禮恩派 (LEG) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Leggett & Platt fourth 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. As a reminder, this conference is being recorded today, Thursday, January 29th of 2004.

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 fourth quarter conference call. I am Dave DeSonier, the VP of Investor Relations. With me today are Felix Wright, Leggett’s chairman and CEO; Dave Haffner, who is our President and COO; Karl Glassman, our EVP and head of our Residential Furnishings Segment; and Matt Flanigan, who is our CFO; and then finally, Susan McCoy, our director of investor relations.

The agenda for the call this morning 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 and the year . Dave Haffner will give an update on the fixture and display tactical plan, and discuss the market trends we’re seeing in our businesses along with factors impacting our earnings and margins. Then Felix will discuss our outlook for 2004, and finally the group will try to answer any questions you might have.

This conference is being recorded for Leggett & Platt, and is copyrighted material. This call may not be transcribed, recorded, or broadcast without our 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, our CEO.

Thank you, Dave, and thank you for joining us this morning for our conference call. We are very pleased with the results for the fourth quarter and the progress we continue to make in our operations. As we announced yesterday, earnings for the quarter were 30 cents per share, exceeding guidance, and 20 percent above last year. A same location sales gain of 8.7 percent drove the earnings improvements, with fourth quarter sales posting a record of $1.14b.

For the first time in four years, all five segments recorded organic sales growth and demand strengthened as the quarter progressed. Margins benefited in the quarter from the increased volume. Gross profit margins improved to the highest level in five quarters, and EBIT margins were at the highest fourth quarter levels since 2000.

Earnings gains from higher sales were partially offset during the quarter by continued impacts from a weaker U.S. dollar. For the full year, earnings were $1.05 per share on record sales of $4.4b. Organic sales growth, and recent acquisitions contributed roughly the same to the sales increase.

Earnings were impacted by several factors this year. Benefits came from higher sales and lower restructuring costs, but these improvements were more than offset by higher energy and steel costs, a weaker dollar, inventory write-downs and lower production levels earlier in the year, and as you know, that was particularly from U.S. spraying and [wire drawing] operations.

Rapid increases in steel costs remain a challenge as we enter 2004. Since last summer scrap prices have risen by roughly $100 per ton, nearly doubling in price. Our scrap prices will reset for the month of February next week, and we expect that they may be up another $25 per ton at that point. This is driving significant increases in the costs of our raw materials. Our steel vendors have rescinded all previous supply commitments for the first quarter, and have implemented 30 day pricing in most cases. We purchase roughly 1.2m tons of steel annually, accounting for about 15 percent of our cost of goods sold, so these higher costs significantly impact our profitability.

To recover some of these costs, in the fourth quarter we announced price increases on many of our products, and recently we have implemented 30-day pricing arrangement for wire, with increases expected beginning in February and again in March. Other steel related products will be increased accordingly.

We made progress in many areas during 2003. We started up our Sterling Rod Mill and are very pleased with its performance. Sterling is performing as forecast. We completed the fourth largest acquisition in our history. In July, we acquired RHC Spacemaster, a manufacturer of retail store fixtures, with annual revenues expected of $100m to $120m. For the year, we completed 15 acquisitions that should add about $200m to total revenues. In addition, we divested two operations with annual revenues of about $23m.

We added five Asian facilities, including our first quarter start-up of an upholstered furniture mechanism facility in China. We are implementing a tactical plan to address performance issues in our fixture and display businesses. Dave Haffner will discuss the past quarter’s activities in his comments. We raised our dividends to an 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 that the growth rate will sustain.

We issued $350m of long-term debt, locking in very favorable interest rates for the next 10 and 15 years. We furthered strengthened our balance sheet. At the end of the year, net debt was 23.4 percent of total capital. We continued generating strong cash flow. Cash from operations was about $395m. And finally, we began expensing stock options this year.

And with those comments, I am going to turn the call over to Dave Haffner.

Thank you, Felix, and good morning everyone. My comments will discuss our recent performance, including some of the major factors impacting our EBIT and EBIT margins, and trends in our various businesses. But first I’d like to comment on our progress under the fixture display group tactical plan.

As we told you last quarter, we are stepping up scrutiny of the underperforming operations within our fixture and display group. Though reduced market demand is part of the problem, we really should be doing better. During this past quarter, I joined Bob Griffin and other of our fixture and display operating executives in visiting seven of our poorly performing businesses within this group.

