total?

Okay. Ivy, this is Karl Glassman. The majority of our Chinese position today is in residential, specifically furniture and bedding, the bedding production is in place for consumption in China. We’re servicing a domestic market. The economics don’t work for us to produce springs in China and ship them to the United States.

From a furniture, hardware perspective, as you know, we greenfielded an operation earlier this year, then acquired a sister to it, and have blended those together. All of that consumption is in China. That product then, to some degree, is exported to the United States by either Chinese companies or U.S. owned companies operating in China. But the economics today don’t work, to manufacture mechanisms in China and shift them to the United States as a mechanism. And so where that ultimately ends up is somewhat dependent on our customers’ moves.

Do you have a rough idea of what percent of what you either sell to the customers, that are then being exported to the U.S. is of the business? Is it less than five percent, is it 10 percent?

On the furniture, hardware side it’s a majority of that production is ultimately exported, either to the United States or other territories.

No, I understand that. I mean of your total furniture, hardware actual sales? What percent is coming from exported products?

Miniscule.

Less than five percent.

Very, very small. It’s less than five percent.

Less than five.

And out of all these numbers they’re giving you are our companies that we produce products on. That doesn’t take into account like anything that we would import from China going into the fixturing business, and et cetera. But that, they’re giving you, our companies and our production in those percentages.

And as your customer starts to really struggle in overall businesses in upholstery, and realizing that upholstery is not seeing the same head winds in case goods, do you hear any grumblings that concern you that upholstery might start getting shipped from China, and that you might have to increase capacity to service the customers that are going to be moving to China?

Ivy, we’ll deal with that eventually. At this point you know that the majority of upholstery product that is imported from China are cut-and-sew covers as opposed to full product, with the main exception being leather, in that category. But ‘yes,’ as our customers move we will, if in fact they do, we will enhance our productive capacity in China as needed.

Okay, great. Thank you.

You’re welcome.

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

Miss Whelan, go ahead with your follow-up question.

It’s actually Susan Maklari. Can you guys give us a little update on how far along you are with your business model reviews?

Susan, this is Felix. And we’re proceeding along relatively well. We prioritized, obviously, the top five or six, or seven that we wanted to do first. And we are better than 50 percent through those first five or six, or seven reviews.

And as we have told you before, those reviews then will wind-up with a business plan for those business units going forward. The rest of them we anticipate trying to conclude by the middle or third quarter of 2004, and we’re well along in data collection, and et cetera. Some of them are on a very low priority of review because we’ve formulated some of them within the last 12 months or 13 months anyway, and we understand where they are, and there’s no problem.

But that’s going along very well. Don’t anticipate that there’s any huge changes at this point, or any exit strategies, or et cetera. It’s the ones that we’re so far through at this point right now are usually winding up with maybe a revised business model that will help us in trying to, or help that business unit manager run that business better.

But Dave or Karl, do you have any other comments for Susan?

No, that’s pretty much it. There are eight more of those reviews that are significantly in progress right now. And then the rest of them, as Felix said, are scheduled out, and will be towards the end of next year when we get them all done.

Okay, thank you.

Thank you. Our next question comes from Keith Hughes. Please state your company name, followed by your question.

Good morning. It’s Scott Phillips at SunTrust Robinson Humphries sitting in for Keith. Good morning. I just wanted to get a summary of the tactical plan in the fixtures business. Is this something that’s being led by aggressive pricing, where you have to come in and lower your cost structure? Or is this more or less you’ve detected some internal snafus with your inventory accounting and you’re just trying to fine-tune your blocking and tackling? I’m just trying to get a weight on those two issues.

Yeah, Scott, as you would expect, it’s some of each of that.

Right.

The competitive environment is real. And yet there’s no reason that we can’t take advantage of our size and leverage here. We’ll be going through, we have been going through, but we’ll be going through in more detail the variances from our standard costs, why those variances exist, how much of those variances can be eliminated through VA, VE type initiatives, or continuous improvement initiatives. After we get through all of that there’s some of that business that may not generate an adequate contribution margin. And in that regard we’ve got to have the stomach. I know it sounds like we’re talking out of both sides of our mouth, and we’ve got to have the stomach to walk away from some business.

Right.

And we’ve got to have the stomach to accept other business even though it may have temporarily skinny margins in order to affect efficiencies in our operations. Now this is not exactly like what we did in aluminum, but it’s a real basic analysis of contribution margins.

And then the snafu portion of it is real. Every one of our locations has an opportunity to improve. What Bob and I are finding is that, as you would expect, there’s a high correlation between the most under performing and the greatest opportunity to improve.

And so we need more management, more capable management in some specific places within the group, and so there are likely to be some management changes down into the unit and Division levels, as you would expect. And we’ll be looking at it’s very basic, but we’ll be looking at all aspects of materials from procurement to consumption, we’ll be looking at labor, and application and efficiency perspective. And we’ll be looking very aggressively at overheads. And so it’s some of each, Scott.

