禮恩派 (LEG) 2005 Q1 法說會逐字稿

Good morning. My name is Cynthia and I will be your conference facilitator. At this time, I would like to welcome everyone to the Leggett & Platt first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a Q&A period. (OPERATOR INSTRUCTIONS).

It is now my pleasure to introduce your host, Mr. Dave DeSonier. Sir, you may begin your conference.

Good morning and thank you for taking part in Leggett’s first quarter conference call. I’m Dave DeSonier, the VP of Investor Relations, and with me today are Felix Wright, Leggett’s Chairman and CEO; Dave Haffner, who is our President and COO; Karl Glassman, our EVP and head of the Residential Furnishing segment; Matt Flanigan, who is our CFO; 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’ll add some additional insight into our results for the quarter. Dave Haffner will discuss the market trends we’re seeing in our businesses, along with factors impacting our earnings and margins. Felix will then address the outlook for the second quarter and the balance of the year. 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 or recorded or broadcast without our expressed 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 due to a number of risks and uncertainties and the Company undertakes no obligation to update or revise these forward-looking statements. For a summary of these risk factors and additional information, 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. Thank you all for taking part in our conference call.

As we announced yesterday, we’re pleased with our first quarter results and believe we’re off to a good start in 2005. We posted record first quarter sales of $1.30 billion, up 10 percent over first quarter of 2004. Same location sales increased 8 percent, mainly from inflation. Overall unit volume was essentially flat during the quarter. All 5 segments posted sales gains in the first quarter, each benefiting from inflation or currency impacts. Demand was mixed across our businesses. We posted modest growth once again in upholstered furniture components and aluminum components. Bedding volume was down versus a strong first quarter of 2004, but volume improved sequentially with year-over-year declines in the first quarter of 2005, less than those experienced in the fourth quarter of 2004. In addition, our businesses that supply the automotive industry were impacted by lower OEM production during the quarter.

Earnings per share increased 16 percent in the first quarter versus the same period last year. We continue to benefit from inflation-related sales growth and a favorable scrap-to-rod price spread. In addition, improvements in our Fixture and Display operations also brought earnings gains. These benefits were partially offset by several factors, including inflation in oil-based raw materials, higher transportation costs, and an unfavorable change in sales mix.

As expected, at year-end we saw a sequential improvement in gross margins in the first quarter versus first quarter of 2004, gross margins declined slightly. This year-over-year decline results primarily from a significant level of inflation-related sales growth from first quarter ’04 to first quarter ’05. But the margin impact from inflation was mostly offset by the favorable scrap-to-rod price spreads.

Steel prices plateaued late last year and were somewhat stable throughout the first quarter. First quarter market prices for scrap were down from fourth quarter averages and lower scrap surcharges led to slight market declines for hot-rolled and cold-rolled steel. These scrap price declines had very little impact on market pricing for steel rod and wire. Market prices for these materials were steady in the first quarter. Earlier this month, market prices for scrap increased back to fourth quarter levels. This continues to be a challenging environment and it’s difficult to predict which direction prices will move over the next few quarters.

Last September, we told investors that excess cash, after funding growth and paying dividends, would be used to repurchase stock. Consistent with that strategy, we were strong buyers of our stock during the first quarter. We purchased 1.8 million shares, the most we’ve ever bought in a single quarter.

Working capital, as a percent of annualized sales, was 19.8 percent in the first quarter versus 19.1 in the first quarter of 2004. This increase is due to several factors, including higher steel rod inventories and purchases of raw materials in advance of price increases. Extremely tight market supply caused steel rod inventories to be below normal levels in the first quarter of ’04. Inflation also contributed to the increase in total working capital dollars during the first quarter.

We closed one acquisition during the quarter that should add about $12 million to the revenues of Residential Furnishings. This company markets and distributes fabrics used in various civil engineering applications, such as road construction and landscaping, and will be part of our fabric, fiber and foam group.

Also, in the Residential Furnishing segment, we completed the divestiture of a small fiber operation with annual sales of approximately $15 million. We repaid $350 million worth of debt that came due in February and ended the quarter with net debt to total capital of 21.6 percent. Our first quarter dividend increased 7.1 percent over first quarter of 2004. 2005 marks the 34th consecutive year of annual dividend increases.

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 the quarter.

