禮恩派 (LEG) 2004 Q3 法說會逐字稿

Thank you and welcome to the Leggett & Platt earnings release third quarter 2004 conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Dave DeSonier. Sir, you may begin.

Good morning and thank you for taking part in Leggett & Platt's third quarter conference call. I'm Dave DeSonier, the Vice President of Investor Relations, and with me here today are -- Felix Wright, Leggett's Chairman and Chief Executive Officer; Dave Haffner who is our President and Chief Operating Officer; Karl Glassman, the Executive Vice President and also head of the Residential Furnishings segment; Matt Flanigan who is our CFO; Dan Hebert who is President of the Aluminum Products segment and also a Senior VP of the Company; and Susan McCoy who is Director of Investor Relations.

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

This conference is being recorded for Leggett & Platt and is copywrited material. It may not be transcribed, recorded 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 and uncertainties, and the Company undertakes no obligations to update or revise these forward-looking statements. For a summary of these risk factors and additional information concerning the statements, please refer to yesterday's press release and the section in our 10-K entitled Forward Looking Statements. I'll now turn the call over to Felix Wright.

Thank you, Dave, and good morning. Thanks all of you all for taking time to participant in our third quarter conference call. We're happy to be having this call this morning. It's nice to have a good quarter to talk about.

As we announced yesterday, sales for the quarter were a record 1.34 billion, up 16% over third quarter of 2003. Same location sales were up 13%, with approximately two-thirds of this increase attributable to inflation. Acquisitions contributed 3% to the quarter's sales growth. Although all 5 segments posted growth this quarter, gains were strongest once again in our upholstered furniture components, carpet underlay, aluminum components, tubing and machinery. All these businesses contributed double digit unit growth versus third quarter 2003. In many of these cases, our gains are coming through increasing market share.

Earnings for the quarter were also a record at 41 cents per share versus 26 cents in the third quarter 2003. Higher sales and ongoing consolidation, cost reduction efforts were major factors behind the quarter's 58% earnings increase.

We also benefited at our Sterling rod mill from a continuing above-average spread between scrap cost and rod prices. Rising steel costs were our greatest challenge again this quarter. Third quarter market prices for steel scrap and rod jumped unexpectedly in July and again in August, driving steel costs up by another hundred dollars a ton. Costs moderated slightly in September, only to increase again in October to record levels.

We implemented selling price increases effective in early October to recover most of these costs, but the lag we experienced in passing through these higher cost had a negative impact on third quarter earnings.

Margins improved in 4 of the 5 segments during the quarter, with only specialized products declining. Versus second quarter 2004, margins decreased in residential, industrial, and specialized, mainly due to delays in passing along higher steel costs. Dave Haffner will discuss segment results, including the factors impacting these margins.

During the third quarter we completed one small acquisition in the commercial segment. For the year, acquisitions should add roughly 200 million in revenue, which amounts to a 4.5% sales growth over 2003. Over the next 3 to 5 years, we expect acquisitions to contribute 6% to 9% growth annually. However, that contribution is expected to be somewhat lower in 2005. We continue to see good acquisition prospects, but following economic down turns, price expectations of buyers are sometimes more difficult to reach. Many sellers realize their opportunities are better with a few periods of improved performance, so they will often delay putting their company on the market until improvements are shown. We are patient and opportunistic in our acquisition approach and we believe significant opportunities exist in our markets to continue to grow through acquisitions.

Despite the potentially slower pace of acquisitions next year, we believe we will accomplish our goal of 10 to 15% total sales growth by driving organic gains beyond our long term target of 4% to 6%. These gains should come from demand recovery in our markets, taking market share from competitors, de-verticalizing our customers and expanding our product offerings. Inflation will also contribute to next year's organic growth.

During the quarter, we generated 83 million in cash from operations, maintained net debt to cap at 22.8%, the lowest level in nearly a decade. On target for net debt to cap is 30% to 40%, but for the past several years, we've been below that range. Over the next few years, we expect to gradually increase our leverage back to approximately 30% of capitalization. We plan to use the cash provided of this additional debt, along with cash generated from operations to fund growth, both internal and through acquisitions, and also to maintain our long standing track record of increasing dividends every year. Any remaining cash will go toward repurchasing the company's stock. The amount available to repurchase shares will fluctuate each year with earnings, capital spending, and the pace of acquisitions. Although no specific schedule has been established, we've been authorized to repurchase up to 10 million shares per year.

