禮恩派 (LEG) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to your Leggett & Platt earnings release second quarter 2004 conference call. At this time, all lines have been placed on a listen-only mode and the floor will be open for questions following the presentation. At this time, it is my pleasure to turn the floor over to Mr. Dave DeSonier. Sir, you may begin.

Good morning and thank you for taking part in our second quarter conference call. I'm Dave DeSonier, the Vice President of Investor Relations. With me today are Felix Wright, Leggett's Chairman and Chief Executive Officer; David Haffner, who is our President and Chief Operating Officer; Karl Glassman, the Executive Vice President and Head of our Residential Furnishings Segment; Matt Flanigan, who is our CFO; Joe Downes, who has recently been named President of our Industrial Materials Segment and Susan McCoy, 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 the press release and then will add some additional insight into our results; David Haffner will 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 the third quarter and the full year. And finally, the group will try to answer any questions that you may have.

This conference is being reported for Leggett & Platt and is copyrighted material. This call may not be transcribed, reported or broadcast without our express permission. A replay is available from the IR portion of Leggett's website. In addition, I need to remind you that remarks today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements. Actual results or events may differ materially from such forward-looking statements due to a number of risks of 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 these statements, please refer to yesterday's press release and the section in our 10-K entitled forward-looking statements. I will now turn the call over to Felix Wright.

Thank you, Dave, and thank you all for joining us this morning in our second quarter conference call. In yesterday's press release, we announced record quarterly sales of 1.28 billion for the second quarter. All five segments posted strong growth in the quarter and four of the five segments reported organic growth. Earnings-per-share for the quarter of 39 cents were near the upper end of our issued guidance and marked a 63 percent improvement from the 24 cents we earned in the second quarter 2003. Second quarter same location sales growth reflected gains in volume as well as inflation. Approximately half of the quarter's improvement was attributable to the unit volume and half resulted from higher selling prices as we continued to pass along increased raw material cost. Volume gains occurred in many of our operations. Finishes posting double-digit improvements included upholstered furniture components, primed foam and carpet underlay, diecast aluminum components, tubing and machinery. In many of these cases, our strong growth is coming through increasing market share. Dave will comment further on these improvements as he discusses each segment's results.

The majority of the inflation we are experiencing relates to steel. Since late 2003, we've implemented selling price increases to pass along rising cost. Those increases continued throughout the second quarter, contributing to year-over-year revenue growth. Higher sales resulted in significant earnings growth for the quarter. Volume gains provided earnings leverage as we were able to more fully utilize our productive capacity. Prior plant consolidations further enhanced utilization of our existing facilities. These improvements, along with enhanced manufacturing efficiencies in many operations, led to better overhead absorption, which increased second quarter earnings and margins.

The quarter's earnings also benefited from an above-average spread between steel, scrap and rock prices, enhancing profitability at our Sterling rod mill. Despite second quarter declines in scrap prices, market demand pushed rod and rolled steel prices higher during the quarter. These material prices increased from first-quarter levels and on average, were nearly double year-ago levels. Our visibility into the market is limited beyond the near-term, but a July increase in scrap prices is expected to drive rolled steel and rod prices above current levels during the third quarter.

We acquired two businesses during the quarter. One company designs, produces and sources comforters, pillows and other top of the bed accessories and should add about $12 million in annual revenues to our residential furnishings segment. The other is a small German manufacturer of specialty sewing machines that should add approximately $4 million to annual sales in the specialized product segment. Our working capital as a percent of annualized sales was 18.4 percent. We continue to focus on working capital and believe we will operate at or below our target of 19 percent of annualized sales. Net debt to cap of 22.9 percent was the lowest in nearly a decade. And with these comments, I'm going to turn it over to David Haffner.

Good morning. In my comments, I plan to discuss each segment's major business trends and the factors impacting EBIT and margins. As Felix mentioned, operationally, this was a strong quarter. We are encouraged by the performance improvements our employee partners have accomplished in many of our businesses.

In residential furnishings, same locations sales grew 13 percent with more than half coming from increased volume. Our worldwide innerspring unit sales increased in the low-single digits during the second quarter based on strength in international markets. Our furniture components businesses had a strong second quarter. For both the quarter and year-to-date, we have seen worldwide unit sales growth in mechanisms for upholstered furniture in excess of 20 percent. This business unit has performed very well for the past three years. We sell to nearly all manufacturers of motion upholstered furniture. These customers include major public furniture producers, as well as smaller, privately owned manufacturers. Our international presence and depth of product line allows us to efficiently supply upholstered furniture manufacturers no matter where their facilities are located. We benefit from worldwide demand since our components are used in furniture produced not only in North America, but also in Europe and Asia and we've benefited from an industry trend to incorporate high quality motion features into more lines of furniture. Our strong performance over the past three years has resulted from growing share with domestic producers and a well established international presence.