I am pleased with the priority these ; Leggett partners are assigning to the various remediation tasks, and the leverage they provide to my personal involvement. Our focus during these reviews is on gross margin improvement, administrative cost reduction and process improvements. Specific initiatives include review of standard cost by customer and product; a critical review of all of our customer accounts, including raising prices if necessary, or walking away from business if we have to; negotiating cost reductions with vendors; head count reductions; continuous improvement projects, leading to better production efficiency and labor utilization; and improving process and procedural controls.

To date we have identified certain potential consolidation opportunities and are analyzing options in each case. As we continue with these reviews, opportunities to further consolidate facilities and implement best practices will receive significant attention. We expect these moves to be implemented over the next year, and anticipate only modest restructuring charges in line with those recognized the past few years.

Now to briefly comment on other quarter highlights. During the fourth quarter, we completed seven acquisitions that should add about $65m to annual revenues. Four companies were acquired in our residential segment, adding $40m in revenue. The largest is a producer of adjustable beds. Two plastic injection molding businesses should add $17m in revenue to our commercial segment, and one company that produces cables for automotive applications should add roughly $8m in revenue to our specialized segment.

At year end, working capital as a percentage of annualized sales was 19 percent, in line with our target. Accounts receivable dollars were higher versus year end 2002, the result of acquisitions and strong December sales. The inventory dollars, on the other hand, were basically flat with 2002, despite higher steel costs, acquisitions, and the impact from a weaker U.S. dollar.

Now turning to the individual segments. In residential furnishings, fourth quarter sales increased 10.2 percent, or 7.9 percent excluding acquisitions, with most of our business unit posting growth in the quarter. EBIT increased, reflecting higher sales and improved overhead absorption, offset in part by foreign currency impact. For the year, total sales increased 2.5 percent, or 1.4 percent excluding acquisitions. EBIT decreased for the full year, as higher raw material and energy cost, currency factors, unabsorbed overhead at our U.S. Spring facilities earlier in the year, and sales mix more than offset the benefit from the sales increase.

Bedding demand was much improved in the last half of the year. Our U.S. Spring operations posted sales growth in the third and fourth quarters, partially offsetting the significant declines experienced through early June. International spring sales increased in each quarter this year, primarily from currency impacts, but in part from unit growth. Upholstered furniture component sales were strong throughout the year, reflecting positive comparisons against 2002’s solid results.

Sales also increased in our fashion bed and adjustable bed operations, and we experienced strong demand for carpet cushion. With improving consumer confidence levels and pent-up demand from the past few years housing strength, we believe these positive trends will continue in 2004.

In our commercial fixturing and component segment, total sales increased 27.5 percent in the quarter, benefiting from our recent acquisitions and a strong 10.6 percent improvement in same location sales. This improvement reflects the benefit of some major programs where product was shipped in the fourth quarter. EBIT decreased slightly as the sales improvement was offset primarily by currency impacts and several small factors. Margins in our fixture and display operations continue to reflect operational inefficiency, but we are aggressively addressing that, as I mentioned earlier.

Sales for the full year increased 7.4 percent with acquisitions offsetting the slight decrease in same location sales. EBIT declined significantly for the year, primarily from inventory write downs, the weaker dollar, higher steel costs, price competition, and operational inefficiencies.

Although certain major retailers continued with new store openings and refurbishments this past year, most continued at reduced capital spending levels. Consumer confidence, retail sales, and more importantly, business spending, seem to be improving. We continue to believe that pent-up demand exists since many retail environments have not been updated for several years. With the bankruptcies on the part of some of our competitors and market share gains we’ve accomplished, along with the improvements we’re making in our operations, we are well-positioned to benefit from the industry’s eventual recovery.

Starting in mid-June, we began to see modest improvement in demand for office furniture components. Although the market remains at very depressed levels, those improvements continued for the last half of the year. For aluminum products, the fourth quarter total sales increased 9.8 percent, or 11 percent excluding divestitures. EBIT was roughly flat, as the benefit from higher sales volume was offset by a change in sales mix. For the year, total sales decreased 4.2 percent, but excluding divestitures, sales increased 2.5 percent. EBIT increased for the full year, primarily reflecting single location sales gains. The non-recurrence of 2002 charges for restructuring and inventory and equipment obsolescence also improved EBIT, but this benefit was offset somewhat by changes in sales mix, mainly lower barbeque grill production.

New programs for motorcycles, small engines, and large appliances represented the majority of the sales increase for the quarter and the full year. These market share gains were partially offset by a decline in sales and production levels of barbeque grill castings. Although we are gaining efficiency as the new programs ramp up, this new volume is not yet generating the level of EBIT margins we achieved with existing business, although it will.