Finally, we increased the quarterly dividend to 15 cents per share, making 2004 our 33rd consecutive year that dividends increased. With those comments, I'm going to turn the call over to Dave Haffner.

Good morning. In my comments, I plan to discuss each segment's major business trends and the factors impacting EBIT and margins. In residential furnishings, same location sales grew 11%, with roughly one-third coming from volume and two-thirds coming from inflation. Continued strength and demand in market share gains in upholstered furniture components, carpet cushion and adjustable beds drove our volume growth. But these improvements were mitigated slightly by flat worldwide bedding demand.

Our furniture components businesses reported another strong quarter. Year-to-date, we've seen double digit worldwide unit sales growth in mechanisms for upholstered furniture and most notably, these gains were accomplished on top of difficult prior year comps. This business unit has performed very well for the past 3 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 allow 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. We've benefited from an industry trend to incorporate high quality motion features into more lines of furniture. Our continuing strong performance results from growing share with domestic producers and a well established international presence.

Residential furnishings segment EBIT and margins improved over third quarter last year. Mainly from higher sales, prior cost reduction and plan consolidation efforts and a bifold benefit, offset slightly by increased transportation production costs and currency impacts. Versus the second quarter of this year, segment margins declined 100 basis points, as we experienced delays in passing along the recent steel cost increases that Felix mentioned earlier. Implementation of this year's price increases has been extremely challenging and we continue to work with our customers to recover our escalating steel costs. Our latest round of price increases was effective October 4th, and although we didn't fully recover all of the recent cost increases, fourth quarter margins should benefit slightly.

In commercial fixturing and components, same location sales were up 3% in the quarter, entirely due to inflation as overall volume was down slightly. This decline was driven by lower demand in our fixture and display operations, as retailer spending continues to be lackluster.

In contrast , volume improved in our office furniture components business, with these operations posting mid single digit growth over the prior year. This quarter's improvement in our office component businesses follows nearly a year of stable to improving results. Segment EBIT and margins improved this quarter versus the third quarter of last year, reflecting cost reductions and improved efficiencies arising from the tactical plan and the non-recurrence of last year's inventory obsolescence charges. These gains were partially offset by higher steel costs. Margins improved 50 basis points over the second quarter, mainly due to higher volume and incremental benefits from the tactical plan, with higher steel costs offsetting some of the gain. Although we're pleased with this quarter's margin improvement, there is still more to come. We believe, given the recovery in our markets, we can reach a run rate that generates 10% margins in our fixture and display business by late 2005. And even if our markets don't improve, we believe we can accomplish 7 to 8% margins in these businesses by the end of next year. For the segment we aim for double digit margins by late 2005 and anticipate longer term EBIT margins of 13 to 14%. Steps taken under our tactical plan have contributed to the earnings improvements realized to date and are critical to accomplishing in our margin goals. These steps include standard costing reviews and price increases where necessary, reduction of overheads and head count, vendor cost downs, management changes in certain operations, and close scrutinization of capacity utilization and scheduling optimization.

Over in our aluminum products segment, same location sales increased 16%, mostly due to volume growth. Much of this segment's growth over the past few years has come through continued effort to increase market share. These gains will continue to occur as we de-verticalized maker users, increase our volume with existing customers and enter new markets. During the past year, sales have benefited from new programs for producers of motorcycles, small engines, and large appliances, among others. Most recently, in late September, we announced an arrangement with Briggs & Stratton, whereby we will supply aluminum castings to support their assembly plant in Auburn, Alabama. Production at that facility is expected to begin in late 2005. Higher sales and cost containment initiatives led to the quarter's EBIT and margin improvements, compared to the third quarter of last year. Third quarter sequential margin declines are entirely volume driven, as sales decreased from the second to third quarters, with the seasonality of the barbecue and the lawn equipment industries.

In the industrial materials segment, we posted organic growth of 58%, with the majority of this increase coming from inflation in steel prices. Segment margins benefited this quarter from higher production rates, improved overhead recovery, and the full utilization of the Sterling rod mill. In addition, margins continued to reflect an above average scrap-to-rod price spread, again which Felix mentioned earlier. Those should moderate in the coming quarters.