Our prime foam and carpet underlay operations also posted double-digit growth this quarter versus a year ago. These improvements primarily reflect new specialty foam product introductions and market share gains. Residential furnishing segment margins improved 260 basis points versus the second quarter of last year. This increase resulted primarily from stronger sales. Higher production levels at many operations, prior plant consolidations and a FIFO benefit also contributed to the improvement. The third quarter is typically the seasonal high sales quarter for this segment. Generally, our bedding and furniture customers are optimistic about the fall season. This should translate to a favorable third quarter performance.

In commercial fixturing and components, same location sales were roughly flat. Volume was down slightly in our fixture and display operations. Retailer spending has not shown much improvement yet and our outlook for the balance of the year is for flat to slightly positive volume. Demand for office furniture components improved modestly during the quarter. Although the recovery in this market is expected to be gradual, the past year has seen stable to improving results for most of these businesses. Segment EBIT improved significantly during the quarter, despite flat same location sales. Margins grew to 6.8 percent versus 2.9 percent a year ago. These gains are due in part to the steps taken under our tactical plan, which includes standard costing reviews and price increases where necessary, reduction of overheads and headcount, vendor costdowns, management changes in certain operations and closely scrutinizing capacity utilization and scheduling optimization. We believe in the long-term attractiveness of this business and are progressing towards the double-digit margin targets we expect to accomplish as market demand strengthens.

In our aluminum products segment, same location sales increased 18 percent. This improvement is primarily volume related as inflation has been modest. Much of this segment's growth over the past year has come from new programs for producers of motorcycles, small engines and large appliances, among others. Barbecue grill volume declined versus last year, but new opportunities in these other markets have helped replace the volume. Higher sales led to a year-over-year EBIT increase. The quarter's modest inflation in aluminum prices have been passed along to our customers. EBIT margins improved over last year, ending the quarter at 9.9 percent. For the full year, we expect margins to approach our 10 percent target.

In the aluminum segment, third quarter is the lowest volume and margin quarter each year due to the seasonality of barbecue grills and lawn and garden equipment. With that said, we still expect year-over-year improvements in the third quarter as we continue to benefit from the past years' market share gains and plant efficiency enhancements.

In the industrial materials segment, we posted organic sales growth of 54 percent. Inflation in steel prices contributed the largest share of this increase. The volume also grew at a double-digit rate. EBIT margins increased in the quarter to 17 percent. Higher production rates and improved overhead recovery added to the gains. We also benefited from improved performance at our Sterling rod mill. Last year, the facility was ramping up production and this year, we've produced at full capacity. And as Felix mentioned in his comments, this operation benefited in the quarter from an above average scrap-to-rod spread. These spreads are not sustainable long-term. In fact, we've already seen the spread narrow a bit when July scrap prices increased to first-quarter levels or slightly above.

In specialized products, same locations sales increased 9 percent. This resulted primarily from higher volume in our machinery operations. Machinery demand and the current backlog is strong this year as many bedding manufacturers who have delayed spending in the past three years are placing orders for new equipment now. Our automotive sales are roughly flat when compared to last year. Production levels by the major automakers declined in the second quarter due to weaker market demand. Industry production levels for the remainder of the year are expected to be slightly below last year’s levels. Despite the market declines, we expect our volume to remain steady due to new programs and increased product placement over the past year. The segment's EBIT increased versus last year with sales related gains partially offset by higher raw material costs and a very small restructuring charge. And with that overview, I'll turn the call back over to Felix.

Thank you, Dave. In yesterday's press release, we announced our third quarter and revised full-year guidance. For the quarter, we are expecting earnings in the range of 38-43 cents on organic sales growth of approximately 10 percent. Third quarter is typically our strongest quarter of the year with sales generally flat to $50 million higher than second quarter. Our third quarter guidance assumes this normal seasonal pattern. For the full year, we raised the lower end of our previous guidance by a nickel to a current range of 1.35 to 1.45. This assumes full-year sales growth of 8 percent to 11 percent. Acquisitions are expected to add 150 to 200 million of incremental revenue, resulting in full-year trade sales of $4.8 to $5.1 billion.