In Residential Furnishings, same location sales increased 7 percent, with inflation growth partially offset by slight unit volume declines. Bedding volume was down versus a strong first quarter of 2004. As expected, demand improved sequentially with year-over-year declines in the first quarter of ’05, less than those experienced in the fourth quarter of ’04. Increased promotion by major bedding manufacturers led to slightly improved industry demand in the first quarter of ’05.

In Upholstered Furniture components, we posted modest worldwide unit growth versus strong first quarter 2004 comps. This recent quarter continues our 3-year trend of year-over-year unit growth. Residential segment EBIT declined in the first quarter versus the same quarter last year due to several factors. Those factors include lower unit volume; higher raw material costs, primarily the chemicals used in our foam and coated fabrics operations; changes in product mix; increased transportation costs; loss on the sale of 1 small operation; and some restructuring charges. Although price increases have been implemented, we have not fully recovered the recent inflation in chemical costs. In addition, the quarter’s significant level of inflation-related sales growth reduced margins in the segment. These increases achieved only a nominal margin, much lower than typically earned on unit volume growth.

In Commercial Fixturing and Components, same location sales increased 9 percent, primarily from inflation, as unit volume was roughly flat. EBIT doubled from the first quarter of 2004. Operating improvements and cost savings from implementation of the tactical plan brought much of these gains. Commercial segment margins increased to 4.5 percent versus 2.5 percent in the first quarter of ’04, primarily the result of these operating improvements. The quarter also benefited from modest margin on incremental sales in the absence of last year’s restructuring charges.

Over in the Aluminum Product segment, same location sales increased 4 percent, primarily from inflation. Unit volumes grew slightly during the quarter, but the rate of increase slowed from last year’s double-digit pace, as we began to anniversary the startup of programs for motorcycles and large appliances. EBIT decreased during the quarter with benefits from slightly higher sales, offset by higher energy and raw material costs and production inefficiencies at some plants.

Over the past 2 years, much of this segment’s growth came through new programs for motorcycles, small engines, and large appliances. Looking forward, there are opportunities for even continued growth. We expect the segment to benefit in 2006 from the new program with Briggs & Stratton that we announced last fall. This program is an example of our de-verticalization strategy. We will produce the castings that Briggs will use in their Auburn, Alabama production facility. Once the program is in full production, we expect it to add between $45 and $50 million to annual sales.

We’re currently expanding our die-cast facilities in Mexico to supply growing demand by large appliance manufacturers who produce finished products in that country. In late 2003, we became a preferred supplier for Maytag and began production of transmission components used in their washing machines. And later this year, we expect a new Whirlpool program to begin ramping up. We’re also actively pursuing a presence in Asia, either through a joint venture or wholly-owned facility. In Aluminum, much like other businesses, we need to be in China to supply a growing domestic market and also to be efficiently supplying customers who move production of their finished products overseas.

In the Industrial Materials segment, same location sales increased 32 percent. Inflation growth was partially offset by unit volume decrease. Declines in bedding demand led to lower production of wire during the quarter versus first quarter of last year. In addition, lower automotive production reduced demand for tubing. Segment EBIT increased significantly, reflecting the benefit of a favorable scrap-to-rod price spread and inflation-related sales gains. These gains were partially offset by unit volume declines. Although performance of the rod mill should continue to be strong in the second quarter, prior year comps will become more difficult as we anniversary last year’s higher scrap-to-rod price spread.

Given the past year’s turbulence in the global steel market, our steel rod mill turned out to be a timely investment for Leggett. Building on this success, we are planning an expansion this year that should increase future output by 20 percent. We currently produce about 450,000 tons of rod annually, and the expansion increases that output to approximately 540,000 tons. Our rod strategy has not changed as a result of this expansion. We will continue to be a substantial purchaser of rod on the open market, enabling us to maintain leverage with suppliers. This expansion should be completed by late 2005, and next year we should begin to see the incremental benefit of segment earnings and margins.

In Specialized Products, same location sales increased 2 percent, mainly from currency impacts. Volume was up slightly in our machinery operations and down slightly in automotive. The declines in automotive are partly due to the first quarter shutdowns by North American OEMs. EBIT decreased during the quarter due to lower unit volume in automotive and the currency impacts. Over the past few years, our growth in automotive has outpaced the industry due to a few factors. One of our units has become standard equipment on more models of cars and options with upgraded power and massaging features have become more common. We have developed and introduced new types of seating comfort options, such as back contour features for third-row seats as well.

We’ve also established a presence in the vast and rapidly growing market of Asia. These initiatives and other similar strategies should continue to provide growth opportunities for the foreseeable future.