In specialized products, same location sales increased 9%, primarily due to higher volume. Our machinery operations continued to post double digit growth, as bedding manufacturers who delayed spending for the past 3 years have begun purchasing new equipment.

In addition, we saw growth in our automotive businesses this quarter, reflecting benefits of new programs and increased product placement. EBIT declined vs. third quarter of last year, with sales related gains more than offset by higher raw material and other costs, including restructuring, depreciation and new product development. Versus the second quarter of this year, margin declines are partially volume related and result from normal third quarter automotive shut downs. Recent steel cost increases further reduced third quarter margins. We did implement price increases, effective the 1st of October, to recover some of these costs. With that overview, I'll turn the call back over to Felix.

Thank you, Dave. In yesterday's press release, we announced our fourth quarter and full year revised guidance. Based on the third quarter results, our outlook has improved. For the fourth quarter, we expect earnings in the range of 31 to 36 cents per share, with organic sales growth of approximately 6%. We typically see a sequential sales decrease of about $100 million from the third to fourth quarters and our guidance for the fourth quarter assumes this normal seasonal pattern.

For the full year, earnings are expected to be $1.43 to $1.48 per share. This assumes organic sales growth of about 10% versus 2003. Acquisitions should contribute roughly 200 million of incremental revenue, resulting in record full year trade sales of 5 to $5.1 billion. We don't expect to issue specific guidance for 2005 until late January, but qualitatively, the factors that should most influence 2005 results are market demand growth, raw material costs, and the performance improvements we accomplish in the commercial segment. And with those comments, we're going to turn the call back over to Dave DeSonier.

That concludes our prepared remarks. We appreciate your attention and we'll now try to answer your questions. In order to allow everyone an opportunity to participate, we request that you ask your single best question and voluntarily yield to the next participant. If you have additional questions, please reenter the queue. We'd be happy to try to answer all of them. Lewis, we're ready to begin the Q & A.

The floor is now open for your questions. If you do have a question, press star followed by 1 on your touchtone phones at this time. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received, and we ask that, while posing your question, you pick up the handset to provide optimum sound quality. Once again, ladies and gentlemen, to pose your questions at this time, that is star followed by 1 on your touchtone phone. Our first question will come from the line of Margaret Whelen of UBS.

It's actually Susan for Margaret.

Hi, Susan.

You guys have done a great job over the last several quarters in spite of the tough conditions in materials and things. I know you're not giving 2005 guidance, but to help us assess margin performance next year, can you tell us if your inventory is calculated on LIFO or FIFO or does it vary by business?

Susan, I'll take a shot at that. This is Matt Flanigan. Our inventories - about half of them are based on LIFO. Those would include our steel and our wire inventories primarily. Off shore inventories and our aluminum segment inventories are carried on FIFO. So, half of our total inventory is booked LIFO, the other half FIFO. So when you see LIFO expense, for example, on annualized basis, it is primarily touching on our steel, wire and some other inventory pools, not on our offshore locations or the aluminum segment.

Okay. Thank you.

Next question will come from the line of Budd Bugatch of Raymond James.

Good morning, this is actually Chris Thornsberry on behalf of Budd.

Hi, Chris.

How are you doing, Felix? Congratulations on a good quarter.

Thank you.

Quick question on the fixture and display business. No units were down this quarter year-over-year. Want to get a sense of what your expectations going forward -- what you see in demand now and when you kind of expect to see things turn positive there.

Chris, Dave Haffner here. I know we sound like a broken recorded because we talk about lackluster demand and resistance. But I would guess that next year -- I haven't seen the operating budgets. I would guess next year we're going to see somewhere in the mid single digit growth for same store locations. Obviously our margins are going to be much better. We are starting to get an opportunity to bid on some products and some programs that that haven't had the opportunity to do so before. Some of that is due to some disappointments that some of our competition have had relative to our customers. So I'd like to say some time next year. I don't see it in the fourth quarter.

Okay. Thanks, Dave.

Our next question will come from the line of David MacGregor of Longbow Research.

Good morning. You talked in your prepared remarks, Felix, about market share gains across a broad variety of your end market. I was wondering if you could elaborate further on that and give us indication of what you believe to be the drivers behind that progress.