Our guidance for both the quarter and the year assumes that market demand will remain steady, that rising steel prices will be successfully passed along and that the fixture and display group performance will continue to improve. And with those comments, we're going to turn it back to Dave DeSonier and try to answer all the questions that you may have.

That concludes our prepared remarks. We thank you for your attention and as Felix said, we'll be glad to try to answer any questions. In order to allow everyone an opportunity to participate, we again request that you ask your single best question and then voluntarily yield to the next participant. If you have additional questions, please re-enter the queue and we will try to answer as many questions as you may have. Leandra, we are ready to begin the Q&A.

(Operator Instructions). Margaret Whelan, UBS.

Hello, everyone. Well done on the quarter. And I guess my first question would be -- the balance sheet is strong right now, what kind of opportunities are you seeing in each of the business units?

Margaret, the things that we're looking at in each one of the business units, we continue to have some internal or organic deal that we continue to look at. One of the latest ones was our deal that we announced out on the West Coast of a new facility in the carpet cushion industry, a facility capable of producing about $50 million worth of product. We have some others of those that we are looking at from an internal basis.

From an external basis, the line is about the same that we reported last time. I believe that probably -- expect somewhere in that 5 percent range of increased revenues from acquisitions. As we stated earlier in the conference call, 150 to 200 million this year looks to be the reasonable number. We still continue to look at a number of opportunities, and there certainly wasn't too much in this quarter. Both of them were very strategic in nature. But I think that range -- as we're coming out of this downturn that we have had, we still are finding some of the opportunities that we have looked at. The companies are not in as good a shape as they should be to command the price that some people are asking for them, and I think patience is a virtue right now as we continue to look at some of those.

So at this point, we are not willing to project either the balance of this year and '05 any greater than that 5 percent growth in revenue from acquisitions.

Is there anything going on in Asia that's interesting --.

Yes. We continue to look at different things there, Margaret. And as we mentioned, I believe conference call last, that you should expect within the next 18 months that we will probably do something in the aluminum segment in Asia. And then there are other acquisitions there within the different segments; not just only residential that we are continuing to look at and I would not be surprised in the next 18 months that you would expect to see some of that.

Okay, thank you very much.

Budd Bugatch, Raymond James.

Good morning and my congratulations on the quarter as well. If I do the guidance math properly, I guess, I am looking at what it implies for the fourth quarter. Knowing you all as well as I think I do, I think I may know the answer to this, but I just want to get it out in the open. I think the math says that the minimum would be 26 cents and the maximum would be 36 cents, if you do your math to the year guidance?

We would not disagree with that, Budd.

Tell me what's going on in the fourth quarter, then. That would imply that you are very conservative about the fourth quarter and that you might see something down the road that's a problem?

I would not say it that way. I would say -- let us get third quarter behind us before we become overly optimistic about the fourth. But a couple things you have to remember -- fourth quarter last year is when the growth began. We saw 9 percent organic growth fourth quarter and that was kind of when everything ramped up. So the comps get harder as we go into fourth quarter. And typically from third to fourth quarter, we see a decline in sales. In the last four years, it has averaged about $100 million. And so we have just kind of factored that in. Now to be candid, we have not spent an enormous amount of time trying to figure out what fourth quarter guidance is. We looked at full year and we look at third quarter, and then you just kind of back it into those fourth quarter numbers.

I did the same math, but I do have that same kind of sales ramp-down. But in last year’s fourth quarter, even though you were selling at about a 9 percent same location growth, that you didn't quite get it in margins. It didn't quite happen quite that quickly, which is understandable. You don't see it ramp-up quite that quickly.

Let me try to convey one thing to you. We don't -- you and anybody else don't think that we're seeing anything out there in this fourth quarter that we think is a problem or is different or anything such as that. And really, like you stated earlier, you know us very well. We are going to be in New York with all of you in September. And what we would really like to do -- we would like to have the majority of the third quarter behind us before we really tie into this fourth quarter and try to tell you what we -- a better feel as to what we really think that it could be. But there is nothing out there that we're seeing, whether it be further inflation in steel or whether it be any other problems in any business units or markets that we're servicing, etc. Obviously now one thing we are dealing with, we have had a consumer that has set on our hands for a couple of months here. And I think that is probably temporary to a degree. But should that continue or even worsen, then obviously, we would like to have as much vision about that fourth quarter as we can. But I hope it is conservative, Budd.

Okay Felix. I have more questions but I'll get back in the queue, per Dave's requirements.

Ivy Zelman, Credit Suisse first Boston.