And with that overview, I’ll give the call back to Felix.

Thank you, Dave. We continue to be optimistic about ’05 and expect to post record sales and earnings. Earnings growth in 2005 should be influenced by 3 main factors – organic sales growth, the direction of raw material cost, and the extent of improvement in the Fixture and Display operations. For the year, we’re assuming total sales growth of 6 to 10 percent, with organic growth contributing 4 to 6 percent. We expect steel costs to stabilize.

Cost for oil-based materials, including chemicals and fuel, have been increasing and are expected to escalate further. Our commercial segments margins are expected to improve by 200 to 250 basis points versus 2004, with most of the gain coming from Fixture and Display operations. Based on these assumptions, we’re maintaining our full-year earnings guidance of $1.50 to $1.70 per share.

For the second quarter, we expect sales of $1.32 billion to $1.37 billion, a sequential improvement of $20 to $70 million over first quarter and about 5 percent growth versus second quarter of ’04. Based on this sales assumption, we are expecting earnings of 40 to 45 cents per share for the second quarter.

And with those comments, we’re going to turn the call back to Dave DeSonier and try to answer your questions.

That concludes our prepared remarks. We thank you for your attention and we will be glad to try to answer your questions. As is our typical practice, in order to allow everyone an opportunity to participate, we request that you ask your single best question and then voluntarily yield to the next participant. If you have additional questions, please re-enter the queue and we will try to answer every question you’ve got.

Cynthia, we’re ready to begin the Q&A.

(OPERATOR INSTRUCTIONS). David MacGregor, Longbow Research

Just a quick housekeeping question before I get to my question. The tax rate for the rest of FY05, what are you modeling?

David, this is Matt Flanigan. You should use something around 32.5 to 33 percent for the rest of ’05.

Okay. And then just looking at the Fixtures and Displays business, it doesn’t look like there was, even though this quarter was seasonally weak, there is much demand in that business. What are you expecting, I guess, in terms of unit volume growth for the full year? Because the margin expansion looks extremely back-half weighted, just given where we’re modeling at this point in time.

Dave, this is Dave Haffner. I know you know the seasonality of that business with the third quarter being the larger piece of the year for Fixtures and Displays. We are expecting only modest increases in unit volume for the year. Obviously, we’re expecting substantially higher increases in EBIT percentages, but we’re forecasting only modest increases in unit volume.

Dave, this is Felix. We might put a little bit more flesh on that because Dave Haffner and I just came back some 3.5 weeks ago from the Global Shop out in Las Vegas, which is the largest fixturing show in the United States. I would have to say of the last 3 shows the attitude of the customers that were there was probably as upbeat as we have seen in some time even though we saw retail sales have some kind of a disappointment in March. But we believe that we’re on the front-end of obviously seeing a bigger expansion of capital deployment within that business. You all may be tired of hearing us say that because we continue to say that quarter-to-quarter or year-to-year, but it does feel better. And even though optimism there doesn’t relate to a CapEx or purchase order the next quarter or the next quarter, they have to get in this attitude before they start doing these things. And the things that are happening on the consolidations between Sears and K-Mart and May and Federated and some of those things, those are all good for us. Those are going to give us good opportunities with no more floor space to go in and rationalize some of those businesses, or help them rationalize some of those businesses. So we are optimistic going forward.

And Felix, Wal-Mart, or Ingersoll Rand just announced that they’ve reached an agreement with Wal-Mart on some case fixtures and I was just wondering how that impacts your business with Wal-Mart.

Dave, this is Dave DeSonier. If I remember right, and I could be wrong, I think Rand is doing primarily refrigeration and things like that. Is that right?

Well, that’s primarily been their business, but I understood and maybe I’m wrong on this, but I understood that this business was non-refrigeration.

I don’t know. I’d have to check.

We’ll have to check.

Yes, if it’s there, Dave, we don’t know that. We’ve had nothing as far as our modeling with Wal-Mart in supercenters and their small stores or their Sam’s Clubs, there has been nothing that’s been shown to us in effect on any of our models. And obviously we’re out looking at ’06. ’05 is through with them. So we haven’t seen anything, but we’ll sure run it to ground.

That would be a new business for Ingersoll.

Yes, exactly. So I was just trying to get some clarity on that. I mean I typically don’t go into this degree of granularity, but can you give us some sense of the rate at which your Wal-Mart business is growing within the broader commercial fixtures business?

