禮恩派 (LEG) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Leggett & Platt earnings release fourth-quarter 2004 conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to introduce your host Mr. Dave DeSonier. Sir, you may begin.

Good morning and thank you for taking part in our conference call. I'm Dave DeSonier, the Vice President of Investor Relations. Joining me today are the following, Felix Wright, who is 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; Jack Crusa, the President of our Specialized Products segment, and Susan McCoy, who is Director of Investor Relations.

The agenda for our call this morning is as follows. Felix will start with a summary of the major statements we made in yesterday's press release, and then we will add some additional insight into our results for the quarter and the year. Dave Haffner will discuss the market trends we are seeing in our businesses, along with factors impacting our earnings and margins. Felix will then discuss the outlook for 2005. And finally the group will try to answer any questions you might have.

This conference is being recorded for Leggett & Platt and is copyrighted material. This call may not be transcribed, recorded or rebroadcast without our express permission. A replay is available from the IR portion of Leggett's website.

In addition, I need to remind you that today's remarks concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements. Actual results or events may differ materially from these statements due to a number of risks and uncertainties, and the company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release and the section in our 10-K entitled, "Forward-looking Statement". I will now turn the call over to Felix Wright.

Thank you, Dave. Good morning and thank you all for taking time to participate in our call.

As we announced yesterday, sales for the quarter were 1.28 billion, up 12 percent over a strong fourth quarter in 2003. Same location sales increased nearly 11 percent, almost entirely due to inflation as unit volumes were essentially flat. Although many of our businesses posted growth in the fourth quarter, gains were strongest once again in upholstered furniture components, aluminum components and machinery. Bedding industry declines in late 2004 led to weak demand for wire, Bedding Components and other products, and these declines offset some of the quarter's sales gains.

Earnings for the quarter were 33 cents versus 30 cents in the fourth quarter of 2003. Benefits came from several factors, including full production at our steel rod mill, an above-average spread between scrap costs and rod prices, prior cost-cutting and consolidation efforts, gains from asset sales, a lower tax rate due primarily to our mix of domestic and foreign income. These improvements were largely offset by higher LIFO expenses, lower utilization rates in certain operations, higher raw material costs and other factors including product mix and impact from a weaker U.S. dollar.

In prior quarters, the LIFO expense was offset by sequential increases in average product sales prices. That offset did not occur in the fourth quarter. These expenses certainly affected gross margins for the period.

In addition, the quarter's significant level of inflation-related sales growth reduced margins. These increases achieved only a nominal margin, much lower than typically earned on unit volume growth. Although the impact from inflation-related sales is not expected to reverse in early '05, improved unit volume and the absence of LIFO expense should help margins return to a more normal level in the first quarter.

2004 was a very good year. For the full year, sales were a record 5.09 billion, up 16 percent versus 2003. Same location sales increased 12 percent with roughly two-thirds of this growth coming from inflation. Volume improved in many of our businesses in 2004, but gains were strongest in upholstered furniture components, carpet underlay, aluminum and machinery. Earnings grew 38 percent to $1.45 for the year. This earnings increase is primarily the result of higher sales, but a full-year's production at the steel rod mill and improvements in our Fixture & Display operations also helped. Gains from asset sales and a lower tax rate were offset by impacts from the weaker U.S. dollar and other small factors.

Gross margins and EBIT margins improved for the year with gains in four of the five segments. David Haffner will discuss these segment results, including the factors impacting margins, with his comments in a few minutes.

Operationally 2004 was a busy and productive year. We completed our first full year of production from our Sterling rod mill. With the past year's turbulence and the global steel market, this mill has been a good investment for Leggett both from quality and availability of product and return on investment.

In October of 2003, we announced increased attention to our poorly performing Fixture & Display operations, and we made progress under that tactical plan during 2004. For the entire commercial segment, margins improved from 2.8 percent to 5.1 percent during the year. Still there is more work to be done in order to reach the long-term margins we expect from this segment.

In late September we announced an agreement to supply aluminum diecasting for Briggs & Stratton, an assembly plant in Auburn, Alabama. This project is an excellent example of our deverticalization strategy, and a full production should add about 45 million of annual revenue.

Rising steel costs were our largest challenge in 2004. Although prices have recently plateaued, they remain at record levels and in most cases have nearly doubled in the past year.

During 2004 we paid over 200 million more for steel than we did in 2003. Due to the magnitude of these increases, we were compelled to pass along higher costs and were reasonably successful at doing so.

During the year, we completed nine acquisitions that should add roughly 72 million in revenue. Three of these acquisitions should bring 22 million in revenue to the residential. In commercial we added three companies with roughly 13 million in revenue, and the remaining three operations are expected to add 37 million to Specialized Products.

Over the next three to five years, we expect acquisitions to contribute 6 to 9 percent growth annually. However, that contribution is expected to be somewhat lower in 2005. We continue to see good acquisition prospects, but following economic downturns, price expectations by 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. We believe significant opportunities exist in our markets to continue to grow through acquisitions.