Dave, the market share gains have been pretty broad. Dave Haffner just touched on some of in the commercial fixturing part. That industry and the competitors of ours are pretty much still in disarray. With all of the down turn that's been there, there's a lot of pressure financially on a number of those people. We continue to take some market share, which has helped us to continue to maintain our volume while we've been rationalizing there.

Another area is in our aluminum business. We continue to take some market share there from a number of domestic competitors and then that, tied into the de-verticalization efforts that that segment is using, we expect above average growth there.

From the residential side of the business, if you take bedding, vertically integrated manufacturers, or you would take upholstery manufacturers, whether they be tier one or tier two manufacturers, the customers that we have been dealing with have continued to take market share, hence our volume there has continued to enhance. And ,as Dave read in his remarks, we're double digit increase in the pieces within that part of the business. So it's been a pretty across the board deal.

Obviously, you say what's driving that. Obviously lean manufacturing, best practices, product development and trying to be very aggressive in a very tough economy that we've had over the last three years. But that's not abnormal because that's pretty much been our policy over the history. We catch these touch economic periods, we try to do everything we can to work with our customers to pick up market share, and, as we do that, when we start out the other side, we're in a great position to capitalize on that. Karl or Dave? Got a question more about market share? I think that probably covers it, Dave.

Well, could you perhaps address the whole issue of pricing? Are you uh - Is some of this market share gain results of more aggressive pricing, and if so, which areas of the business?

Well, there has certainly been some that's been more aggressive. But the problem we have had, Dave, with the extreme movement in steel, as you're certainly aware of, what may have seemed to be aggressive pricing to us, may not appear to be so aggressive to somebody else just sitting out there on the other side of the market place. Because of the pass-through of a number of our raw materials and no margin carrying with that, there's been some relatively aggressive pricing. Not enough to have any huge impact on margins because technology has driven a lot of this -- technology in aluminum, continuing to find different ways to do things there that reduce scrap and reduce waste -- that all becomes pricing is what it really does. But that's a huge effort for us. And obviously, where we have had to use pricing, whether it be in some of the residential components, if there is some Asian influence that may be encroaching on some market share, obviously we do whatever we have to do to be able to protect those markets.

Also, bearing in mind that you compete in a lot of markets where you are the 600-pound gorilla, so to speak -- I mean that in complimentary terms. Is it possible that a lot of the smaller competitors that you're playing against are somewhat paralyzed by higher raw material costs and that their working capital lines allow them to carry less product, from a volume standpoint, and as a result, their service levels are down. I'm wondering if there's a structural advantage you're picking up here competitively because of higher raw material costs.

There may be some of that. Obviously, we try desperately to work with our customers in some extremely difficult periods of time, and not try to exert the gorilla pressure in relationship to that. I don't think there's any doubt, Dave, that because of either purchasing power or the things that we may continue to do in some raw materials, etc., that it probably does give us some advantages in some touch economic times, like we have been dealing with over the last 3 years.

Thanks very much.

Our next question will come from the line of Joel Havard of BB&T Capital.

Good morning, everybody.

Hi, Joel.

Let's see. I guess first of all, if you could help me understand -- I feel like I should know this, but the nature of your deliveries in aluminum, I suppose, are much more fixed price contract where the residential products tend to be more off the shelf or spot, which is probably true for the industrial. I know that feeds y'all. How does the fixture and commercial business reflect that? And correct me if I'm wrong on either aluminum or residential.

Well, on aluminum, I know Dan Hebert's here and he can comment too. A lot of that volume is indexed -- the pricing is indexed to the market. So, if the market goes up for a particular alloy, our pricing would go up. If the market goes down, it goes down.

Will that contract -- will the delivered price can fluctuate over the course of the delivery cycle?

Yes, it can.

So, you're not locked in? And in fixtures and commercial? In two parts?

Yeah, in the fixture and display portion of commercial, we tend to bid specific programs on little projects. If there's relatively small risk, we'll lock in to a particular price. On big projects, most recently, we have gone to index pricing, because of this unheralded escalation in steel, we've had to go, on those big programs and work with our customers, to get index pricing, Joel.

Is that a long-term or long-standing way of doing business for the Company or is this a bit of a shift for you guys?