Our efforts to gain share and enter new markets will continue. 2004 will benefit from the programs we added this past year, and should see further growth as other new programs start up and as our overall markets begin to improve. We expect these gains to be partially offset by somewhat lower grill volume. In our industrial materials segment, the fourth quarter total sales increased 2.9 percent, with a divestiture partially offsetting 5.7 percent growth in same location sales. EBIT improved, reflecting higher sales and the start-up of our Sterling rod mill. In the fourth quarter of 2002, the rod mill was incurring significant start-up costs, and in this past fourth quarter that facility operated profitably, and according to our plan.

For the year, total sales declined 5.3 percent, or 5.1 percent excluding divestitures. EBIT decreased, reflecting lower sales and production levels earlier this year, along with higher steel and energy costs. These negative impacts were partially offset by favorable results at our Sterling rod mill, and a gain from the sale of a tubing fabrication business. The full year sales decline resulted from weakness in many of our end markets, including weak bedding demand early in the year, and also market declines for ATVs and accessories. Volume increased late in the year as some of our end markets began improving. We are expecting these improvements to continue into 2004.

In specialized products, fourth quarter sales grew 12.4 percent, or 11.4 percent excluding acquisitions. We saw improvements this quarter in both our automotive and machinery businesses. EBIT also increased on these stronger sales, despite continuing pressure from foreign currency. Total sales for the year increased 11.6 percent, or 10.7 percent excluding acquisitions. For the full year, EBIT increased slightly as sales gains were offset by the weaker dollar, sales mix and other factors. This segment has consistently posted sales growth over the past two years, with the past seven quarters, each showing positive comparisons. This year’s improvements reflect currency rate changes, but also continue to benefit from new programs in our automotive businesses as well as growth in machinery sales.

With those comments, I’ll now turn the call back over to Felix.

Thank you, Dave. We would like to talk now about the outlook for 2004. Earnings growth in 2004 will be heavily influenced by three major factors; the amount of sales growth, the degree to which we recover escalating steel costs, and the extent of improvement in the fixture and display operations.

For planning purposes, we are assuming 2004 sales growth, excluding acquisitions, between 3 percent and 8 percent for the full year. We are facing the ongoing challenge of rapid steel cost increases. We cannot offset increases of this magnitude with enhanced efficiencies, so we are reluctantly compelled to pass along the price increases to our customers.

A modest EBIT gain is expected from operational improvement in the fixture and display businesses. We will be better able to quantify this benefit later in the year. Incorporating all of these factors, our earnings guidance for the full year 2004 is $1.15 to $1.35 per share.

For the first quarter, we expect sales to be approximately 10 percent higher than the first quarter of 2003. The fourth quarter included a one cent EPS benefit from the realization of foreign tax credit carry forwards that will not recur in the first quarter. Based on these assumptions, we expect earnings of 26 cents to 31 cents per share for the first quarter. And with those comments, I am going to turn the call back over to Dave DeSonier and we will try to answer any of the questions you may have.

Okay, that concludes our prepared remarks. We thank you for your attention and we will be glad to answer your questions. In order to allow everyone an opportunity to participate, we request that you ask your single best question, 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 might have. Marcia, we are ready to begin the Q&A.

Thank you, sir. (Operator instructions) The first question is from Margaret Whelan. Please state your company name, followed by your question.

Good morning, it’s Susan Maklari, actually, for Margaret from UBS. Can you guys talk a little bit about what you are seeing in your residential segment? Sales were up nicely there, but can you give us just a bit more detail on the trend?

Susan, this is Karl Glassman. The trend certainly strengthened as the fourth quarter progressed. As we had told you earlier, that we really saw a turn on the bedding side of the business, say middle of June, and continued to see strength. December was unusually strong, business continues to be strong at this point, affected maybe slightly in the last few days with the nationwide weather situation.

But on the furniture side itself, the hardware business was extremely strong all year, as compared and contrasted to a very strong 2002. That business continues to be strong as we speak. Market share gains in our carpet underlay business that accelerated through the year, adjustable beds, Dave announced the adjustable bed acquisition we made mid-fourth quarter, that is a very quickly growing category and that business is at a 15 percent to 20 percent CAGR. That business is extremely strong at this point, with the major introduction on behalf of one of the bedding manufacturers.

Okay, and then just one more quick question. As business trends seem to be accelerating and business is improving across your segments, do you expect the pace of acquisitions to increase this year? Are you seeing any change in the valuations and prices that people are looking for?

Susan, it is Felix. I think that the pace of acquisitions or the cost of those acquisitions I think we probably haven’t seen that much of a change at this point, as far as either an escalation in those prices or anything such as that. I would expect that our acquisition pace should be somewhat in the range of where you saw it last year, maybe somewhat enhanced, but somewhere in that range. I don’t think that 2004 will bring us back to the level of acquisitions that we had had in some years past, but I think somewhere in that range of that 4 percent to 6 percent range is probably where you should expect those in 2004.