Other highlights for the year. In November we issued $180 million of 10-year notes at a 4.65 coupon rate. We decided to take advantage of current interest rates and lock in another portion of long-term debt. When combined with the notes issued in the first half of 2003, we have issued 530 million of fixed-rate debt with an average remaining life of just over 10 years and an average coupon rate of about 4.6 percent.

During 2004 we generated 346 million in cash from operations. Working capital increased resulting in a use of cash for the year. This increase was primarily due to impacts from inflation and currency. For the fourth quarter, working capital as a percent of annualized sales was 19.8 percent. Our working capital levels will vary from quarter to quarter, but we believe we will operate at our 19 percent target on average over time.

We reduced net debt to cap to 21.9 percent, the lowest level in nearly a decade. At year-end cash on hand totaled 491 million, of which 350 million will be used to repay scheduled debt maturities in the first quarter of '05. Our target for net debt to cap is 30 to 40 percent, but for the past several years, we have been well below that range.

Over the next few years, we plan to gradually increase leverage back to approximately 30 percent of capitalization. As this occurs, additional cash will be generated. We plan to use our available cash, including cash from operations, primarily to finance growth and increase the dividend. Remaining cash will go toward repurchasing the Company 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 have been authorized to repurchase up to 10 million shares each year.

We increased dividends for the 33rd consecutive year. We remain one of the only two Fortune 500 firms to have increased dividends for at least 33 consecutive years at a compounded annual growth rate of over 14 percent. And lastly, we believe we are in good shape with all of our Sarbanes-Oxley efforts.

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

Thank you, Felix. Good morning. In my comments, I plan to discuss each segment's major business trends and the factors impacting EBIT and margins for both the fourth quarter and the full year of 2004.

In Residential Furnishings, fourth-quarter same location sales grew 9 percent primarily from inflation as unit volume was down slightly. Further gains in upholstered furniture components were offset by declines in other areas, including US Spring.

For the full year, same location sales grew 11 percent with more than half coming from inflation and the balance from increased volume and currency factors. Unit volume gains were strongest during 2004 in upholstered furniture components and carpet underlay, but these improvements were mitigated slightly by approximately flat worldwide bedding demand.

Our furniture components businesses have performed well for the past three years, and in 2004 we posted double-digit worldwide unit sales growth in mechanisms for upholstered furniture. 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, and we have 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.

Worldwide bedding demand was strong in early 2004, but moderated in the second and third quarters and declined in the fourth quarter. These fourth-quarter declines were discussed in our mid-December conference call. We believe that reduced advertising expenditures by the bedding manufacturers during the fourth quarter led to less promotion by retailers and in turn lower demand for bedding.

In early 2005 the major bedding manufacturers implemented price increases, in some cases through remerchandising their product lines to recover the higher costs they were absorbing late in 2004. These recoveries should allow the manufacturers to return to normal levels of promotion in 2005, and therefore, we expect bedding demand to improve in this first quarter.

In January shipments in US Spring were down versus the prior year, but the rate of decline is lower than we saw in the fourth quarter. And further these gains are being made against some very strong comps in early 2004. Utilization rates have also improved sequentially, in part due to the improving demand.

Residential Furnishings segment EBIT declined slightly in the fourth quarter versus the same quarter last year. Improvements from higher sales, higher cost reduction and plant consolidation efforts and asset sales were more than offset by lower capacity utilization, higher raw material cost and changes in product mix. For the full year, EBIT increased significantly due to higher sales, a FIFO benefit and gains from asset sales. These improvements were partially offset by higher raw material costs, the impact of a weaker U.S. dollar primarily versus the Canadian dollar, and modest restructuring.

In Commercial Fixturing and Components, same location sales were up 5 percent in the fourth quarter, almost entirely due to inflation as overall volume was flat. Slightly lower demand in our Fixture & Display operations was offset by mid single digit volume growth in our office furniture components business. These gains in our office components businesses reflect a continuing trend of stable to improving market conditions.

For the full year, same location sales increased 2 percent with inflation more than offsetting a slight unit volume decline.

Segment EBIT improved significantly this quarter versus fourth quarter of 2003 reflecting cost reductions and improved efficiency arising from the Fixture & Display tactical plan and a gain from the sale of assets. These EBIT improvements were partially offset by higher raw materials costs and other smaller factors.

For the full year, EBIT more than doubled from tactical plan cost savings, non-recurrence of last year's inventory write-downs and gains from asset sales. These items were partially offset by higher raw material costs, currency rate impacts and modest restructuring charges. Although we are pleased with the progress we have made this year, there is still more to come. We expect a 200 to 250 basis point improvement in the segment's margins in 2005. Steps taken under our tactical plan have contributed to the earnings improvements realized to date and are critical to accomplishing our margin goals.

Moving to our aluminum products segment, same location sales increased 8 percent in the fourth quarter due to a combination of volume growth and inflation. For the full year, same location sales grew 12 percent with volume gains contributing three-quarters of the improvement. 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 deverticalize 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.