Good morning, gentlemen. Actually Dennis McGill on behalf of Ivy today. Great overview, as always. A couple of quick ones. If we start in the furniture segment, can you elaborate a little bit on regionally where you're seeing a lot of the strength? Obviously, you mentioned your benefit from the global economy versus just the domestic demand here. But are you seeing a big divergence between the domestic manufacturers and those elsewhere in Europe and Asia?

Not necessarily. What we have seen on the bedding side was a very strong first quarter on a comp to the last year basis and then a second quarter that was kind of flattish. On the furniture perspective as you saw, the shipments were up in that 20 percent range first and second quarter. That follows some significant strength last year also. So we're building on a growing base over the last few years. But from a regional perspective in the second quarter, innerspring shipments were stronger in Europe than they were in the U.S. We also saw some strength in our spring plant in China. But remember, that is on a very, very small base. It's their softnesses, it's in Latin America, Mexico, in particular; to a lesser degree, in Brazil. From a furniture perspective, we're seeing worldwide strength.

I can't site a market where there is weakness.

How much do you feel is market share gains? Is it fair to say that 20 percent-plus growth this quarter?

It's a combination of market share gains from a Leggett, perspective but it is also a factor of there being more motion product in a greater percentage of upholstery. So it's a combination of the two. The market is growing and we're growing our share in that growing market.

On specifically the upholstery and furniture, can you remind me how much your capacity is in China on a percentage basis?

Very small.

Less than 5 percent?

Maybe less 10 percent.

I think David is right in that range. It's certainly ramping up in China, but we have not taken and don't foresee the need to take any U.S. capacity off-line. So less than 10 percent is probably a good number.

If I could sneak in one more quick one here.

Number four, but I'm not counting.

No one is, it's early. If we look at the commercial side, if you don't get the topline growth here in the near-term, where can margins go strictly on this restructuring initiative?

Dennis, this is David Haffner. They will continue to go up a bit from where we are because we have not hit full stride or annualized effect of many of the cost saving initiatives. As you know, the fixture and display part of that segment is the largest part of the segment. Office contract and plastic makes up the rest of it, which has higher margins. For fixture and displays, it would not be 10 percent, but it's maybe 7, 7.5, 8 percent, something like that. But, I want to stress that we anticipate some increase in demand here and so we're not going to be satisfied with those lower percentage.

But without the topline growth, you think the 7.5, 8 percent can still be attainable?

Absolutely.

Matt McCall , BB&T Capital Markets.

Good morning, guys. Most of my questions were just answered, but I wanted to go to number three. You mentioned a FIFO benefit a couple of times. Talk about the timing of that FIFO benefit -- when it could end, when you're going to start hitting that more expensive inventory?

Matt, this is Matt Flanigan. David and I will double-team that question. We think we have seen most of the inflation now as we have gotten now into July for the full year; we will see. You may have picked up in this release that our LIFO estimate expense for the full year has gone from 70 million to 82. And what that is reflecting is that we have seen some escalation from the second quarter -- from the first quarter, rather, obviously -- in some of those raw materials that we're now baking into the full-year estimate and it has gone up $12 million.

Relative to the FIFO benefit, to remind everybody on the call, the segments show their results using FIFO, and then at a corporate level, we go ahead and make the adjustment on 50 percent inventories -- not all of them, 50 percent -- to bring it back into LIFO basis at a corporate level. Have we seen all of the inflation yet? We will still see a little bit through the third quarter, we're anticipating. But as we go from the end of the third quarter to the end of the year, at least at the moment with our $82 million LIFO expectation now, that is assuming we will be relatively flat from there on out.

Okay, thank you guys.

David McGregor, Longbow Research.

Good morning. On the commercial fixtures business, the question was asked earlier how far can you take margins without topline growth. I guess just to focus in on the topline growth opportunity, I realize retailers are still standing still on this space. But is it possible for us to be winning share and developing some topline growth, just by taking share from the smaller and more fragmented end of the market?

The answer is, yes. And in fact, we are experiencing some of that. We have had some -- it is fragmented market, as you say. We have had some of those competitors stumble, if you will, and in fact, fail. And so we have enjoyed some improved plant utilization due to volumes that we would not have had otherwise. So we're gaining market share in what has been a really, really flat, held back market. And I can't help but get excited, quite honestly, because I know what those incremental volumes do to those plants, now that I have waded through all of the details. So the answer is yes. We are gaining market share and it looks like we will continue to gain a bit more market share.

Can you talk about the extent to which you have forward visibility in that business? Is it a quarter, is it through the second half?