Okay, thank you.

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

With Raymond James, good morning Felix, David, Karl and everyone else that’s there.

Hi, Budd.

Seeing as I am going to adhere to the DeSonier rule, can you, based upon after all of the restructuring and what you know now, could you kind of give us EBIT margin targets by segment, by the five segments, what you think maybe the upper bounds are? Now I realize that’s not a 2004 question, it’s a 2000 and whenever question, but what you think your ultimate margins can be.

Budd, this is Dave DeSonier. You probably are aware of most of this, but we still think EBIT margin overall can get back to where we were in that 12 percent to 13 percent range, and like you said, that’s probably not a 2004 realization, but in the future that’s still our target. Commercial should be above the corporate average, maybe in the 14 percent to 15 percent EBIT range, aluminum will be 10 percent at a minimum, maybe a little better. And the remaining segments will be, you know, at or maybe slightly below that corporate average.

Okay, and then obviously the $64 question as a follow up, when and what does the steel issue do, and to which division mostly does it hit?

Budd, that’s a huge question. I’ve been here longer than most, as you know, but I’ve never seen one like this. In the early 70’s we had something that almost approached this in price controls and everything else, but we’ve never seen one with the rapid escalation that we have got on our hands at this point, and in fact it’s so bad that we do need to see the government step in and place some kind of surcharge on scrap exports to where that we can try to get some kind of a control on this. The consumer is going to be just devastated as to what is going to happen with the magnitude of what’s going on in steel currently.

Obviously the residential section is a huge user of steel, both hot roll, cold rolled, et cetera. Our automotive products and our fixtures and displays, those are obviously the three big parts of the company that we are having to deal with, and we are trying to deal with it as best we can with our customers in mind, but with the movement that has happened, there is nobody that has got enough gross margin or anyplace else to come anywhere close to trying to absorb any of these increases of this magnitude, so they’ve got to go through the system all the way to the consumer.

So it’s something we are dealing with, but those three businesses are the ones that are mostly impacted.

Thank you.

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

This is Laura Champine from Morgan Keegan.

Hi, Laura.

Hi. Could you – forgive me if you’ve already done this, but can you break out for the full year 2003 the acquisitions that should add $200m to revenues, and the divestitures that should take $23m away, can you break that down by segment?

The answer is yes we can, I’m not sure we can do it live, but we can give it a shot. We know the biggest one will be in commercial, and that’s going to be RHC Spacemaster which I think we said should add $100m to $120m in revenue, so that’s the bulk of that $200m. The divestitures are a little easier because there are only two, and the largest was in industrial and was probably three-quarters of that $23m. The other was in residential and is the remainder of that. I’m trying to think where the other bulk of it would come from. Most of the other acquisitions are much smaller than that one.

But the plastic acquisitions get in commercial, so commercial is going to be the –

Yes, unique molded products, which was in October, was $11m of that $17m and the other SEP Plastics was $5m, Orthomatic was $25m to $30m.

That’s residential. Laura, I’ll get you a better set of numbers, but that is just the majority of it.

Okay. Well I’m hoping, David, that you will let me, since I didn’t get a complete answer to that one, ask one more.

Okay.

So in the commercial fixturing and components segment, how much of the year-over-year decline in operating income was affected by currency, and how much was dilution from RHC Space Master?

The second part of that is a pretty easy answer, because I don’t think we had much dilution from RHC –

We didn’t have any dilution from RHC Space Master. I don’t know the answer from a currency perspective.

Currency was roughly $5m in commercial for the year.

Thank you.

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

BB&T Capital Markets. Good morning, everybody.

Good morning, Joel.

Felix or Dave or whoever wants to take a stab at this, with the gross margin improvement we saw in Q4, in the context of steel costs, can you talk about specifically what the drag would have been from steel and/or what that gross margin might have looked like? Because it looks pretty good on its own, what that gross margin might have looked like excluding the steel cost issues you are facing right now.

Joel, that’s a pretty tough question. We started moving some of those steel costs through the system, the first part started in December in the residential spring side of the business. We did not get any through the upholstered furniture side of the business in the fourth quarter, so there would have been some slight drag there. But as far as – Industrial got through --

Joel, this is Karl. What happened in residential is we were experiencing accelerating steel costs specific to rod and wire in the third quarter. Okay? So third quarter was, the gross margins in third quarter were negatively impacted by those cost inputs. In the fourth quarter we announced and implemented the first price increase on bedding components, which we saw wire rod before we saw the steel side, the sheet side, effective October 27th. Okay? And then passed the second increase through effective January 2nd.