Okay, all right. Thanks a lot.

Thank you. Mr. McGregor, please go ahead with your follow-up question.

It’s Sean again. Just back to the price increases that we’re going to be rolling through in the next couple of weeks, is there any way that you could quantify that? And secondarily, I know that you mentioned that I guess your understanding of the pricing pressure your customers are also getting, but has it become any more difficult to pass price increases through over the past year or two? I guess noticeably more difficult, or is it just a greater understanding of your customers’ needs?

Sean, it’s always – this is Karl Glassman. It’s always difficult to pass a price increase through to a customer. It’s something that we, if in this stage, in this state of the economy have been slower to do than is typical. But we communicate with our customers and so well and so frequently that they understand what drive raw materials, they certainly are sensitive to the energy issues that face this country.

And so while they’re not readily accepting the increases they understand the need. We have a long history of dealing fairly with them. And so increases have never been easy to pass through, but they’re no more difficult today than they have been in the past. They’re always painful. And we will pass them through. We have a need, and we will.

Sean, another – this is Felix. Yesterday’s ‘Wall Street Journal,’ you probably may have looked at the article relative to steel, and talking about what’s going on relative to China, driving some of those price increases and et cetera, because the consumption that’s happened in China. And I think there’s about six steel mills that are under construction in China as we speak.

So it has driven scrap, and obviously, when our customers can see and read and understand what’s happening in the world economy, and it’s real in scrap, it’s not something that’s just induced by Leggett or some other vendor of theirs. It’s in a real world, and we’re having to deal with it, and they’re having to deal with it with us. And so perhaps it does help solidify some of that.

All right. I am sorry, did I miss the magnitude of the cost increase? I cut-out for a second.

On a percentage basis at the selling price level it blends to about 5.5 percent on our residential furnishings, specifically bedding components, U.S. bedding components.

Wire related.

Right.

Thank you very much.

It’s steel driven.

Got you. Well, thank you very much.

You’re welcome.

Thank you. Our next question comes from Mr. Matt [Russman] [ph]. Please state your company name, followed by your question.

Hi, guys. It’s [Trison Capital] [ph]. Your net debt to capital keeps going down, it’s 24.1 percent now. A lot of cash on the balance sheet. I know you also sold a lot of debt. And you have plenty of excess capacity. I am curious whether you’d consider taking some of that cash and stepping up your share buyback, or what your thoughts are on that? Thanks.

Matt, this is Felix. And remember that a lot of that cash is sitting there was prefunded to take care of some debt. That we’ve got about $120m worth of debt, I believe, that is going to come due by the end of the second quarter of ’04. And then when we get to the first quarter of ’05 we’ve got $350m that’s coming due. And because the markets are right, we prefunded some of that. It doesn’t mean that even if you took all of that into consideration that our debt to cap would be below our range even if we didn’t pay that debt down, if we used this dollars, and so I understand the question.

But I think that as we come out of this economic downturn, and acquisition opportunities continue to get better, and then obviously facing this, some of this debt retirement, that you’ll see us continue to buy stock on an opportunistic basis, or market weakness basis, or whatever, but as far as us getting out there with an aggressive buyback plan to liquidate the company in some form or fashion by buying back stock I wouldn’t expect that. We obviously will not allow whether it’s either employee benefits or whether its acquisitions, we might use stock for, we’ll obviously buy that back. But I wouldn’t expect an aggressive buyback plan, Matt, at this point.

All right. Thanks, Felix.

Thank you. Our next question comes from Mr. Braig with a follow-up. Please go ahead, sir.

Thank you. Your comments on the price increase for bedding suggests that we’re faced with some unusual pricing elements on wire and rod, and I am wondering if your comments on Sterling performing as forecast would hold true if it were not for that kind of price increase?

This is Felix, Mike. A good question. But the answer to the question is Sterling levelized the scrap charge that has to go into that mill, et cetera, and it is absolutely performing on forecast and slightly above forecast the way that we structured the environment. Because that scrap has been a pass through as the economy has been able to do it, but scrap has certainly increased going into that mill also. But it is absolutely on forecast and is probably as large of a, $130m to $150m revenue generating operation that we started from almost scratch. It probably may be the best one we ever started in the company as far as meeting forecasts, and if we could do that again in another big one we’d be tickled to death. But it’s done exactly what it’s supposed to be doing.

Congratulations, and thank you.

Thank you.

Gentlemen, there are no further questions at this time. Please continue.

We appreciate your interest, and we look forward to talking with you again next quarter. Thanks a lot.

Thanks. Bye.

Ladies and gentlemen, this concludes the Third Quarter Earnings conference call. If you would like to listen to a replay of today’s conference please dial 303-590-3000, and use pass code 553547. Once again, if you would like to listen to a replay of today’s conference call please dial 303-590-3000 and use pass code 553547. You may now disconnect. And thank you for using AT&T.