And most recently, as Felix mentioned, in late September we announced an arrangement with Briggs & Stratton to supply aluminum castings to their assembly plant in Auburn, Alabama. Production is expected to begin in late 2005.

EBIT and EBIT margins increased for both the quarter and the full year versus 2003. In both cases, higher sales were partially offset by inflation in aluminum costs. In the Industrial Materials segment, we posted organic growth of 38 percent for the quarter as volume declines primarily in wire partially offset inflation-related sales increases. These volume declines were primarily due to weak bedding demand in the fourth quarter.

For the year, same location sales increased 41 percent entirely due to inflation. EBIT and EBIT margins increased significantly for both fourth quarter and the full year, reflecting benefits from inflation-related sales gains, full utilization of the Sterling rod mill and an above-average scrap to rod price spread. In the fourth quarter, these gains were partially offset by unit volume declines.

In Specialized Products, same location sales increased 6 percent in the fourth quarter, primarily due to currency rate changes. Modest improvements in unit volumes reflected continued growth in our machinery operations. For the year, same location sales increased 9 percent with unit volumes and currency each contributing about half the growth. Our machinery operations posted double-digit gains for the full year as bedding manufacturers increased spending on new equipment.

In addition, we saw modest growth in our automotive businesses reflecting benefits of new programs and increased product placement. EBIT and EBIT margins for the quarter declined versus fourth quarter of 2003 as slight volume improvements were more than offset by currency rate changes and other factors.

For the full year, EBIT and EBIT margins also declined. Benefits from higher sales were more than offset by higher raw material costs, currency impacts and other factors including restructuring, depreciation and new product development.

And with that overview of the segment results, I will turn the call back to Felix.

Thank you, Dave. We are optimistic about 2005. We expect to post record sales and earnings this year. Earnings will be primarily influenced by three factors -- organic sales growth, the direction of raw material costs and the extent of improvement in our Fixture & Display operations.

For the year, we are expecting total sales growth of 6 to 10 percent with organic growth contributing 4 to 6 percent of that and acquisitions adding 2 to 4. We expect raw material costs and particularly steel to stabilize. It is important to note, however, that unanticipated price swings could significantly affect earnings since steel accounts were about 17 percent of our cost of goods sold. We should see continued improvement in our commercial segment margins and expect a 200 to 250 basis point increase for the full year. Most of this improvement should come from our Fixture & Display operations.

Incorporating all those factors, our earnings guidance for the full year is 150 to 170 per share on sales of 5.4 to 5.6 billion.

For the first quarter 2005, we expect sales to be roughly equivalent to fourth quarter of 2004. This equates to an 8 percent increase over the first quarter of 2004. The fourth-quarter's lower tax rate and gains on asset sales will not reoccur in the first quarter but neither should the LIFO expense. Based on these assumptions, we expect first-quarter earnings of 33 to 38 cents per share.

And with those comments, we are going to turn the call back over to Dave DeSonier.

That concludes our prepared remarks. We appreciate your attention, and we would be glad to answer your questions. In order to allow everyone an opportunity to participate, as we typically do we request that you ask your single best question and then voluntarily yield to the next participant. If you have additional questions, please reenter the queue, and we will be able to answer as many questions as you have.

Elsa, we are ready to begin the Q&A.

(OPERATOR INSTRUCTIONS). Margaret Whelan, UBS.

Good morning, folks. Well done. Good year. And I will give you one question in a few parts. I'm just trying to figure out the sales guidance you provided, Felix, the organic growth of 4 to 6 and an M&A of 2 to 4. And what percent of that would be units versus pricing or what kind of price (inaudible) you're assuming? And then also your CapEx and D&A by business unit for the year. If we could get that, that would be great.

For '05, the 4 to 6 percent probably about 3 percent of that would work out to be inflation, and the remainder would be primarily units.

So 50-50?

Well, I would say even if the organic is about 4 percent, you're still going to have 3 percent of that be inflation. And we are getting there just by anniversarying the inflation that we saw in '04. So it is a rough calculation, but it should be close.

Yes.

And what was the other part of the (multiple speakers)

The other thing I'm just trying to understand is your cost utilization rates in each of the businesses and then your CapEx targets. CapEx in the fourth quarter seems a little higher than we were expecting, so what we should be forecasting for '05 by business unit.

For '05 CapEx should be around the $170 million range, something like that.

And the capacity utilization in the fourth quarter, Margaret, do you want it by segment?

That would be super if you have it, Dave. Then I'm just trying to understand given the mix that we have seen and the pricing power, but then you both had higher costs. What are the target margins for each of those groups now?

Okay. Well, let me give you the utilization rates in the fourth quarter. Residential Furnishings went down slightly to 70.1 percent. Now that is for the entire segment. Commercial furnishings and components went down to 67.9 percent for the whole segment. As you know, that fourth quarter is a normally slow quarter. Aluminum Products went up to 75.7 percent. Industrial Materials went down to 78.6 percent, and Specialized Products segment went to 82.7 percent.

Now Joel Havard is not going to appreciate that you asked his questions. Anyway those are the percentages in the fourth quarter. And I think we are going to have to get back to Margaret with the rest of her answer.

