禮恩派 (LEG) 2005 Q2 法說會逐字稿

Good morning. My name is Lynn, I will be your conference facilitator. At this time I would like to welcome everyone to the Leggett & Platt second-quarter conference call. (OPERATOR INSTRUCTIONS). Mr. DeSonier, you may begin your conference.

Good morning and thank you for taking part in Leggett & Platt's second-quarter conference call. I am Dave DeSonier, the Vice President of Investor Relations, and with 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 the Head of the Residential Furnishings segment; Matt Flanigan, who is our CFO, and Susan McCoy, who is Director of Investor Relations.

The agenda for the 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. Dave Haffner will discuss the market trends we are seeing in our businesses, along with factors impacting our earnings and margins. Felix will then address our outlook for the third 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 express permission. A replay is available from the IR portion of Leggett's website.

In addition, I need to remind you that remarks today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements. Actual results or events may differ materially 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 to the section in our 10-K entitled "Forward-looking Statement."

I will now turn the call over to Felix Wright.

Thank you, Dave, and good morning and thank you for participating in our call. I know this is not time for my formal remarks and scripted remarks, and I will get into that in just a minute, but I think I feel compelled to make a few comments that are really adlib and no script to them whatsoever. But I think that you all know the Company well enough and know me and the management team well enough that this -- we're glad this quarter is behind us and not in front of us because we think the quarters in front of us look a lot different than this quarter we're just coming through.

This quarter has had a tremendous amount of small moving parts, everything from inflation, deflation, LIFO, FIFO, change in mix of products because of huge steel increases over 24 to 28 months and etc., so there have been a lot of positives and a lot of negatives. Probably of these small parts there has probably been more negatives than there has been positives, but the small parts we don't talk about those from quarter to the quarter.

There is another thing that we are going to try to cover today that I know is giving a number of you all some concerns, and that is the data coming out of ISPA relative to the inner spring markets. That data is certainly flawed, and Karl Glassman as we get down into the question and answer will try to address that for each one of you all. And even after we address it, we encourage you that if you don't want to take our information which we believe is certainly accurate, please call the top five or six bedding manufacturers in the United States and get their data and compare it to the data that you are getting from ISPA.

Obviously the sales were weaker than we anticipated, and if we could have seen that at the beginning of the quarter, our guidance would have started with a 3 and not a 4. But be that as it may, we were still within our range of guidance we gave and still feel that our year is certainly makeable and attainable as we stated in our deal there.

There is nothing broke. There has just been a quarter that is tough to explain and a lot of moving parts, etc.

And one last adlib comment I would like to make, and I know it is in our data, is that our acquisition database probably looks as good as we have seen it in the last two and a half or three years, and a lot of that is because of the companies that have been in that database. Their performance continues to improve as the economy improves, and obviously that becomes a much better target for us as we go forward. So I'm going to read the formal scripted remarks now, and Dave will go through his, and then obviously we want to try to answer every question that you have got.

As we announced yesterday, earnings per share for the second quarter were $0.41 on sales of 1.31 billion. Sales and EPS were the highest we have ever posted for the second quarter of any year. Earnings were within our guidance, but sales were slightly below the range we originally forecasted. Same location sales increased 2% for the quarter with inflation offsetting slight unit declines. Demand was mixed across our markets. We saw volume growth once again in Upholstered Furniture components and aluminum, but these gains were offset by declines in other areas. US Spring volume was down slightly versus last year, but continued to improve sequentially with year-over-year declines in the second quarter modestly lower than those experienced in the first quarter.

In addition, our businesses that supply niche automotive components were impacted by lower OEM production during the quarter. Second-quarter margins improved sequentially consistent with our normal seasonal pattern. Compared to the same period last year, gross profit margins and EBIT margins declined slightly when a lower effective tax rate led to a modest improvement in net earnings.

Raw material cost trends have varied this year depending on the commodity. Chemical and resin costs increases during the first six months. We recovered only a portion of this inflation through selling price increases. Steel costs were relatively stable during the first quarter. During the second quarter, rod costs remained steady, but scrap and rolled steel costs declined. We reduced selling prices in some categories where raw materials costs are down.