It's not very easy. Visibility is less than it is in many of our other businesses. But we still feel that sometime early next year, we're going to see some release of pent-up demand. We keep talking about reaching our double-digit EBIT margins for just that part of the segment, by the end of 2005. It's pretty fuzzy out there that far. But, we are sensing with certain of those customers, especially with the big national customers, some improvement. And I think we're going to start to see volume increases, same location volume increases, on quarter-to-quarter comparisons in the very near future.

Is that driven by market share gains?

Partially.

Can we achieve those market share gains without compromising on price?

Yes.

And I guess, lastly, I guess this is the ninth part of my one question. But, what is the reaction of the customer base in the marketplace to the efforts you're making here?

I think they've been very favorable, quite honestly. We meet at relatively high levels with many of our customers. And what we have done is -- what we have enjoyed as part of this tactical plan too is better control of logistics and distribution. Our quality has improved, in some cases. Dave, I hope I'm not being vain. I really do think we're getting some very positive response from virtually all of our major customers over there.

David, this is Felix. I think another thing that has been accepted well -- I believe that we have the best strategy in that business, as far as blending offshore products with our manufactured products in this country to give that retailer the best value and the aesthetics and the design that he wants also. So I think that as Dave said, we are really being accepted very well by what we're doing.

Great, thank you very much.

Keith Hughes, Suntrust Robinson Humphrey.

Thank you. The comments earlier in the call about steel prices moving up here again in July -- are we going to see some more price increases to your bedding and furniture customers in the third quarter?

We're in the process of announcing a wire increase, based on an escalation in the rod market, based on these new actually surprising in their magnitude, scrap cost in July. But, Keith, we are taking a wait-and-see. The market is volatile, as we said, that we saw some softness in scrap cost in the previous -- preceding couple of months. At this point, we need more data points. So we are taking a wait-and-see. If we continue to get more upward costs pressure, then we absolutely will have to go the market and believe that we'll be as successful in the future as we have in the past.

Okay. And your comments on the bedding business being flat in the quarter, did it end -- was it flat basically throughout the entire quarter? Did it end on a more positive, more negative note? What was sort of the tone in the quarter?

Stronger in April, soft in May, saw a little bit of pickup end of June, and while we only have two weeks to look at post-Fourth of July, we have now seen growth year-on-year.

Final question on the residential division as a whole. Is your business in China, both in terms of innerspring and mechanisms, is it getting big enough now that it's really affecting the numbers, or is it too small at this point? I know you have had great growth there.

There's the positive numbers that are appreciated every time we look at them, but your point is a good one, that compared to macro numbers, they are pretty small.

Okay, thank you.

Laura Champine, Morgan Keegan.

Good morning. I think this is the first call that Joe Downes has participated in. Maybe he could talk about his background, how long he has been running the industrial materials segment. And I know that 57 percent topline growth is not sustainable, but.

Hey, Laura,budget for.

You get a bonus, Joe, if you keep it up. But going forward, you have a lot better visibility into your cost and price increases than I do. What do you expect that number to fall out in Q3?

Well, I'm not sure how to start here. I'll just tell you that -- when I say I'd had 40 years experience in the steel industry, I think that probably only means that I'm older now than I was when I started. We are at such unprecedented and -- there is nothing in our history or in my 40 years in the business that helps me understand what is going on right now with the industry. The scrap prices did jump substantially in July. The steel producers are now pushing much higher prices for the august time frame, whether it be surcharge or base price, whatever they want call it, there are higher prices coming out. We will be going up on most of our products made from steel in the industrial materials segment. I won't speak for the other segments, because they'll have to deal with their customers. But we will be increasing prices in the third quarter.

To think that we could match in the third quarter what we did in the second quarter would be very difficult to project, simply because last year in the second quarter, Sterling was just coming up, so their contribution, if any, was negligible. They were a strong contributor this year. Also, we had some plant consolidations and some product consolidations that were taking place during the second quarter of last year that had a cost element to it that are in place now. So in the year-over-year, we got a benefit there. They were in-place in the third quarter last year. So we won't see any loss from it, but we certainly wouldn't see the benefit from a year-over-year comparison.

If I might, this is David. I will just fill in a little bit more of the first part of your question. Joe has been with Leggett & Platt since 1978 and came via an acquisition that we made of Adcom Wire Company. And prior to being with AdComm, he had spent 12 years with Atlantic Steel. And Joe has had several positions of increasing responsibility with Leggett & Platt since 1978 and he is our go-to guy when we have anything to do with long products or wire. So we are real proud to have him in that position.