In fixtures, it's more of a recent phenomenon. We think it's a safer thing and a better thing, not only for us, but for our customers, too. Because some of our customers found some other suppliers that simply were not able to withstand some of that escalation. In the long term, we think it is better for our customers as well as for us. The other part of your question was for office and contract?

Yes.

And those are prices that are not indexed. They are prices that we hold for some period of time until we simply can't withstand the pressure anymore. And that's like with our bedding and residential furniture, we modify those prices periodically, when we have to.

They reflect the normal structure. I'll get back in line for another one. Thank you.

Before you get off, Joel. I think what Dave is really saying, once this market shifted to our vendors like a Nucor, that went to every 30 day pricing on a surcharge basis, yes, things started to change and we had to get in line with where we could buy raw materials. Not only were we being rationed, but we were told every 30 days what we were going to pay. That switched that industry to that kind of pricing. Will it stay that way forever? I don't really think so. Currently that's what we're in.

Felix, that's a great point. I apologize for asking this, but you're begging the follow-up here. We heard, in High Point, that some foam and fiber folks, for example, providers, that is, are allocating some of the upholstery manufacturers. Do you guys have the market power to avoid being on allocation for any raw materials?

Joel, this is Karl Glassman. We have not been allocating. Going back to Dave's question earlier, in our market share gains, one of the components of our market share gains has been availability. When some of our competitors didn't have products in the first half of the year, we were able to make deliveries and we are continuing to do the same. I don't know of us not shipping a customer because of any allocation at all. There are some early talks of allocations of chemicals, specifically to the foam industry.

Yes.

And we have not experienced that at this point. We are continuing to fill all customer orders.

Okay. Congratulations again, guys.

Thank you.

Our next question will come from the line of Keith Hughes of SunTrust Robinson Humphrey.

Back on the pricing issue, if steel costs remain flat and you get the price increases you've announced in October, will that be it or are we going to see another price increase early next year?

Keith, this is Felix. I'm going to start the conversation by saying that we've been wrong 7 months in a row.

So has everybody else.

You have to put that into your equation. If you would ask us to give a bias for 2005, that would be with either modest or no inflation, and flat to down would be what our basis would be for steel in 2005. It is extremely --

I'm not asking you to predict where steel prices are going. I'm just saying in a flat scenario -- at least the next couple months in steel prices, would you see any more price increases in that scenario?

No, we would not.

On bedding -- I assume the prices increases are both on your bedding customers as well as the furniture component customers.

That is correct

Okay. Thank you.

Next question is from Ivy Zelman of CSFB.

Good morning, gentlemen. This is Dennis McGill in for Ivy. I just wanted to touch on the question from a couple ago with the price being indexed on a lot of the products, to understand really where the risk is from further steel increases. You mentioned a lot of the volume in residential is indexed, aluminum we know is indexed in the larger projects, and commercial you said is indexed. I'm trying to understand, where really the risk is -- is it purely in specialized dealing with the big auto companies or can you help me understand what you were talking about there?

Yeah. Dennis, this is Felix. Obviously you just put through some increases, as we said, in early October in the specialized part of business. And those usually tend to be longer type commitments than probably any place else in the Company. So from a residential standpoint, we have been indexing part of that business, but part of that business we have not been indexing. It's just been pricing being passed through as -- through the system, whether up or down, that we have been getting in a portion of that. So I would say in answer to your question, specialized and part of residential would be the two biggest areas that we would have any exposure whatsoever to any kind of pricing.

Those are the biggest pieces. Dennis, there is a bit of the aluminum segment, primarily in the molded office furniture components, like chair bases, stanchions, and things like that, that are not indexed. We could have exposure, either a positive or negative, depending upon whether the market is going up or going down. But there's a little bit in aluminum. I didn't want to leave the impression it's 100% indexed.

If you look at residential, would you say the majority is indexed or not?

On the furniture hardware side, it's indexed now monthly. On the bedding side, we're usually dealing with a 60 day lag, so I wouldn't call it strict indexing, but there's flexibility. Our customers know that have locked in for no more than a 60 day term at any given time.

One follow-up. You touched on the Briggs & Stratton business and some other successful converts in aluminum. Is there anything on the table here, the next couple quarters, that you guys feel pretty optimistic about? We could have some more gains in that business going forward?