Wal-Mart has always been one of those people that you know they obviously like to operate at 40 percent with one supplier, 40 percent with another, and 20 in the middle that you operate on. As their stores have continued to increase, our participation in those stores has been in that same percentage that we have had. So, as their growth continues in their stores, our growth with them has grown the same way. Now, when you go roll over and get into the international field that is a totally different situation. We’re working hard with them to try to see what we can do in trying to service part of that international. At this point, we don’t have it all figured out, nor do they, but we are working with them on that model.

So, you’re growing with Wal-Mart in pace with their new store growth?

That is correct.

I mean what are the prospects for accelerating that rate of growth and winning a little more share there?

That’s pretty tough because, Dave, like I say, they like to keep the competitive environment with 2 great suppliers and then let those 2 vie for that other 20 percent. So, obviously, we’re always trying to get a bigger share of that 20 percent, Dave.

Budd Bugatch, Raymond James

I would hope we could drill down a bit, maybe get a little granular into the segment revenue outlooks for the balance of 2005. To the extent that you are comfortable, please quantify and provide some statistics and some specifics on your outlook for revenue growth for acquisitions, pricing, and units, if you would, by segment.

You want to take that one, Dave?

Budd, I don’t know that we have that kind of detail that we are prepared to share.

I think, Budd, you put 3 categories in that to try to get us there and acquisitions --

You need about $88 million in acquisitions, almost $100 million, to get your 2 percent in acquisitions, right?

Yes, we need about 2 percent to get -- $100 million to get 2 percent.

That’s correct.

And you’ve done $12 million so far. How comfortable are you that you’re going to get there? What do you see in the pipeline?

We still stand by that number and take that number very realistic.

That 2 to 4 percent, we think is still good.

It’s very realistic.

And pricing, as pricing moderates, units are going to have to drive higher, particularly as you get closer to 2006. Is that correct?

That is correct also, Budd, and I think from what we’re seeing in the Residential, both from upholstery and from the bedding side, we do think that we’re going to see some unit growth from the comps that we have been dealing with, because, obviously, the first quarter was tough in the bedding side. That moderates quickly when we get into the second quarter and the third quarter. And then upholstery, I believe that we’re positioned well there on both sides of the continent that you’re going to continue to see unit growth there over some huge comps that we had in ’04.

I think that, as Dave Haffner said awhile ago, from the fixturing side of the business, we project modest unit growth there. We do see some. If we think it’s modest, I think the jury is still out a little bit as to what that third and fourth quarter unit growth is going to be. We think that the attitude, as I answered Dave McGregor’s question awhile ago, is really good there. But, yes, we are expecting some unit growth, even though it’s going to be modest. But we sure expect some across these businesses. We certainly expect some from the aluminum side of the business with the Whirlpool situation coming on in the fourth quarter, Auburn starting to come out of the ground in the fourth quarter of this year, plus some of the other things that we’ve got going on. We expect real unit growth in the aluminum side.

One wild card, Budd, I think is the OEMs and the Specialized Products in automotive. Obviously, our penetration has been greater, but with the big 3 having some problems that’s where unit growth could run into a little bit of a problem there, but I think that’s going to be modest on the overall.

And do we have any issues in office components, as well? I’ve seen some more chairs from some other competitors lately. It looks like they’re gaining some share.

There is always that element, Budd. I was going to take a little different tactic -- I thought you would ask that question about office. We’ve seen a very nice, this last quarter and the forecasted quarter, in the second quarter, a nice increase in our office and contract sales and unit volume. That’s driven by unit volume. We haven’t gone through any major margin increases there. It’s all cost of material related. But we saw double-digit increase in the demand for office furniture components in the quarter. So that’s a real positive. And of course, as you said a few years back, it had a dead-cap balance, it was so low.

Is that growth driven by new customers, David, or is that more with the same?

Both. We had been favored with business, with new customers. Let’s put it this way, same customers with products that competitors had provided before, that business came to us. And then the standard SKU mix that we had been supplying to all of our customers, we have stronger demand for those. There are a couple of new products that are brand new products that just didn’t exist before that we placed with existing customers.

Joel Havard, BB&T Capital Market

I’m trying to carefully craft one question about the cost environment, but I’m going to try and wheedle a couple of answers out of you.

You’re a master.