Thank you.

Barbara Allen, Natexis Bleichroeder.

Thank you and good morning. I was wondering -- this is sort of two questions in one, I'll sneak it in if I can. Could you just review for us again your CapEx expectations for this year? And in that context, are there any areas of your businesses that you are thinking about backward-integrating as you did with what now appears to be the highly successful rod mill situation?

This is David Haffner. We still think that our capital expenditure, absent any capital associated with second quarter acquisitions, is going to be in that $125 to $135 million range. That is well below our depreciation and amortization rate, as you know. There are a couple of relatively large dollar projects that aren't baked into that budget that could happen. One of them is a greenfield -- and this gets back maybe a little bit to Margaret Whelan's question -- one of them is a greenfield aluminum diecasting plant that would be a dedicated plant that would take a current maker-user out of the market. That looks like that may bubble to the top.

But as far as backward integration in any of our other businesses, at this particular point in time, no. You may recall, Barbara, we used to be integrated backward into aluminum smelting. And we sold those assets -- a couple of years ago, we sold the last of those assets. When we did make that step backward, it was a good decision. It moved the purchase fulcrum, if you will, gave us more leverage on the volume that we had. And subsequently, the worldwide market for aluminum specifically, non-ferrous alloys more generally, got to the point where we believe did not need that leverage. It's a long-winded answer to your question, but at this point, we really don't see any other -- I would like to have a bunch more like the Sterling acquisition, because it has been wonderful, but we're not anticipating any others.

Thank you very much.

Richard Diamond, Inwood Capital.

Good morning, gentlemen, and congratulations on a great quarter. I have a quick question about looking to the future. There have been some analysts' notes out that the upholstery industry is moving offshore and following the case good business. Do you think there's going to be a domestic upholstery business left if -- I guess that is my question. What do you see as the future of the domestic future of furniture upholstery business?

I may take a little issue with some of the aggressive positions some of the analysts have taken, in terms of the continued movement and probably view the amount of Chinese specifically -- call it Chinese upholstery -- that shipped into the United States at a lower level (indiscernible) in that we tend to look at it from a finished product perspective. There has been a significant move of cut-and-sew covers to China, but the assembly process of fabric upholstery exclude leather from it. There's a lot of leather coming in from both Italy and China. But on the fabric side of things, I think that there is a strong U.S. market. We expect that the market will continue to have a place. We certainly agree with our customers in that they need to become more manufacturing efficient, they need to deliver the product, and this is consumer more quickly. And she historically has wanted choice in fabric selections and the U.S. manufacturers have to get better at what they do; a number of them have. So I expect or we expect that there will continue to be a significant upholstery industry in this country.

Thank you very much.

I might add one thing to that. There is a group of owner/operator entrepreneurial upholstery manufacturers in this country that are really doing extremely well today and producing upholstered furniture. They are primarily all our customers. That is one of the reasons that you have seen a lot of good growth out of our upholstery businesses. And in motion furniture, they are continuing to do very well. There's a lot more stationary furniture that may be coming in from some of these markets. But as far as motion furniture, that group of companies is doing an outstanding job and I believe that their model is where that they will continue to be competitive with a majority of the Asian imports.

Gentlemen, thank you very much.

(Operator Instructions). Budd Bugatch, Raymond James.

I don't know how many parts I ought to make this question, but we will just do one. Can you talk a little bit about Sterling and the contribution of Sterling, maybe put some numbers to it. You talked about the efficiency and then you talked about the spread between scrap and rod, which is narrowing, I think. And I did not understand why the scrap prices ballooned last week or the last week we looked at. What is the relative sustainability of margins in Sterling? And can you put some numbers to it?

Obviously, down at that level, whether it be at a branch or a business unit or a segment, we don't take the numbers down that far. But let me see if I can help you with some of the detail. That normal spread in a steel mill is mid-200 level, between scrap and rod and etc. And with what has happened in this steel market, as Joe Downes very eloquently said before, we have never seen times like this. They're not going to be sustainable to where that you would wind up and have scrap get on a yo-yo and spreads maybe get into the 400 range, rather than the mid-250 ranges and etc. And then you come back another month, and they are back down, getting closer to a normal level and etc. That is what we were trying to share, is that we know that we had a quarter that not only had Sterling just finally ramped up and compared to last year, where they were just beginning to ramp up, but we have also had some things in scrap that had been very favorable in the quarter and now all of a sudden have turned around and got to a more normal deal. They are not totally to normal yet, but they're obviously trying to move in that vein.