Were the target margins valid of to what has happened the last 12 months?

Yes. We have got the budget done as you know, but I think having to -- splitting that out inflation versus non-inflation in that effect is something that we are going to have to go back and take a look at.

Okay. I will follow-up with you guys after the call.

And, Margaret, let us address your CapEx question. Yes, the fourth quarter was a little bit higher there with that $52 million. There was some carryforwards from last year and some different things that came up in there. We spent $157 million. I think we have been telling you all we were going to spend somewhere in the 140 range, etc..

But a lot of them were specific programs. In 2005, Dave DeSonier told you a while ago it looks like about 170, and that includes a couple of pretty major programs that we're going to be involved in. One will be at our new steel rod mill that we're going to expand some more capital there and increase the capacity by probably 20 percent. And then the other one will certainly be the Auburn project that we're going to be doing in aluminum. Those are all included in that $170 million number, and next year D&A is somewhere in that 180 range is about what it is.

Okay, lovely. Thanks, Felix.

Budd Bugatch, Raymond James.

A little bit about what is going on so far in the first quarter. Talk about what is happening so far in January. You seem to have some more optimism that units are starting to turn around. Maybe flesh out by segment what is happening and why you feel that your margins will return to normality?

I'm going to turn it over to Karl first from the Residential side, but your basic question of margins returning to normality, when we try to give you the fourth-quarter look -- and obviously the fourth quarter had a lot of moving parts in it that made up almost a nickel of improvement. But the thing that you really have got to focus on is that $19 million worth of LIFO charge that carried almost a very small amount of FIFO benefit over into the quarter. So you have got 6 or 7 cents of charge that hit those margins in that fourth quarter that is going to be a non-recur in that first quarter. So that is one big swoop that gets those gross margins back into a more normalized line in the first quarter.

Now let us switch from there and go to the other part of your question as to some of the things that we're seeing. So we will start with Karl in Residential, and then Dave can pick up some of the other segments.

Good morning, Budd. What we are experiencing in Residential and Bedding specifically is as you know we are up against a tough comp in this first quarter. But we are pleased that our Bedding units are down compared to that comp in a low single digit number as compared to a negative comp in the fourth quarter of about 9 percent.

So we actually saw some strength in the fourth quarter after we last spoke to you on December 17. We at that point were forecasting units would be down 10 percent. They actually finished down 9 based on a little bit of pickup in the last couple of weeks of the year, and we have seen that reoccur in January.

The season is alive. We see more promotional activity by our customers. Our customers are generally much more upbeat than they had been in the fourth quarter.

In Furniture, business continues to be extremely strong. We have a number of our customers working six and in some cases seven days. We are again some very difficult comps on a unit perspective and expect to exceed those based on what we are seeing in these first four weeks.

Better than some of the other segments, so.

We have some good optimism over in Fixture & Display in the first quarter. I'm just looking at our revised forecast for the first quarter. We expect to see net trade sales in Fixture & Display up in the high single digits with a very much improved EBIT way over and above that because we had performed so poorly.

So there is a substantial number of dollars sales there, over $200 million in that particular group. So that comes a long way towards helping ratchet those margins back up.

And the other big area, or significant area is in our Industrial Materials, the wire operations. As Karl's or the Bedding Group's demand improves, so does the demand for that wire, and the utilization of those mills goes up, and it has a very positive effect on our wire operations.

And then, Budd, in aluminum also we should not forget that segment because we continue -- our deverticalization efforts with other customers, other than the big Briggs & Stratton deal continue to pay huge dividends. We just continue to pick up marketshare.

Just one little example for you. We go from a transmission that we are making from a washing machine, and then all of a sudden the next thing we know we are making the shafts that go inside that transmission and etc. So we have just got some things that are continuing to grow those businesses. So that is positive as to whether we are heading into the end of the year.

Okay and I guess the last one would be Specialized. Anything there going on? Automotive? It is a challenge I guess with the over inventory -- (multiple speakers).

We have got Jack Crusa here with us this morning, so we will let him address that.

I would describe Specialized as tentative. Automotive is purging some excess inventory, but it is not bad. So I would say automotive is kind of holding its own right now. And on the machinery side, business is still pretty good, although the bedding manufacturers have backed off a little bit, so our backlog is not quite as strong as it was. But as that business improves, their propensity to buy new machinery will generally come back on as we have seen it do in the past.

So in Specialized I would not say that I'm excited about the rest of the quarter and maybe the first half, but it is holding its own at this point.

David MacGregor, Longbow Research.

You talked about raw materials as being one of three principal determinants of your expectations for 2005. I was just wondering if you could at this point give us some sense of how annual contract settlements are shaking out, how much inflation you're seeing there?

In steel you talked about that being 17 percent of your cogs, roughly a $600 million business. I would guess that maybe resins or plastics might be a factor as well. But maybe some sort of guidance on how those inflation rates are playing out would be helpful. Thanks.