On the debt side, Matt, this is really for you. You all have talked in the past about being comfortable with a higher debt/capital structure and here you paid off and you didn’t roll this part into a lower interest replacement, which has kind of been your practice the last few quarters. Could you explain to us what your plans are there?

Yes, you bet. Joel, as you will recall, we’ve taken down over the last 2 years about $530 million of debt. Some of that certainly was in anticipation of the $350 million that just matured in February and that we really check for. There’s no question –- well, I think it’s safe to assume that the current debt-to-cap percent you’re seeing in the first quarter should be about our lower watermark now. That debt has been paid off and we start to further execute our plan to modestly increase our leverage back up to the traditional range we have had, which is 30 to 40 debt-to-cap over the next 2 to 3 years. It won’t be a knee-jerk reaction at all, but it will be probably a steady migration. For example, by the time we get near the end of this year, we might be something around 23 or 24 percent as an estimate.

And really what we have done, preemptively, over the last 2 years was to lay in some very long-term debt capital at very attractive interest rates. And now, as we go forward, some of our debt that we’ll take down will be in a shorter-term nature, some of it floating rate, which is still at a very compelling level right now. And that’s what we’ll look to to better right size our leverage position, if you will, relative to the assets we have on the balance sheet.

Is that a matter of dry powder for maybe more substantial acquisition effort in the --

It’s a combination. It certainly will be funding the CapEx activity we see happening through the rest of the year. We do think we’ll actually be pulling out some working capital. So we see some cash being generated there over the next 2 to 3 quarters. That’s certainly our intent. And then, yes, indeed, as we see M&A activity coming around the corner, and we are seeing a little bit more feel flow right now, which is good, we’re certainly poised to take advantage of that happening.

And, Joel, as Matt was alluding to, see, we’ve gotten that fixed part of our debt up to over 90 percent. This was all in the plan and we were going to pay this off. We’ve always liked to keep maybe that fixed portion and that 50, a little over 50 percent. So, now as we start spending this cash and going back, it’s obviously going to be in the short form and non-fixed rate form where we’ll get ourselves back to where we were. But, as you know, that fixed rate dead is still out there at about almost 11 years and at about a 4.6 percent coupon rate. So we’ve got the balance sheet, I think, in pretty good shape and we’ll obviously use the benefit of this lower cost floating debt as we go forward.

Okay. And that’s where the flexibility to pursue these opportunities is coming from?

Absolutely.

You bet. Again, keeping with your main point of your question, Joel, you will see our de-leveraging stop now and start to modestly move back up a bit on the debt-to-cap.

My subtle follow-up, unrelated actually, I’ll admit, was that SG&A, looked like you all really were working on a cost savings effort above and beyond what we might interpret as sort of sales-driven leverage. Is that a fair assumption or do you see it really just as sort of sales driven?

I’d say it’s mostly sales driven, Joel. I think the numbers are $112 million, both last year and this year, in the first quarter. So we can’t take a lot of credit for reducing that this –-

We’re wondering if we sort of sign a commission valued to the sales level that the sort of remainder implied fixed SG&A looks like it was down a couple of percent. I didn’t know if that was the function. [Inaudible – multiple speakers] effort or --

No, I’d say at first blush, no. I mean most of that sales increase is not unit related. So it’s primarily inflation.

Although I have to wade in and say I feel plenty of pressure to continue to keep it in check.

Joel, keep asking the questions because, yes, the pressure is going to be there.

Margaret Whelan, UBS

Most of my questions have been answered, but I did have one about the change in the LIPO reserves was flat and I’m wondering what we should be forecasting for the rest of the year there?

Right now, certainly with where current prices are and our best guestimate on inventories near the end of the year, we are assuming a relatively flat LIPO expense estimate for the year. Again, as we look back a year ago, at least it’s a lot smoother sailing at the moment than what we were seeing at this time at the end of last year’s first quarter. But for the moment, certainly from our perspective and the guidance that we’ve given you for the second quarter, it is assuming we will not have any significant LIPO expense or LIPO income that would occur in the second quarter and to the balance of the year. That could change, but that’s our look right now.

And Matt, I think we would also answer Margaret’s call, if she asked us to give a bias at this point, it would be positive, not negative.

Yes.

Okay. That’s good. And the second question I had, and Budd asked it already, about the unit demand, or the unit growth was essentially flat. One, could you just give us your take. You cover so many different segments of the economy. Where do you think the industry, or the economy, is right now relative to your industry because we’re getting a lot of mixed signals?

Karl, do you want to take a shot at that? The big residential part.