So from a residential perspective, it was a catch up and certainly weren’t made whole, but caught a good part of it. Where we start to see is now it’s, as Felix said, it’s moving so darn fast that it’s a challenge to catch up here in this first quarter.

Okay. I can interpret that then to say that Q4 based on the timing was, you had sort of a partial price recapture? But it’s slipping away from you a little bit since. What I’m getting at there of course is Q4 gross margin may be difficult to attain again in the near term, until you can start to stabilize or capture some of that increase via other price increases from your part. Is that right?

Joel, the only thing that we can tell is that we are attempting to try to do the same thing that our vendors have done to us. We have had – I don’t believe we have got a steel contract at this point that we had prices locked in the first quarter that haven’t been cancelled, and we are now on a 30-day pricing schedule and we are trying to do the same thing from our industrial part of our business as well as through some of the components is trying to go into a 30 or 60-day pricing mode with them.

Now obviously you are going to get some drag or some lag, but we are trying to operate under this horrible situation, in that kind of a manner, but there will be some lag.

Also, Joel, I mean just mathematically if you recovered, only recovered your absolute costs, your margins experience slight decline, and I realize people don’t know that, but if we just recovered our costs, margins would decline slightly as a percentage of sales.

And what’s happening to us, because of the uptick in sales, the additional throughput through these assets is helping cover some of that raw material cost.

That helps. DeSonier, I apologize, but one little follow up on there. Felix or Dave, in your experience in dealing with these kinds of materials cost environments, is tagging along, playing catch up with price increases – I know you guys have talked a lot about your relationship with your customers and how you play ball when costs are helping people. Are you getting much push back? What other mechanisms do you have at your disposal to fight this fight?

Well, Joel, it’s tough on us, it’s tough on our customers, and this one is such a magnitude it’s got to go all the way to the consumer, and we’ve got to help our customers and hopefully our vendors are going to try to help us, but we’re not getting much at this point. We’ll try to get it all the way through the system to the consumer, because that’s the only place this one can go, it’s just too much of a magnitude. There’s not that much gross margin between where we buy the steel and where our customer winds up and sends it to the consumer to absorb this stuff. It’s got to go through the system some way, so we are trying to work with them, obviously and they understand because it’s not just Leggett it’s across a number of industries, you read about it every day that anybody that is using any kind of a seal, and quite frankly I think that if we continue the way that we are that there could be even some availability issues on certain items that people have to deal with. Thank goodness we’ve got a Sterling rod mill that we have started up that is making 50 percent of our product that I believe we can get scrapped if we’ll pay the price for it, and we are certainly going to do that. So I think that’s one comfort that our customer can have, that we are going to have material for them, but I believe there’s going to be some other people that availability is going to be a problem.

Okay. Guys, sorry to drag that out so much. Thanks, and good luck.

Thank you.

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

AG Edwards. Just to expand on that pricing issue the attempts to go to current pricing, or ad hoc pricing. I think you had mentioned throughout 2003 that mix or decontenting, especially in the residential sector, was penalizing margins. Does the kind of cost pass through and price kick back you are going to get from customers going to continue to retard that mix or that value-added features capability?

Mike, this is Dave DeSonier. In the first half of the year, part of the mix issue was trading off, probably betting for other products in that segment that may not have as strong a margin. But I don’t know that we would say that same thing for the fourth quarter.

I would agree. And from a decontenting standpoint – that’s a new word I’ve got to learn – that we don’t see an acceleration of that. The customer specifications now, that all of us in the chain are working so lean that I can’t see significant spec changing or despecing at this point and as Felix said, our customers and the retailers are in the same position, that this has got to go through the system to the consumer. Certainly not without resistance, but it’s just like I said, it’s so much, so fast that that is our expectation at this point.

And this, Mike, sort of goes back to part of Joel’s question. Those customers that are either maker/users or buy steel in some other form or format such as structural to build stores, they understand more directly what we are going through. It doesn’t make it necessarily easy, at least there’s an understanding there that some of the other customers that are a step or two away from steel purchases don’t, but we do see a little bit of decontenting continuing to take place in some of our automotive products. What we are doing there is trying to do some things internally though to maintain our margins while we value-engineer some of those costs down. There is still some decontenting going on, not so much in residential.

Thank you.

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

Good morning. Edward Jones. Some questions on the fixtures and displays business. Felix, can you give us an update on where you are in terms of hiring any executives for that business? And then my second question is for Dave, given the time that you’ve spent in the division and the fact that organic growth now is starting to return, when do you expect to see some margin improvement?