As far as the operating side of Sterling and the way we are operating Sterling, we are operating it right on forecast. We're just doing an outstanding job of taking those assets and running them as good as anybody could run them in the world today. So it's purely a matter of what's going on in this marketplace between rod and scrap. Those are going to normalize out. Can I tell you, is it going to normalize out in the fourth quarter of this year or the first quarter of next year? I don't know. But for darned sure, they're going to normalize out and get back into those normal margins, and so it will get back there.

Everything that we're seeing, we've got in our guidance, and so we just have to see when that starts to happen, Budd. The big appetites for scrap in both Turkey and China and etc., will abate somewhat because of what's happening in the economy and those countries. It's not going to abate to a big degree, but obviously, if we start our manufacturing back in this country, we're going to be generating more scrap. So as we start to do that and the manufacturing certainly is coming back, it will start getting itself back into more of a normal range. But we have had a quarter that was abnormal at this point.

Let me try to see if we can attack it this way. You did 17 percent this quarter versus 5.3 percent last year, in terms of EBIT on gross revenues and industrial, and that is a heck of a spread. Last year, I think it was a total of 6.5 percent with your EBIT margins. What -- if you have given us a 10 percent target margin for commercial, what is the right way to think about industrial as a maintainable EBIT margin, excluding some of these rare price moves.

Over the long term, I would say it is probably going to be in the 12 to 14 percent range.

And this year, what do you think, David, 300 basis points higher than that, or 100 basis points higher than that?

You would have to give me a couple of minutes to look at that. I would say that we are also benefiting -- not all of that EBIT enhancement is due to Sterling. We are benefiting from some consolidations that we did within some of the wire operations, too. Joe, you may want to embellish that. But we have not an insignificant amount of improvement due to some things we did in our wire operations.

Those are the things that I touched on a few minutes ago. We would anticipate that the efficiencies that we've realized from making those moves will be continuing efficiencies. And it's just that the biggest part of them kicked in during the second quarter. In the second quarter last year, we were in the midst of shutting down one of our facilities up in Indiana and relocating that equipment. We were shutting down some production lines, producing certain products at one of our South Carolina facilities. And that has been fully rationalized and we're getting the benefits of those moves at this time.

Last thing -- do you have any more costs in any parts of the business -- cost issues planned for this year that you may not have talked explicitly about?

Restructuring type things, Budd?

Either in industrial or any other segments? Pardon me.

We've still got some consolidation expenses, but they are very modest, between here and the end of the year.

In which segment?

We have some in commercial --.

In residential, (multiple speakers).

This is the first time -- I had not thought of it this way -- but the first time in the last four years I would answer that question no in residential.

The last half of the year (multiple speakers).

It is really just a bit more in commercial.

A little bit more in commercial, but we're about through it, Budd.

Isn't that a thrill? Thank you very much.

Ivy Zelman, Credit Suisse First Boston.

Good morning. Dennis again with a follow-up. I think last quarter, you guys had mentioned the LIFO/FIFO impact was a slight positive to EPS -- is that right?

I think we said it was -- (multiple speakers) -- neutral to slightly --.

Neutral is a good estimate, Dennis.

Similar impact this quarter?

Yes, particularly when you factor in that we have raised, again, our full year estimated impact of LIFO about 82 million. We had a catch-up piece that then comes into play in the second quarter to get us on that full year run rate now. And so the LIFO charge in the second quarter was $23.5 million, which is in the press release.

So the way to think about it is that 23.5 is offset by benefiting the segments, which is not included?

For the full year, that is definitely correct. That's exactly what you're trying to do. There can be a little bit of slop between quarters just because you can't estimate it precisely.

It's not as though that 80 million just becomes an incremental benefit next year; it's offset by the margin?

It would be nice, but it is not (multiple speakers).

Perfect, I just wanted to clarify that. And just in the commercial segments with the RHC acquisition anniversary, will we start to see more positive organic growth out of that segment, or is that business not necessarily improving more than the whole?

I don't know how to answer that question at this particular point. I would like to say that we should see modest organic growth out of that piece too. We've gained some market share.

You have to remember, that is just a piece of that whole operation.

Any currency benefit in the quarter? I think last quarter might have been 2, 3 percent or so.

It was on the order of about a percent to revenue.

About 12 million in revenue benefit, Dennis, in the quarter. Which we have anniversaried now and the dollar dramatically to where it is no longer near the impact it had been in prior quarters.

I appreciate it again, guys.

David McGregor, Longbow Research.