This is Felix. I guess the way that we would probably have to try to answer that -- you're exactly right about resins and plastics and etc. Those are still some things that have still got some inflation that we had in the fourth quarter, and we have still got some of that that has burdened us in the first quarter. And whatever happens in a barrel of oil, I think that is still a wild-card, and I'm not sure we are good enough to answer what that is going to happen on that side.

From the other side, from the steel side, which is certainly the huge part of the equation, in talking to our suppliers, scrap certainly is a big driver in our equation. We believe that worldwide demand now for scrap is somewhat about neutral, and as long as that worldwide scrap demand is probably neutral, we think that pricing is stable to down. That usually is about the way that that commodity shakes out, so therefore from a rod cost and etc., we have wound up and forecast that to be neutral for '05.

Now we have got the other wild-card out there that I believe that China has become a net exporter rather than a net importer of steel as we speak. That could be something that could maybe put some deflation into that part of that market, and that we've just got to see how that hand plays out. That can turn on a dime from that standpoint.

From all the hot rolled and cold rolled materials that go into a lot of our other products, we will probably last six months, have been operating them purely on surcharges primarily tied to scrap. And if our analysis of the scrap market is correct, we would assume that those surcharges will be flat to down as we are going into the balance of '05, and that is the way we forecast it.

We don't commit for full year, so we don't have full-year contract settlements, if you will. We do go out, depending upon the individual division or group, for a number of weeks or in some cases months, but we don't do a full-year commitment. We will commit tonnage to certain vendors and negotiate on that tonnage, which gives us the ability to still take advantage of some spot buys.

So you are buying your steel under a framing contract and then negotiating the price at time of settlement or time of shipment?

Well (multiple speakers)

That is correct, yes.

The second question, just quickly, is on this tax rate. You have explained that it is down because of a fluctuation in the mix between domestic and foreign business. But I wondered if you could just explore that a little further for us and just give us a sense of where those proportions are now and what is the longer-term expectation there?

For example, a good illustration of that is in China where we had a very strong year in 2004, and the ultimate tax burden that we incur on the earnings generated over there is a little bit less than what has been the corporate average.

Another example, for example, in Canada we had a little bit of a softer year. In fact, Canada is relatively a high tax environment. So those are just two of many pieces that cause the mix of earnings to be a little bit different than it has been, say, in 2003.

Going forward as you look for 2005 -- this is good news -- we would estimate right now an effective tax rate about 33.5 percent in '05, and that reflects again our best guesstimate right now to the budgeting process of where our earnings will be showing up. But also in several tax jurisdictions, not only around the world but even in some of the states here in the U.S., we actually saw near the end of the year reductions take place in those jurisdictions. So that is all providing a little bit of a tailwind to to help us to continue to drive our effective tax rate down.

Is it possible to give us what the mix is now between domestic and foreign revenues? Also, is it possible to break your cogs into domestic versus foreign?

It is possible, but it does not mean we have all that data right in front of us. The mix of revenue is going to be probably a little bit over 20 percent international, and I can get you a more firm number. And then the cogs, I would have to get back to you on, Dave.

Ivy Zelman, CSFB.

Actually Dennis McGill in for Ivy. Just quickly touching on a question from earlier, if you were to look at that 3 percent inflation for the year, can you talk about that in relation to the segments and which segments you're seeing more or less?

Yes, that's another one that we are probably better to get back to you with. Off the top of our head because so much is steel-driven, it is going to be biggest in Industrial and Residential (multiple speakers) and then the other segments would all be substantially less than those two probably.

Okay. If we were to look at the FIFO benefit that you talked about, maybe the best way to look at it is on a year. Can you talk about segment-wise where the biggest benefits were?

For '04?

Yes.

It is going to be about the same. Same -- (multiple speakers).

So would we be talking 50, 60 percent of Industrial?

I don't know that it would be that much. I mean again we would have to go try to break it out. But Industrial is a smaller volume segment versus, say, Residential. I mean it is a huge benefit to Industrial, but when you look at a percentage of the whole Company, it is not going to be as much as you said. But again Industrial and Residential are going to be the two primary beneficiaries of that FIFO, but I don't have the percentages here with me.

As a reminder, about half of our inventories were on a LIFO basis. None of our aluminum diecasting segment inventories are on there, and in general all of the international operations are not on a LIFO basis.

And then just two other quick ones. Of the $200 million in incremental steel costs that you had mentioned you paid in a year, how much of that were you able to pass on? And then just lastly, if you can kind of talk about your cash flow implications for '05 driving you down a little bit this year?

Well, the 200 million, I would say we were pretty successful at passing it through.

The majority of it went through.

And then, Dennis, what are you looking for on cash flow?

Yes. Just looking at what maybe our expectations should be for free cash flow for the year?

Well, we told you that amortization and depreciation will be probably about 180 million. I would say we will probably use a little bit of cash for working capital, and if you wanted a number, I would pick 50 million. But that is a wild guess. It could be 100, it could be -- I don't know that it would be zero given that sales are going up, but 50 to 100 million is probably a reasonable number. We are already mentioned that CapEx should be about 170 million, dividends would be about 118, but that ought to give you enough of the pieces.