Dennis, this is Dan. We're really excited about the partnership with Briggs and the opportunity we have in Auburn. We're always working on -- aggressively working on chair gains and de-verticalization. We have projects that we're working on currently. To be able to predict when those might happen, we really can't do that. Most of the projects that we work on take several months, or even longer, to actually bring to fruition. We're aggressively looking at market share gains. We expect to continue to have those gains, but to predict exactly when another major project would hit, would really not be very accurate.

Can you talk about maybe by certain industries, where you see the greatest opportunities?

Well, we're gaining some nice market share in appliances and we see that continuing to grow.

Small engines also, even though we got the Briggs side, we see some really good upside in market share growth in small engines.

Obviously in the motorcycle side of the business, we've had really nice growth with Harley. As Harley continues to grow, obviously that business grows for us as well. We also see some nice upside in power hand tools. Particularly in the magnesium side of our business in power hand tools.

People like Black and Decker. Black and Decker was a de-verticalization project for us several months ago. They got out of the magnesium diecasting business and we picked up a lion's share of that business. Those are the markets we see the largest growth in over the next 12 to 18 months.

Dennis, this is Felix. Dan did a great job from the aluminum side. You're offering an extremely fertile feel that we feel like, for Leggett, because if you start taking people that may be having some Asian pressure on some products that they're making and they've been doing some vertical things, obviously, if they can find some low cost, lean manufacturer in this country and keep their manufacturing processes here and we can make some of those components for them through a de-verticalization, that's great. We got another factor that's going on. We've got a lot of our customers that are now being owned by venture capitalists and venture capitalists usually are not interested in putting any more money into the business. They're usually trying to find a way to do a better job and maybe continue to take some money out of it. There's a lot of fertile ground there. We think corporate-wide that we do have a lot of opportunities that will come to the forefront within the next 18 to 36 months that could give us an opportunity to de-verticalize more of these customers.

Okay. Very good, guys. Thank you very much. Have a good day.

The next question will come from the line of Laura Champine of Morgan Keegan.

Good morning. Had a question about the very strong growth in the upholstered furniture segment. Who are your largest customers in that segment of the business?

Laura, this is Karl. It's very broad-based. I don't believe that there is a manufacturer of upholstered furniture of any size or substance any where in the world that we don't do business with. The people that are backward in their manufacturing, the Furniture Brands and La-Z- Boys are very good customers of Leggett. So I -- in ranking them, don't want to do it off the top of our head, but I -- You couldn't identify them that we don't touch.

You did make some mention, that customers where you have the most exposure in that segment, are themselves taking share, which piqued my curiosity. Would you be willing to reveal who some of your fastest growing customers are?

There are a number of manufacturers that -- Ashley's Best Chairs, Berkline-Bench Craft -- that really, Cleveland Chair -- that do a good job, and they have focused their business, they've become low cost manufacturers, and they have really done a good job of reducing their cycle time from point of order to delivery. We do a good job with them and they do a good job in the market.

Great. And how -- Matt, how would you like me to model for a tax rate going forward in Q4 and beyond?

That's a good question, Laura. Something in the neighborhood of 34, 34.5% is a pretty good guesstimate right now.

Thank you.

Next question comes from the line of Barbara Allen of Natexis.

Thank you. I was wondering if you could expand a little bit on your comments about the office components part of your commercial fixturing business. Did you say that the volumes were up in mid double digits?

No. Single.

No.

High single?

When I made that comment, I said that I expected to see our fixture and display, not the office and contract, into the mid single digits next year. I don't know because I haven't seen the operating --

I didn't mean that. When you were reviewing the segments, you talked about retailer spending lackluster and then you talked about office components and how they performed in the quarter.

Yeah. They have been mid single digits, up. And we expect -- and I think we mentioned this publicly, that we expect, going forward, that that part of our business will grow approximately 5% per year, on same locations. So it's better than it has been. And I know those of you that followed business statistics know that that industry was down CIRCA 30% and we've seen a continued improvement in that part of our business. The margins are better over there, too, than they are in the rest of the commercial segment.

Just one follow-up on that. About, could you break down commercial fixturing between, you know, how much is office components as a share of revenues, or any way you would like to express it?

It's about -- yeah, it's about 25%, 27% of the total segment.