Linda, this is Felix. Let me take the first portion. We announced earlier that we had hired an EVP of that group from a manufacturing standpoint. He has been in lock step with Bob Griffin who is the CEO of that business, and Dave Haffner in all of these changes. We have also made a number of other changes in the management down below there to take some good operating and sales executives and put them into certain positions within the three different parts of those businesses, and then obviously when we buy the Space Master operation we do get some of their management talent at that point there.

So from a structuring standpoint, we do have the majority of those people in place, however we are going to wind up, there are two other people that will be put in place and they will be from a finance and from a marketing standpoint, and those are in the process of being put in place as we speak, but I will let Dave address the rest of it, he may want to make some other comments about the management.

Well the only thing on the management is that we are in final interviewing stages for the CFO for that group, so that is coming to a head pretty quickly. With regard to things that we are doing and the improvement in market share and the improvement or apparent improvement in some demand, when will we expect to see margins improve? The answer is quickly. The harder question is, when are we going to see those margins – this gets back to Budd’s question, when are we going to see those margins back where you think they will ultimately be? That’s going to take longer, but you know there is seasonality in this business and margins vary quarter to quarter. I am talking about fixtures and displays now. But we will see margin improvement right away. The improvement that we are going to see this quarter and next quarter still will not satisfy us, we will be several quarters before we get it back to where we need to be, but interestingly enough, there are a finite number of ways, albeit a large number of ways, to improve those margins and we’re chiseling away at them one by one. So you can expect improvements right away.

Thank you.

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

Good morning, gentlemen. It’s actually Sean Harrison for David, Longbow Research. I guess while we’re on the topic of raw materials, I guess could you talk about maybe if you are seeing rising raw material costs in other areas, and then additionally I know lumber had been a topic in prior conference calls, could you touch on that as well.

On the lumber side, the situation is multi-faceted. Early in 2003 the issue was [inaudible]. The other issue was trying to pass along a tough situation as it relates to counter veiling duties and tariffs put on the Canadian exports by the U.S. government, and the negotiations between the countries and the uncertainty of the negotiations of the countries through that process that many of the producers in Canada were not impacting their selling prices by that duty, thinking that they were temporary. So there were those pressures. Most significant, though, was the change in the relationship of the Canadian dollar to the U.S. dollar in that we produce in Canadian dollars and sell in U.S. dollars and that has certainly not been a positive for us. Those businesses continue to be under, all three or certainly the latter two of those pressures, we have seen an uptick in demand.

We have just recently, within the last two weeks actually gone to the market with a price increase to our bed frame lumber customers that is driven by the combination of this duty situation and the currency, and we are attempting to and have been successful in passing that through in recent weeks.

And then with regard to aluminum we’ve seen some upward pressure that pales in comparison to the [ferrous] market, but there is some upward pressure on secondary alloys, which is what we utilize. We do a good job of buying those sals and ingids and have arrangements with our customers whereby those metal costs are included in our selling prices as they vary, so do our selling prices in those cases.

One thing, although we don’t buy a substantial amount of it, stainless steel has just gone through the roof, that’s primarily because of the cost of nickel, and thank goodness we don’t buy a heck of a lot of stainless steel, because it is very, very challenging at this point.

Other things like corrugated and paint and lubricants and abrasives and other things like that all have a tend to want to be upwardly biased, however we are doing a good job of leveraging our corporate purchases and regional purchases on those, so those don’t pose a significant problem.

All right. Thank you very much.

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

Wachovia Securities. Congratulations, nice quarter, by the way. My question is – and if you addressed it earlier, I am sorry, we were on other calls – but the dollars versus unit, both the consolidated revenue number you reported as well as specifically in the residential segment.

John, you are getting at how much inflation is in that number?

Yes, how much is pricing and how much is in units?

I would guess there is not much inflated.

Very little.

I don’t even know if it would be a percent for the fourth quarter.

Certainly it would not be a point.

And that would apply to the consolidated results as well as the residential?

It would be diluted down from there.

And was bedding stronger than furniture within the residential, or was it fairly equivalent?

I would say furniture has – our segment of the upholstered furniture business, from a hardware perspective, has been stronger and probably continues to be stronger than bedding, but the gap is narrowing. Bedding is accelerated, furniture was strong all year.

And I know I am violating the DeSonier rule, but I’m asking these questions quickly. Last one. And I’m ignorant on steel, so pardon me, but is there any way for any of your customers to get these products from somewhere around the world, elsewhere in other words, at a different price or is this just a noncompetitive issue.