Just turning to aluminum business, you had a revenue improvement that your margins traded down a little. And I guess I'm just mindful that aluminum as a material had a pretty good price pattern in the first quarter, and the second quarter as well. Is it higher raw material prices here, or can you help us understand why you have margins and revenues going in opposite directions?

David, we had two of our diecasting facilities that significantly underperformed to their budget and to our expectation. The wheels are not falling off necessarily, but we had extraordinary poor efficiencies in two of our operations. At least one of those, I feel comfortable we have the problems behind us. The other one, I think it's a little bit more complicated again. Not ready to call foul. But I'm going personally down there in a couple of weeks. So it's just that we had a couple of plants that did not perform up to expectations.

Are these in Mexico?

No, no those plants are doing extremely well.

How does the overall cap utilization picture look in aluminum right now?

I'm glad someone asked that question. 75.3 percent, up from 73.2 percent last quarter.

As compared to 70.7 percent in the fourth quarter of '03.

That number's not moving around much, is it?

No, but what is exciting about that, Dave, that's one of several segments where we've still got plenty of capacity to utilize. That incremental volume goes a long way from EBIT leverage.

The only reason I ask is you had talked earlier talked in response to another question about CapEx plans, that there is a possibility that there is a fairly substantial aluminum acquisition you'd be looking at. I'm just trying to understand how that would play into the overall environment.

It would not been acquisition. It would be a greenfield build.

I told him the aluminum acquisition.

That would be a joint venture in Asia, and would be what we would deem an acquisition. The other one that I mentioned would be a greenfield operation here in North America, which would --.

That was the maker user?

Which would accommodate a the current maker user.

Finally, on the aluminum business, can you give some sense of geographic distribution on the assets? How do they split out between, say, United States, Mexico, Asia, so on and so on?

Well, we have nothing in Asia, we have two significant plants in Mexico. And from an asset distribution perspective, this is just a real rough cut -- we can get back to him, Dave, with the actual asset distribution. I'm going to say it it's 75 to 80 percent here in the United States and the rest of it in Mexico.

Great. Thanks a lot guys.

Margaret Whelan, UBS.

Thanks. I had some questions about residential for Karl. First, we were hearing about power shortages in China specifically which are slowing down some of the imported residential furniture. Are you experiencing that at your factory?

More in the direct proximity to Shanghai. I will give you a specific example. Last weekend, we were contacted by the Chinese government telling us that we just weren't going to be able to run in our Shanghai machine assembly facility for the first couple of days of this week. We are -- that's not all that atypical. We're given relatively short notice, then we try to work around it. It has not impacted us significantly in the Jiaxing mechanism facility at this point. We have historically had some problems from time to time at Guangzhou. So I would say, the frequency actually is accelerating.

Do you have your own generator?

We're in the process of putting generators into the Jiaxing facility. Shanghai is so small that we would have a hard time getting a return on that generator right now. Because it's machine assembly, it's more flexible in its time sensitivity. We talked about CapEx and purchases and expansions, digress for just a second. We, as you know, we are in the process of completing a significant expansion in Jiaxing at the upholstery plants. We're in the process now of a significant relocation and expansion in Guangzhou in the spring plant there and we will be able to self-generate electricity in the new facility.

Is that going add to your CapEx?

Not significantly. In that case, the return on that capital is extremely high to have a consistent supply.

And the second thing that I had is -- it sounds like the (indiscernible) bankruptcy is going to be some more bankruptcies of smaller U.S. manufacturers. Do you have closure or do you have reserves set up, or are you hearing anything about that yet?

We don't know of anybody of magnitude past rumors. There's always rumors, but I would say the general health of furniture retail in the United States is actually stronger than it was a year or so ago. And we feel like that we are adequately reserved for any scenario.

Why do you think it's stronger?

It would be -- sales were up -- I think margins, as you have reported, have been slightly compressed, but the increased volume has helped people. And we're not hearing -- when we talk to our bedding and furniture customers, they are not talking about concern about specific retailers like they may have a year ago. There's not anybody on the radar screen past Bruner's (ph).

So your observation is that most of the retailers are seeing good demand flowthrough, and so they are healthy enough?

Yes.

Thank you very much guys.

That will conclude our question and answer session. Are there any closing comments?

Just a couple. Just to remind you, we will be in New York on September 14th hosting an investor day. Just about everybody around this table, as well some of our other segment heads, will be there and we invite you to come. And other than that, we will speak to you in another quarter. Thank you for your attention.

Thank you all for your participation. That does conclude your teleconference. You may disconnect your lines at this time.