Is that under normal times or 1999 times or what?

Pretty much. Pretty much on an ongoing basis.

Okay. Thank you very much.

You're welcome, Barb.

Our next question will come from the line of Matt Russman of Clovis Capital.

Hello everybody. This will be a surprising topic. I want to ask you about natural gas and your hedging strategy so far as you head towards the winter. What are you doing? I'm not asking to predict where natural gas prices are, but maybe if you thought about them being right where they are today, how do you see that shaping up in terms of your drag or it won't be an issue?

Matt, we've been waiting on your forecast; you're a little bit late in giving it to us.

I knew that was coming.

Okay, Dave or Matt, who is going to take it?

This is Matt Flanigan. Starting about 2, 3, 4 months ago, we began implementing a rolling 3 year hedging program of natural gas that would ultimately get us in a hedge position on some where between 50 to 60% in the first year, 30 to 40% in the second year and a little bit less than than that in the third year of our natural gas consumption. As we sit here today we have so far laid down about 20% over the next 12 months, 15% over the next 12 months beyond that, and the third year, we're about 10% hedged right now, if you will. It won't surprise you, since we did that about a month and a half or so ago, that those positions happen to be very strong, relative to where the market is today. We don't have a crystal ball. We don't think we will know where natural gas prices will go up and down from here, but we want to buy some insurance as we look over the longer term period of 1, 2, to 3 years. Will it have a dramatic impact where prices are right now, on a year-over-year comparison of our energy cost? It will be notable but it will not be dramatic.

A few pennies is what we're talking about? If that much.

If that much. I wouldn't think -- a few pennies would be too much. Now, if it runs away from us in the winter, for sure it will become more painful.

Thanks.

Our next question will come from the line of Karru Martinson of CIBC.

Good morning. I was wondering if we could go back to the foam raw materials pricing. I was wondering if we could get more color on what you were seeing on (indiscernible) pricing on the supply front and also, in conjunction with that, what we're seeing in the double digit growth for your carpet underlay business. Is that spread across residential, nonresidential, taking market share from competitors and so forth?

It's somewhat of a complex issue in that's it's evolving as we speak. Basically what's happened to us is the chemical suppliers have come to us recently and said they're raising prices. The chemical suppliers historically have not been consistent in their inflation, and it's caused a significant issue in the manufacturers and their ability to price their product. And now what the chemical fellows are saying to us is, not only do we have the need because of the petro-chemical base, to raise our prices, but there is a shortage of supply. Speculation -- some of that may be fabricated to allow their price increase to stick, and it is, in fact, sticking. The manufacturers of foam have to increase their selling prices. And we're seeing that now in various stages. So that's primarily impacting the prime foam portion of our business, which is a lesser issue than carpet underlay, where carpet underlay is more than two times the size of prime.

What we're seeing in carpet underlay, right now, is strong demand. Some of it hurricane-related in the south/southeast. We have been picking up market share, but in total, demand has been good for the last 24 months. There's such a close correlation with housing starts and carpet underlay demand, the change in the reduction of square footage of the average house actually has helped us because, as houses have become smaller, they've moved away from wood laminate floors and tile floors, into a higher percentage of carpeting, which is a good thing.

Then on the other side, to answer your question, is on commercial. We have seen a significant uptick in the last 6 months in the demand of both fiber and high-end carpet underlay for commercial or institutional uses.

Thank you.

Thanks.

Our next question will come from the line of Steve Searl Conning Asset Management.

Good morning. You had mentioned your balance sheet is under-leveraged now and, in light of the $350 million maturity you have in February, should we expect you guys to come to capital markets to refinance that, as opposed to paying it out of cash?

No, Steve. This is Matt Flanigan. We would expect not to go to the capital markets before that debt matures in February. We have a lot of cash on our balance sheet. Basically it is earmarked for that obligation coming due. You should anticipate seeing us in the capital markets some time in 2005. That is for sure, as we have our leverage go back, at least head back towards the 30% long standing range that we've been very comfortable in. But that will take us a year or 2 or 3 years before we get to that point. Right now, we would not hit the capital markets before our debt matures in February. Felix makes a good point in that, as we do get to the -- the end of February and have that $350 million come due, if we don't have all the cash on the balance sheet to write the check, we'll go ahead and tap our short term availability to weave that low cost capital into our capital structure.