From a residential standpoint, Margaret, mixed signals is probably an appropriate expression. What we’ve seen recently is continued growth in the motion side of business, up against some very, very difficult comps - low single digits. We saw a little softness in that side of the business for the first time in the last couple of years actually in March leading up to the high-point market but have seen strong shipments in the last couple of weeks. So it’s hard to predict.

Bedding, obviously, a very, very difficult fourth quarter of last year. We saw some recovery, significant recovery, in January and then a soft February. And pull the quarter together and we were off low single-digits there. There, we’re starting to anniversary now some weaker comps going forward. So I expect that we should see domestic unit growth as the year grows longer just because the second half of last year was so soft. But, boy, is it difficult to forecast.

How long has the trend been into April, other than the upholstery picking up after the furniture market?

Bedding is almost schizophrenic. What we’re really seeing in bedding is what we believe to be a shift. Not sure what to make of it yet, but I make reference to it as a bifurcation of the price points. We’re seeing real strength at the upper price points. The Kingsdowns of the world, TempurPedics are doing well. Those real high price points and the consumer that’s associated with it seem to be in the market.

The other side, the strongest area of our business bedding-wise though, is in the low-end promotional business where we have a significant market position. And those manufacturers, the non-branded volume players, are having a field day right now. They are extremely busy. It’s those middle price points, the branded $599 to $999 volume that is showing the softness.

You ought to address upholstery [inaudible – multiple speakers].

Commercial.

Upholstery after the market, I think Margaret asked you.

Yes, I said it’s recovered.

It did pick up, yes.

And I think your next question there was commercial, Margaret.

Yes.

As I mentioned, our office components, that got some real health to it, relatively speaking. We’re seeing that improve. Fixtures and Displays, some modest improvements. It’s okay out there. Refurbs, some older stores are getting refurbs. As you know, those affect us about the same as a new build. So things are just okay out there. Aluminum products is sort of a mixed bag. We’ve got some of our motorcycle customers that have suggested a moderation in their demand. On the other hand, other small, non-automotive application engine components for things like lawn tractors and power washers and things like that, those are robust. So that’s sort of a mixed bag. Industrial materials, it’s going to primarily correlate to what happens in our residential furnishing segment. So that’s how you can look at that. And then in Specialized Products, I’d say the North American automotive is bias down. And we won’t be hurt quite as badly because of the placements of our products in more and more models, but that’s not a healthy environment right now. And then machinery and technology, albeit small, is really, really hard to predict. I would say it’s neutral.

Okay. Let me squeeze in one last one. In terms of your CapEx spending for ’05, what percent of it will be in the U.S. versus overseas?

Oh, a large percentage in the U.S. I’m going to guess it’s going to be 90 percent.

85 or 90 percent.

I should say North America. I’m sorry.

Yes, that’s right, North America, 85 to 90.

Keith Hughes, Robinson Humphrey

To follow up on your last comment, how, in the bedding side of your business, do you do better in terms of selling components at the high end, the middle, the low end? Where is the sweet spot for Leggett and that industry’s fine [ph] components?

Keith, every price point we have a nice position. There are margin differentials at different price points. And as we move into the higher price points, we get more to a higher percentage of our proprietary product, which typically we have a greater margin on. But the low end of the business is where we obtain overhead efficiencies, as we run those plants full out, and they’re greater contributors to the industrial material segment. So low-end volume, or that tonnage, is extremely important to us. I know I’m not answering your question very well, but every bedding piece is important to us and we have such a high participation at every price point.

Right. Okay. It seems as though you would do a lot better on the, as you said, on the margin side of the high-end stuff. And then the growth there at the high end has just been incredible in the last year. And so I kind of struggle with kind of your comments, what you’re saying in the bedding business. It seems as though you’d be doing better. Is the answer the volume that could be missing, particularly in that $500 to $1,000 retail price point segment?

Yes.

Is that really the problem?

Yes. We believe industry units were negative in the first quarter. We believe the industry units were a greater negative number than what we’ve given you this morning.

You mean innerspring?

Innersprings, yes.

John Baugh, Legg Mason

One question, a reference there about units being up and mechanisms globally. Maybe Karl will flush that out between what’s happening in Asia versus domestically and how that may be impacting your profitability?