The channel for –

It’s always a competitive issue, first off. The steel situation is not a U.S. phenomenon, it is a worldwide issue that we are dealing with – I’ll give you an example. In the U.K. where we produce wire for our bedding operations, we were on a Monday given a surcharge of a margin of eight pounds a ton, the following Monday it was 32 pounds a ton. It is moving at the same rate in Europe as it is in the States. China, we have just experienced our seventh price increase in China since January 1st of 2003. So the Chinese are dealing with a surge in cost and then a problem with electrical, electricity availability, so what’s happening is our customers look to other markets, they are placing orders and those orders aren’t being filled and are being requoted. So there is not a place for them to go, but that’s a geographic issue and a worldwide steel issue, it is not a market share issue.

Karl, they think they can get a better deal somewhere else, so they are trying it, but in reality they really can’t. Is that what you are saying?

Yes.

That’s basically it, John.

Yes, they assume – first they assume it’s a Leggett phenomenon and then they assume it’s a U.S. phenomenon and then they find out that it’s a worldwide issue.

So at the end of the day you don’t expect large market share movement from one country to another because of this issue?

Not at all.

Thank you very much.

As a matter of fact, I expect that there will be lesser pressures than there have been in the last few quarters because of the Chinese situation.

Interesting. I’m sorry, and you said seven increases in prices in China since the beginning of 2003?

Yes.

Wow. Thank you.

Thank you. Our next question comes from Keith Hughes. Please state your company name, followed by your question. Mr. Hughes, your line is open at this time.

SunTrust Robinson Humphrey. In the residential business, is it fair to say we are going to see several more price increases in the first half of this year on your products to help offset this?

Unfortunately that’s fair to say.

Okay, and in terms of the problems, having some of these stick, are customers just looking to move stuff in house, or – I’m not really seeing where they have a lot of options at this point.

Their steel costs are certainly accelerating at the same rate as ours, if they are maker/users. As a matter of fact, because they don’t enjoy the purchase leverage that we do, that they are probably accelerating at a greater rate. Keith, it’s a terrible situation, none of us have a choice.

Okay. Thank you.

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

Good morning everybody, this is Marek Ciszewski with Vestor Capital. Just a quick two questions. First I just wanted to see if in the past you have stated that every $10m in revenues equals about an EPS with the current capacity you are able to support about $500m of additional revenues, so I just wanted to find out if that still is the case. And then, just a secondly we are going real quick, maybe is the Asian production that you have, is it primarily for local production or is it for export? And then in those terms, on a relative basis, do you feel you are ahead, behind, or pretty much on par with competition in moving production to China?

Marek, this is Dave Haffner. Let me take a stab at the first part of that, which is primarily the gearing or the leverage question. It varies, depending upon the individual segment or division within the segment, and that of course gets to their existing capacity utilization by division, by segment. But if you blend it all together, if you blend it all together, we still have a feeling that for every $10m or $11m we can get that approximate penny per share. But it’s important to know that if we have a bias or a skew of volume in a particular area that’s already significantly utilizing their assets, that that gearing is less than it is otherwise. But on average, yes.

And the second part of that first question was, do you still have about a half a billion dollars in capacity, unused capacity, the answer is yes. That assumes the same product mix that we have now, so if for some reason that mix were to shift slightly, it could be that we would have more or less than that $500m.

So that’s the first part. Karl needs to take the Asian part.

As it regards China, our spring operations are in place solely for domestic consumption. Our upholstered mechanism facility is all for Chinese consumption. That product, in many cases, may be incorporated into a product in China on our customer’s behalf and shipped back to this country, but we sell it primarily it stays in China. There are sales in China to Chinese producers.

On the automotive side, a good part of that joint venture, productive capacity would come back to the States. We are sourcing from a machinery perspective, we are building machines that are built in China, sold in China, but that business also is in the procurement business and also the milling business of parts that in parts form are sold back to the United States.

And then I think the last part of your question was, is how do we feel as to where we are in what we are doing in Asia versus what we should be doing in Asia or what competition may be doing in Asia. We believe we have ourselves positioned at this point where we should be. There are some things that if we would have done earlier we would have probably made some mistakes, but we do think that we are ahead of the curve now to where that as far as either sourcing products for ourselves, sourcing products for our customers, and et cetera that we are where we feel very comfortable.

We have approximately 2,000 people employed in China as we speak today, and continuing to look at other factories, et cetera. But we believe we are positioned just right.

Thank you. Our next question comes from Geoffrey Dancey.

Cutler Wentzell Management. I was wondering, you gave in your press release that 2004 organic sales growth between 3 percent and 8 percent for the full year, I was wondering if you could break that down by segment?