Joel Havard, BB&T Capital.

Haffner, I just want you to know that I'm capable of asking other questions. (multiple speakers)

I knew as soon as I said it, I was going to get that. I'm sorry, Joel. I know that.

Oh, sure. Let's pick on Matt a little bit and think probably second-half issue. The EPS range does include any options expense? I know you guys kind of neutralized that with the repurchase, but could you give us a little sense of EPS impact as you are -- and I know we are early, but as you're starting to think about that effect for the year?

You've had two pieces here for you. First of all in '04, our stock option expense was approximately $7.5 million, and we have been incurring stock option expense since 2003 when we, of course, started doing that. And in '05, you should ballpark our stock option expense to be about $9 million for '05.

And so that assumption is baked into the turns?

Yes.

Okay, great. I will hold that one question and get back in line. Thanks, guys.

Anand Krishnan, Morgan Keegan.

Can you give a sense of how much earnings contribution you achieved in 2004 from price increases and inflation that you passed through?

We would say in rough terms it was EBIT neutral to slightly positive. I mean on some of it we made a little bit of margin, but nothing like the margins we make on unit growth. And in general we were roughly EBIT neutral.

That is helpful. Thanks.

Karru Martinson, CIBC World Markets.

I was just wondering with everybody it seems like they are coming out with new viscoelastic products or at the very least saying they are increasing the foam content of their mattresses. I am wondering what you're seeing in terms of the impact on components, supply and pricing, and also just in terms of the bedding outlook for trends with that?

We certainly see continued placement of viscoelastic foams, latex foams, higher value-added more luxury type products as the bedding manufacturers continue to merchandise their lines and the consumer makes a demand for a higher quality of finished product.

Leggett does produce viscoelastic foams. As a matter of fact, we have some intellectual property in that area. We see continued growth. We certainly think that the growth will be more from a topper application than it will be in a full foam core. The consumer is still roughly 90 or 95 percent of the units, of mattress units sold in this country contain an innerspring, and we don't expect a significant shift there.

In terms of the outlook, the bedding outlook, for 2005. The bedding manufacturers surveyed forecasted unit growth of about 2 percent. They would say that they would look at dollar growth in the 7 to 9 percent range, evidence of this continued up specing and the consumer demand for a more luxurious product. We are pretty comfortable with that 2 percent unit growth.

I think that there is some potential upside to that that may not have been in those producers' forecast, and that is a significant replacement that is taking place in the hotel/motel lodging business. We're seeing more and more evidence. Marriott announced within the last couple of days that they are going to fully replace all of their beds. I believe UBS Warburg -- no, I'm sorry, it is PwC made a forecast within the last few days that they thought that replacement of bedding units in this country would be 1.4 million pieces attributed to lodging. We think that is low. So we really expect 2005 to be a strong year from that perspective and saw a little of that in the fourth quarter and our forecasts show that. So I may be a little more optimistic in unit growth than the major bedding manufacturers are.

Karl, why don't you go ahead and give him as far as alternative sleep services about what percent of the market that we think that -- and I know you used the 90, 95, but kind of clarify the viscos and the (multiple speakers) and etc.

What I'm going to have to do is use 2003 data, because neither Select Comfort nor Tempur-Pedic, the two largest alternative sleep players, have issued yet their wholesale dollars. But if you look at the U.S. bedding industry, it is a $5 billion marketplace at wholesale dollars. Select Comfort's sales were 197 million; Tempur-Pedic, 188. So you consolidate that to 385 million, which is 7.6 percent of the dollars, and extrapolate that back into units, it is about 3 percent of units.

One thing that is important to remember, this is a Furniture Today statistic, that slightly more than 80 percent of the mattresses sold in this country retail for a price less than $1000. And alternative sleep products at this point have not been able to hit those price points. So the volume is done at lot lower price points, which have a very high percentage of a spring content.

With those types of beddings certainly slightly on the increase, are we seeing a constriction in terms of component supply for foam on TDI/MDI?

You are seeing -- we're certainly dealing with a shortage of MDI in this country, which is a key component of viscoelastic in particular. We are having to deal with it ourselves and using a little bit more TDI than we would prefer. So yes, it is an issue, but we don't think it is restricting sales or consumption at this point. But it certainly will drive the cost of those alternative products even higher.

Barbara Allen, Avondale Partners.

I'm very interested in your forecast on the commercial fixturing and so forth. That 200 to 250 basis point margin expansion, what are you forecasting in terms of sales growth in the two major areas of that segment?

The forecast for the entire year in Fixtures & Displays is a small single digit. We think we are forecasting conservatively, but it is a small single digit with a very substantial improvement in margin. And the increase in the rest of the segment, which is office and contract and plastics, is in the mid to high single digits.

In the office business, you have been seeing gradual improvement in that now for how many quarters?

It has been probably three or four quarters gradual improvement.

That is good to hear. Thank you very much.

Joel Havard, BB&T Capital.