They’re up in all, what we would consider all 3 regions of the world, John. Certainly we’re seeing continued growth in Eastern Europe and in China, but the domestic market has also been up this quarter and that slows. As we’ve discussed in the past, maybe lesser names, lesser branded guys that are out there that are creating significant volume at some price points much like bedding that are velocity points right now. There’s been strengthen in all of the markets there. There may be a slight continued shift to Asia as we grow that Chinese operation. As it matures, that volume continues to grow.

And margin implications, as we shift slightly to, say, Asia for U.S.?

It’s not negative to us.

Danna Getske, Morgan Keegan

I wanted to ask about the impact of stabilizing cost pressures in regards to field [ph] and what not that you say is somewhat stabilizing. On your revenues and earnings in ’06, given that almost all of your growth is coming from inflation and price increases, if you see those price increases sticking going forward? And if you could give us any comments on that.

Well, I think the price increase is sticking depends upon what happens to commodity prices. I mean if steel clearly heads back down and stays down, some of that price increase will have to give back. But as far as ‘06 for now, and we haven’t done a lot of trying to pull together ’06, I’d say we don’t have a bias for steel going up. We might have a slight bias for steel going down. We’re not going to see the inflation-related growth, at least we don’t expect to see the inflation-related growth in ’06 that we’ve seen in ’04, ’05. So you’ll be back primarily to unit volume growth. And our long-term projection for growth and sales is 10 to 15 percent and that includes acquisitions. We’re still comfortable with that long-term projection.

Karru Martinson, CIBC World Markets

I was wondering how much flexibility there is in the market for pushing through price increases, not only for steel, steel doesn’t need to go up, but also on foam products going forward, and if we were seeing any easing on the supply constraints for polyol, MBI, and to a much lesser extent TDI?

To answer the second question first. Yes, we are seeing a lessening of the supply constraint, that there is a greater availability of MBI, in particular. It’s still tight, but not nearly as tight as it was in the third and fourth quarter of last year. Interestingly enough, as the price went up, the availability showed up.

In terms of ability to pass through, it is significantly more difficult in today’s environment to pass through cost increases in foam than it is in our steel-related businesses. We’re passing them through, but it’s slower, more difficult, and has a more complex competitive environment than our other businesses.

Looking back through my notes, the price increases that you discussed in your fourth quarter call for January were kind of in the 10 to 12 percent range, correct?

Yes.

So I was wondering what the expectations were in the year in terms of, you mentioned that you don’t have an upward bias for steel per se, but in terms of foam-related products what we’re seeing kind of in terms of expectations for raw material costs and the respective price increases?

We certainly think the bias and chemical costs continues to be to the increase side, while -- when we spoke in December and January, we talked about the need for that 10 to 12 percent. Subsequent to that, there was another raw material increase announced to all of the chemical consumers. So there’s been another round of price increases put into the marketplace. Recovery has been only partial and it would vary by industry. There are no currently announced additional increases, but I believe we’ve all been told, been put on notice by the major chemical suppliers, to expect more going forward. But there’s been nothing announced at this point.

Richard Diamond, Inwood Capital

When bidding for acquisitions, are you able to compete against financial buyers and still maintain pricing discipline? If you could talk about the environment and the competition for acquisitions, I’d be grateful.

Richard, this is Felix. I think the answer to the question is that in most instances, yes, but in some instances, no. It gets to where that on some of those we run into some auctions and sometimes the pricing with what we think we can do as a synergist buyer just doesn’t make sense long-term for the shareholders. But if we go up against purely just a venture capitalist in one of the acquisitions that primarily relates to any one of our 5 segments where there are some long-term synergies that we can put in place more or less like a bolt-on acquisition, I believe that we can compete.

Now, does that mean that the pricing of some of these acquisitions today that the way some of the venture capitalists look at it is not a little bit stronger than what our historical price that we have been willing to pay for those, yes, it probably is, but I think with us looking at our cost to capital and what we’re doing, we may have to become a little bit more aggressive in our thinking, as long as it can bring long-term shareholder value. So I think the bottom-line to your question is we believe that we can compete with them. There is going to be certain instances we’ll choose not to, but, long-term, I think we can.

As a shareholder, I commend you on your discipline. I’d rather you reduce growth rates, if it ever comes to that, rather than pay up and have acquisitions long-term that don’t work. Thank you.

Thanks for your comments, Richard.

Fred Speece

The last 2 quarters you had zero volume, total. When do you expect that to grow? And when that does happen, the margins in the commercial, high teens was the old watermark, where do you think that will be mid-cycle now that you’ve got your structural changes placed?