We can give you a rough feel. I’d say for the most part it’s going to be spread pretty evenly across the segments, probably stronger in commercial than the others, maybe up to twice the percentage growth, so if growth was 5 percent across the board, you might get up to 10 percent in commercial, but the rest of them would be pretty even with that corporate average.

Okay. All right. Thank you.

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

Speece Thorson Capital Group. I’ll respect Dave’s rule and ask one question. The point of sale, is it more dependent upon retail remodeling or square foot expansion, and do you see any backlog building or order building there?

Where that that used to be a lot more square footage expansion, it has certainly shifted much greater to renovations and reworks, et cetera. Whereas I think that maybe used to be 30 percent or 35 percent renovations, and maybe 65 percent or so more square footage, that certainly has reversed, and we think obviously there is a lot of retail space out there now, maybe there is a lot of retail space that is unused or unutilized, but we think that the refurbishing the renovation is certainly going to be the biggest driver, it won’t be all of it because you are still going to have the Wal-Mart’s and the Home Depot’s and a lot of other people that are continuing to put more square footage in play, and we’re certainly a player in that part of the business too. But the big driver in our business is certainly going to be the renovations.

Thank you.

Thank you. (Operator instructions) The next question is from Margaret Whelan. Please go ahead with your follow up question.

Good morning, guys.

Hey, how are you?

I’m terrific, and congratulations, I am delighted to see the quarter came in so well. I have two short questions. The first one is, if you mentioned capacity utilization, I didn’t catch it?

Dave will give it to you.

All right. I am so glad you asked that question. At the end of the fourth quarter, our capacity utilization on average for residential furnishings was at 76.2 percent. And it ranges, of course, as you know we’ve got lots of various divisions, and it ranges from a low of 59. 3 percent up to 95 percent.

Okay.

And then in fixtures, displays and plastics, we are at about – they range from 51.4 percent to 67 percent. Aluminum we are at 70.7 percent, sterling steel we are at 100 percent.

Wow.

Although I really think we could find one more ton somewhere. Wire we are at 89.7 percent, tubing and automotive we are between 80 percent and 85 percent and machinery and technology we are at 72 percent of our capacity.

Okay. Now the reason I am asking is because I am wondering, if you look for example in residential furnishings, you put up such a solid number in terms of sales, yet your margin is 10.3 percent, and if I look back historically, you’ve had a higher margin there and I think what might have been even lower sales. So I am just wondering, just on the progression during the quarter, did you take any downtime or anything?

Margaret, this is Karl, that’s a byproduct of a number of things; currency, mix, we certainly don’t have any downtime, those from a productive capacity those businesses in total are certainly more heavily utilized in the fourth quarter than they were in the third, that variance was probably three to four points. So it truly, what you are seeing is mix and then you are seeing a little bit of this lag in passing through the cost increases.

Okay. And then – okay, so that will catch up with you in terms of cost increases, I guess, in the first quarter you did say?

I would hope, but it’s moving so fast, Margaret, no, I don’t think it will catch up in the first quarter.

The raw materials are moving so fast, Margaret, that’s going to give a little pressure on the first quarter.

Okay, but nothing, it is included in your guidance?

Yes.

Yes.

Now the second question I have, when we were in Asia in November we met with many of the suppliers, and your customers and the upholstery guys over there, and the only complaint they had was they couldn’t get enough product from you, because they love the quality and the service, but they felt that you didn’t have enough operations set up over there. Can you just comment on that? The speed at which you are moving?

We are in the process of starting construction on another 80,000 square foot addition to the facility in Jiaxing that you toured. So we are adding capacity as quickly as we can.

Okay, and then would you be phasing out more capacity here in the U.S. as you do that?

The tide has risen to a point, Margaret, that it has not been a situation of lesser demand in the U.S. If there is a switch that we have a facility in Australia that a good part of that business has moved to China, so we are downsizing the Australian mechanism facility, but not the U.S. facilities at all. They are running full out as we speak.

Are the margins in China better than Australia?

Yes.

And so net net, as you are moving your factories over there, we would expect, you have this landed U.S./Asian made product, we should expect the margins to be higher, right?

Yes.

Okay, terrific. Congrats again, guys. Thank you very much.

Thank you.

Thank you.

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

Okay, we appreciate your interest and hope to talk to you again in a quarter. Thank you very much.

Thank you.

Thank you, sir. Ladies and gentlemen, this concludes the Leggett and Platt fourth quarter 2003 earnings conference call. If you would like to listen to a replay of today’s conference call, please dial 303-590-3000 with pass code 565766. You may now disconnect, and thank you for using ACT Teleconferencing.