We're about 90% fixed now, aren't we?

That's correct.

About where we are right now, Steve. So we want to get some of that back off into the short side.

Great. Thank you.

Again, ladies and gentlemen, to pose your questions at this time, please press star followed by 1 on your touchtone phone. We do have a follow-up from Dave MacGregor.

I was just wondering if you could quantify for us, in the aggregate, how much you think higher raw materials costs impact your P&L this quarter.

This is Felix. There were moving parts in the quarter, but our best guess is that probably 5 to 7 million, and, as we are moving into the fourth quarter now and trying to get our pricing through, we're trying to recover the majority of that. That's EBIT.

So you're pursuing price increases in the fourth quarter?

Yes, sir. Most of them effective the first week of October.

Maybe I just misunderstood the guidance on the typical seasonality, where you would see revenues down 100 million in the fourth quarter and you would see this year as not being an exception to that. Given that you're pursuing price increases in the fourth quarter, does that imply that you're losing unit volume or is there a mixed delta that I'm not appreciating? Help me understand why that number is as great as it is.

It does not imply that at all, Dave. 100 million is a round number. We can't tell you if it's going to be 75 or 125. We can look at past history and the decline from third quarter to fourth quarter tends to be around that $100 million level. We pick that as a ballpark and that incorporates any price increase that we'll get in the fourth quarter.

Thanks a lot.

We do have a follow-up from the line of Joel Havard.

Thanks. Haffner, didn't want to get off this call without asking my favorite -- kind of an eyeball capacity utilization in the 5 segments, realizing that specialized is one that you kind of have to guess at.

You need to ask it more specifically than segment, though.

Well, let's start with carpet.

Expand your question, Joel.

I would have to add a bunch of these numbers up. Goodness. Let me give you some. Do you have a specific one that you want to hone in on?

No. I think the one we're all probably most pleased with is in the fixture/commercial. If you could put the emphasis there, that would be helpful.

Last quarter, we thought we were at 73.1. This is a tough one to predict. I personally think we're between 80 and 82%.

That's for the fixture/commercial as a whole?

No, just fixture

Great.

Office components, if you want the rest of at that segment --

Yes, sir.

We're still, we did so well over there and we're still well below our capabilities. We've moved from 50.8% to 62.8%. And plastics, we actually backslid a couple of percentage points. We're at about 77%. That catches that segment.

Okay.

Anything else?

Just the sort of top level, then, for residential and aluminum and industrial.

Aluminum, 74%. Let's see. U.S. Spring, about 76%. Let's see. Hanes and Coated Fabrics combined -- if I combined those, it would be about 76%. Foam, 80.1%. Fiber, 75%.

Very helpful. All right, guys. Thanks, good luck.

We do have a follow-up from the line of Matt Russman.

Yeah, I wanted to ask you guys about China. We've been hearing a lot of, sort of, antidotal evidence all over the place that China is slowing to some degree. You guys have a lot of operations there. I was curious if you had a perspective on what you're seeing in China now relative to, I guess, what you've seen in the year so far.

Matt, we really haven't seen the effects of a slowing economy at all. Remember in our bedding operations that all of that productive capacity stays in China and we are actually seeing an increase in demand there, as we should from a seasonal standpoint. The furniture hardware business, kind of a mix of stay in China, ship export, from our customers' perspective. That demand continues to be extremely high. The automotive supply facilities continue to run well. So we don't have a feeling of a slowing. We certainly read it. It's talked about, it's talked about by the Chinese Government Officials, but we haven't seen the impact of it.

Matt, I think if Joe Downs was here, the President of our wire and steel businesses, that we do believe we're beginning to see -- maybe more of a beginning of some more availability of some grades of rod or something coming out of China, which tells us that there's got to be some little underlying slowing there. Some of the prime grades, they're not available. But some lower quality grades, we're beginning to see them. I think maybe it's just a start of that slowing that you're talking about.

Okay. Great. That's great. Thank you.

If there are no further questions at this time, I'd like to turn the floor back over to you for any closing comments.

We'll say thank you and we'll be talking to you again in a quarter. Thank you.

Thank you ladies and gentlemen, this concludes the conference call at this time. Please disconnect your lines and enjoy the rest of your day.