Recent reductions in steel costs resulted in LIFO income of 20 million during the second quarter, but this impact is offset with the segment results. Segment margins were adversely affected during the quarter as higher cost beginning inventories were matched against current sales. In the second quarter last year, segment margins benefited as lower-cost beginning inventories were matched against sales that were increasing. The impact on margins is limited to segment results since our LIFO adjustments mitigate the effect at the consolidated level. Working capital as a percent of sales increased to 21% during the quarter consistent with the seasonal increase the Company typically sees at midyear. Even so this year's increase is higher than normal because of unusually high steel rod inventories and demand weakness in some of our businesses.

In contrast, last year's second-quarter working capital was unusually low at 18.4% of sales. This was largely due to extremely tight market supply which caused steel rod inventories to be well below normal levels. We continue to target working capital as a percentage of sales at about 19% on average over time and expect to be back in line with our targets by the end of the year. And those rods that we were talking about, there is some of the penalty that we are paying for that higher percentage raw materials and rods today is because of material we committed for back last year that finally starts coming in because we were for sure not going to run out of raw material.

We are encouraged about the acquisition opportunities we are currently seeing. Our acquisition database continues to strengthen, and we expect activity to increase in coming quarters as the economic health of potential targets continues to improve. During the second quarter, we completed three acquisitions that should add about 48 million in annual sales. The largest of the acquired businesses produced rubber and felt carpet underlay and should add about 41 million in annual sales to the Residential Furnishings segment.

We also purchased a South African manufacturer of inner springs that should add about 6 million in annual revenues to the residential segment.

The third is a Chinese manufacturer of automotive seating components and should contribute about 1 million to the Specialized Products segment. We also divested two small noncore operations that previously generated annual revenue of about 5 million. Last September we told investors that excess cash after funding growth and paying the dividend would be used to repurchase stock. Consistent with that strategy, we were strong buyers of our stock again in the second quarter. We purchased 1.8 million shares in the quarter, bringing our total purchase for the year to 3.6 million shares. At our May board meeting, we increased our quarterly dividend to $0.16 per share. This is a 14.3% increase over last year's second-quarter dividend. Our dividends have increased annually for 34 consecutive years at an average compound growth rate of better than 14%.

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

Good morning. In my comments, I plan to discuss each segment's major business trends and the factors impacting EBIT and margins for the quarter.

In residential, second-quarter same location sales grew 2% primarily from inflation as unit volume was down slightly. Gains in Upholstered Furniture components were offset by declines in other areas, including US Spring. During the quarter we saw modest year-over-year declines in bedding units in line with industry results for the quarter. The normal seasonal pattern in bedding is for a sequential increase in volume during the third quarter, and we are optimistic that we may see improvements beyond these normal seasonal gains due to planned promotions at retail.

Again, this quarter we posted solid gains in worldwide unit sales of mechanisms for Upholstered Furniture. These gains were accomplished on top of very strong growth in the same quarter last year. We sell to nearly all manufacturers of motion Upholstered Furniture. These customers include major public furniture producers, as well as privately owned manufacturers. Our international presence and depth of productline 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 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.

Segment EBIT and EBIT margins decreased due to several factors, including the absence of last year's FIFO benefit, changes in sales mix within the business units, higher raw material cost primarily the chemicals used in our foam and coated fabrics operations and reduced overhead absorption due to lower production levels.

In commercial fixturing and components, same location sales grew 4.8% from a combination of inflation and modest unit growth. We saw slight volume gains in both office furniture components and Fixture and Display during the quarter. EBIT decreased for the quarter due to unfavorable changes in sales mix and inefficiencies at certain of our store fixture operations, higher resin costs which continue to impact our plastics businesses and currency factors. But these declines were partially offset by benefits from modest sales gains and cost savings from recent plant consolidations.

Commercial segment margins improved sequentially, but decreased versus the same quarter last year due to the factors previously mentioned. We now expect an approximate 100 basis point improvement in margins for the current full year, which is lower than previously anticipated. Initiation and startup costs for several new program awards will affect 2005 margins. These new programs will carry higher future operating margins as we ramp up their volume.