The second question we can take first. Long-term EBIT targets for commercial would probably be 13 to 14 percent. And the first question, were you talking about volume of acquisitions?

No, no, just the total company volume. The last several quarters have been zero. There is a lot of moving parts, but do you have any crystal ball when that might start becoming positive, or will it turn into the negative territory?

I think that probably, based on what we’re seeing, if I could kind of blend some segments and take commercial, obviously, and residential and add them together, you’ve got a huge part of the Company’s volume. And from what we see in perhaps ’06 in the commercial side of the business, or an opportunity there we think, and then what see is for residential part of the business with what’s happened in housing, and we still contend that there is some pent-up demand that hadn’t been filled as far as furnishing all of this housing growth that’s taking place, etc., we have ourselves positioned extremely well, both in North American and Europe and Asia, to benefit from that growth wherever it takes place.

So I think that, obviously, our crystal ball is not totally clear, but we would expect unit growth in both those businesses to pick back up in ’06 and ’07, barring a reasonable economy to operate in. And as that happens, and we’ll be able to utilize either our unutilized $300 million worth of capacity we’ve got in place now, un-utilize or utilize the throughput the assets and the facilities we’ve got, we would certainly expect not only the sales growth but the margin improvement to move. Now that gets back to the fact, our high watermark in our after-tax margin was in that mid-7s range. We’re tickling with the 6 range now. Do we think that we can get the Company back into those ranges with the volume and with the ability to run those assets, yes, we still think we can.

(OPERATOR INSTRUCTIONS) David MacGregor, Longbow Research

Just following up on pricing, I just wanted to make sure, did you say anything about adjusting prices in aluminum, given the rise, I guess, in energy and other costs?

Dave, we didn’t say anything, but let me comment on that. I think you know that a substantial percentage of our aluminum business, or volume, is indexed to the market. So as the market goes up, our transfer prices will go up for that metal portion. On the part of the business that’s custom for us, or proprietary I should say for us, we have had some price increases on some of those furniture components.

Okay. Is there a lag effect for the metal portion of the business that is indexed to the market?

Yes, and it varies. Some of those are quarterly. I think we’ve got some that are twice a year. There may even still be some that are done on a monthly basis, but most of them are quarterly.

Okay. In the June quarter, if energy prices were to stay fairly sort of stabilized, we’d see a margin benefit?

That’s correct, if it stabilizes.

The caveat being if it stabilizes. And then on the foam base, it sounds like it’s more of a 6-month lag, given the difficulty you’re having.

Yes, I would say that’s safe.

That’s a tougher one, Dave.

There is reluctance in that industry to pass along price increases. And what’s happened, Dave, is the later increases get piled on, theoretically they have to be passed on more quickly because there is a greater need at that point. The first one seemed to take longer and the later ones actually were implemented more quickly just because of the dire need that starts to become established.

Okay. And then my last question just has to deal with the spread between steel, scrap, and rod. It sounded like you were saying it narrowed a bit coming in here into the second quarter. Am I correct in making that assumption?

Yes, Dave. There has been a slight narrowing. Obviously, we’ve had some movements of scrap between months and then when you get that you get some movement in some selling prices out in the marketplace with some of those things. But you wind up -- here in April, we’ve had a movement back up in scrap that just about got us to where they were in the fourth quarter. So we’ve had some movement between those things. And as you do that month-to-month, you wind up and you might have a slight narrowing of that spread.

Allen Zwickler

Could you talk about international volume in bedding versus domestically? You’ve beaten the domestic horse dead, but what’s going on internationally?

The Chinese volume continues to grow dramatically, albeit small base. Some of that is domestic Chinese growth, which is still on a 15 to 20 percent annual CAGR. The growth there though also has augmented by our de-verticalizing 2 major manufacturers in Australia. So we’re shipping more and more Australian springs from China. Brazil, we’re seeing some growth. Mexico is pretty soft right now. They didn’t have the strength of their high season that they normally would experience in the first quarter. The one that probably is of greatest concern right now is Europe. There has been a significant softening in Europe in the last 2 to 3 months, Germany in particular, but also in the U.K. Scandinavia probably is the only strong market in Europe today.

I’ve got to send some La-Z-Boys over there.

At this time, there are no further questions. Are there any closing remarks?

Just we’ll be very brief. We appreciate the folks’ time and we look forward to seeing you again next quarter.

Thank you for participating in today’s conference. You may now disconnect.