I did not think I would get back in that fast, guys. I want to take advantage of having Jack Crusa in the room. And, Jack, if you and Karl could kind of walk us through I guess the conflicting signals we're getting on bedding. Karl, you were saying earlier that it had been stronger in early '04, tapered off. Jack, I think you said something about the machinery orders, which would intuitively indicate an improvement in demand. You said that backlog had dropped off lately. Did that imply that it had dropped from a real pickup in the second half or fourth quarter? And maybe you could just kind of give us some color on where you guys think '05 is right now and sort of what your forecast in bedding is?

I think that generally bedding manufacturers in this country are more optimistic. But we saw in Specialized in the second half of last year were a number of manufacturers -- remember a number of them are individual owner/entrepreneurs that were taking advantage of the tax law as it relates to accelerated depreciation on capital purchases.

Makes sense. Okay.

So I think we experienced some of that pickup based on that, and now we are seeing a more normalized scenario.

Okay. So you would not read too much into a slowing backlog of machinery for the manufacturing and retail forecast?

No, not at all.

I would not either. And, Joel, another thing we have got too you know that a lot of these businesses have been recapitalized by venture capitalists, etc. So there is a lot of things that are trying to wring some things out, and I think as they get their model set, we're going to see a return to whatever normal capital they are going to. But I think we have had both Simmons and Sealy both that have been recapitalized. And now we are in the process of having Spring Air recapitalize. So I think that has had some effect timing-wise probably.

I'm sorry. Go ahead.

I was going to say we have also got a couple of new products -- new equipment products -- which are primarily labor savings and efficiency-oriented products that are being reasonably well received. So we continue to look for systems that we can provide our customers that will help drive their costs down and simultaneously increase our machinery sales.

That always helps. Karl, I think you were saying that your anticipation is that these guys are starting to free up some promotional budgets and starting to pick the pace up there. I just want to make sure I heard that right.

You heard it correctly.

(OPERATOR INSTRUCTIONS). Margaret Whelan, UBS.

I just had a quick follow-up, Karl. In terms of the pickup you're seeing right now in the Bedding business, do you have a sense for what your mix is now at TUS (ph) domestic manufacturers versus international products you know that is coming back into the U.S. since it is coming in through OEMs in China?

Well (multiple speakers)

Just on Residential furniture specifically.

Okay. It is a very different situation on bedding than it is upholstered furniture as you well know. What we're seeing on bedding is still very limited importation of finished product and seeing some activity on innersprings as a component, but still believe that that number is well less than 5 percent of total U.S. units.

On upholstered furniture, boy, it is an absolute changing landscape. We are seeing more of our customers move to a cut and sew situation and significant growth by the Ashley's and the Best Chairs. And certainly their business is very very strong, and they as you know both upholster all their products in the United States. So we are seeing actually a stagnant trend of importation of finished product that is a significant acceleration in cut and sew.

Interestingly enough, you probably saw Ashley a week or so ago announce the acquisition of a distribution center in Pennsylvania, 1.2 million square feet. 900,000 square feet dedicated to logistics and warehousing, but 300,000 square feet dedicated to the upholstery of furniture, which is a little bit of a change.

Well, they are just trying to make sure they manage the quality.

Yes

But how do you manage your business around that given how much change you are seeing?

It certainly is a changing scenario as I said and it is a challenge. We continue to expand our manufacturing capacity of components in China. We are in the analysis of looking at the establishment of Eastern European manufacturing capability. We are dealing with it on an everyday basis. I know that is not a good answer, but we expect the environment to continue to change. We don't know exactly how, but we know we will capitalize on the change.

What percent of the Residential Upholstery components that you're selling are made in China now?

Probably between 10 and 15 percent.

Okay, which is about the breakdown of upholstery that is being imported?

That is about right.

Okay. But it feels to us like it is going to explode over the next couple of years now that the tariff has gone. So do you think you are positioned for that if we are right?

Yes.

The answer is yes, and the answer is that we're looking at additional things in Asia as we speak. If it does happen, we believe that we are in a position where we can capitalize on it.

But the other beautiful part of it at this point is, Margaret, our component plants making components for upholstery furniture in the United States are running dead full as we speak.

What is curious about that is that we are not really seeing it in the results from some of the other publicly traded Residential manufacturers. Do you get a sense that the Ashleys are doing better than those companies?

We are getting on dangerous territory because everybody is a customer, but anyway I don't think that there is any doubt about it that the Tier 2 furniture manufacturers are running much fuller than some of the others that are much larger.

Our capacity utilization in the home furnishing components business in the fourth quarter was 89 percent, which is the highest in the five quarters that we have tracked.

But to Felix's point, the mechanism plants were at 100 percent. You're running full out.

Can I move on to the office furniture business? What kind of trends have you seen there over the last -- the three months of the quarter but also in January?

Yes. As I inferred a little bit earlier, it has been a slow but improving trend. I just talked to the Vice President of Sales of our largest facility, which is located up in Canada, day before yesterday and ask how it looked going into January in the first quarter. It continues to be better both sequentially and year-over-year.

As you know, that tends to be a significantly higher margin piece of our business. So we love to see that utilization rate go up. We are not predicting a significant percentage increase in 2005 versus 2004, but -- and we play primarily in seating. I know you know that. But our forecasts, which I mentioned earlier, may be a little bit conservative, but it definitely is continuing to improve.

Improve. Yes, that is what we are seeing. Okay. Thank you.

And even those numbers from the fourth quarter of '03, the fourth quarter of '04, we had 12 basis points improvement in utilization in our office and contract plants. So it has been very good.

So you are definitely seeing it in your bottom line?

Yes.

Budd Bugatch, Raymond James.

Yes, I guess I have to change my name. (multiple speakers)

It sounds like you have.

Let me ask a question on tax for Matt. One of the things that I'm hearing from a number of CFOs is a greater interest by the SEC to allow tax to really fluctuate quarter by quarter, and also we have the other added issue this year that we're going to have some repatriation of cash from overseas. Could you kind of address both of those, see what that does to your tax rates?

You bet. Both good questions. I will take the second one first. Regarding repatriation, we do not see a significant benefit for us coming back on that repatriation window of this year. A lot of other companies have, but for us that is not material.

And you are right, the SEC is starting to look more for fluctuation in tax rates. And for Leggett -- just specific to our story -- we continue to work very hard to get our various tax obligations around the world increasingly efficient and effective, and we're finding that to be the case. In fact, if you look back over the last two or three or four years, you will have seen our tax rate steadily decline from about 36 to 37 percent effective to what this year was closer to 32.5. And that is a lot of good hard blocking and tackling to make that happen.

Again as we look into '05 and beyond, we will certainly see some quarterly fluctuation in our effective tax rate. But we continue to believe there is a good chance we can continue to drive it down 50, 100 basis points for the next year or two.

So to model it, Matt, you said 33.5 I think for 2005.

Right.

Do we see much in the way of quarterly fluctuations, or is it just too cloudy to even have that kind of visibility yet?

Yes, it is too cloudy to guess on that, Budd. But 33.5 is certainly a good estimate for '05, and we hope to even do maybe a tad better. The other thing I mentioned earlier (multiple speakers)

Can you quantify a tad?

(multiple speakers). But for sure, elsewhere around the world and as you know Leggett is in a lot more places than we were 10 years ago, we are seeing some general pressure from those various communities to make their places of doing business more attractive, and that is causing some of our tax rates around the world to be pressured down by those authorities, which is a good thing for all of corporate America for that matter, and it is benefiting us as well.

Let me just take one last question. I saw we had $9 million worth of comp deferred this year, which I think is still a very unusual program from what I have seen. Can you tell us how many executives deferred comp?

90.

90?

90.

Terrific. Thank you very much.

David MacGregor, Longbow Research.

A three-part follow-up. First of all, on the commercial fixtures business, how do you feel about your marketshare? Are you holding share there? Do you think you may be slipping a little? If you could just talk a little bit about that.

Secondly, on the Industrial Materials, you noted 78.6 percent is your cap utilization rate. What is the high watermark there, and how high has it been historically?

And then thirdly, once upon a time you provided the street with leverage guidance where I believe you were talking about 10 cents per share in earnings for each 100 million of revenues. With all the inflation and everything that has been going on in the P&L, I thought I would just see if you could give us an update on that. Thank you.

Fixture & Display, the marketshare, no, we don't think we are slipping. Contrarily we think we're gaining marketshare, and we have some legitimate reasons to believe that.

The market is not very robust as you know, but we think we are gaining marketshare in a stingy market.

The next one was Industrial Materials utilization rate high watermark. (multiple speakers). Yes, that is right. A little -- just a little under 90 percent, high 80 percent, and we're at 78.6 percent right now.

Now Sterling still is 100 percent, Dave, and as Felix mentioned earlier, we're looking at some additional capital to increase the output of that mill. So we will continue to keep that one right at the very top.

Can you break out the cap utilization on the wire mills?

Not on the wire mills by themselves, but wire division is probably today as we speak -- in the fourth quarter, it was about 75 percent. Today as we speak it is probably in the 78 percent, something like that. (multiple speakers) 78, 80 percent (multiple speakers) cap utilization.

At what is the high watermark on the wire mills?

90 -- about 92 percent. Dave, excuse me. That is not just on the wire mills. That is on the wire division, which includes a few other formed wire businesses, which are much smaller.

Okay. Good. I think I understand. And then leverage --

Leverage, Dave, we have not changed that number. It is still a penny for every 10 million of sales. But on inflation sales because our goal is to basically be EBIT neutral (multiple speakers) we don't make -- no, we don't make much margin on that. And as -- we're going to revisit that number because as cost of goods sold with all the inflation in the cost of goods sold, variable versus fixed is changing a little bit, but it should not be substantially different than that number.

Thank you. There are no further questions at this time. I will turn the floor back over to you for any further or closing remarks.

Just thank you to everybody. We appreciate your time, and we will talk to you next quarter.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.