Integration inefficiencies associated with the RHC Spacemaster acquisition have also taken longer than expected to resolve, but we are comfortable we will have most of these behind us by the year end. We still expect to achieve double-digit EBIT margins in this segment with continued volume increases and full effects of recent consolidations and cost improvement initiatives.

In Aluminum Products, organic sales increased 5% from a combination of unit growth and inflation with volume increases in several end markets. EBIT decreased in the quarter due to higher startup costs related to new programs, production inefficiencies at certain locations and higher utility and other costs. These declines were partially offset by benefits from overall volume gains. We are addressing these issues and believe we are still headed in the right direction. We continue to target 10% annual EBIT margins for this segment and believe this target is attainable.

In Industrial Materials, same location sales grew 1% with inflation offsetting high single digit unit declines. The rate of growth slowed this quarter as we anniversaried much of the inflation experienced in 2004.

Volume declines resulted from several factors. Last year there was a shortage of steel rod in the marketplace as Felix had mentioned earlier, and we utilized excess melt capacity at our rod mill to produce and sell steel billets to external customers. Those sales did not reoccur this past quarter. We also experienced declines from two industrial products customers who began sourcing their finished products overseas. And two being volume declines related to lower production by the major North American automotive manufacturers and weak demand for ATV parts and accessories.

Segment EBIT and EBIT margins decreased due to several factors including lower volume, the absence of last year's FIFO benefit, higher transportation costs and reduced overhead absorption due to the lower production levels.

And finally, in Specialized Products organic sales declined 3% with benefits from currency rate changes more than offset by volume declines in both automotive and machinery. In automotive, lower volume due to production shutdowns by the North American OEMs was partially offset by new programs. Segment EBIT and EBIT margins decreased during the quarter due to lower unit volume in both automotive and machinery and currency impacts.

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

Thanks, Dave. We are optimistic about 2005 and expect to post record sales and earnings. Earnings growth in 2005 will continue to be influenced by organic sales growth, the direction of raw material costs and the extent of improvements in our Fixture and Displays and other operations.

Our earnings guidance for the full year has been narrowed to 155 to 165 from our previous range of 150 to 170. We expect full-year sales growth of 3 to 5% with same location sales posting about half the growth and acquisition contributing to the balance. This assumes organic sales roughly flat for the second half of the year.

The lower organic growth expectations for the year relate in part to two factors. Selling prices have been reduced in certain product categories where raw material costs were down, and some customers chose to offset inflation by switching to less expensive components.

For the third quarter, we expect sales of 1.34 to 1.39 billion. This forecast includes a sequential improvement of 10 to 60 million over second quarter, consistent with our typical seasonal pattern and about 20 million of incremental revenue from acquisitions. At this sales level, same location sales should be essentially unchanged from third quarter of 2004. Based on the sales forecast, we are expecting earnings of $0.42 to $0.47 per share for the third quarter.

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

That concludes our prepared remarks. We thank you for your attention, and we will be glad to answer your questions. In order to allow everyone an opportunity to participate, we request that you ask your single best question and then voluntarily yield to the next participant. If you have additional questions, please reenter the queue and we will try to answer all the questions you may have. Lynn, we are ready to begin the Q&A.

(OPERATOR INSTRUCTIONS). Joel Havard, BB&T Capital Markets.

That must mean that none of us are able to think that quickly of our very best question. We will stay in residential. That is still the one we hear the most about.

The comments you made about the shift to international is that becoming more pronounced to the degree specifically that you see some intermediate term risk of needing to scale down domestic production?

That comment on the shift was industrial. It was not in residential. That was two large wire customers that are Industrial Materials customers outside of the Residential Furnishings segment that moved some of their productive capacity. Specifically they are manufacturer of pet cages and trampolines. That was wire tons that moved to China.

Okay. I had in my notes here that on the mechanism side of residential you had seen -- I guess I wrote it down wrong -- that you were seeing a little bit heftier growth on international maybe I have misinterpreted that?

We're not really, but we are continuing to see this mix shift of weather and there certainly is some growth. But we believe that that movement from U.S. manufacturing to Asian manufacturing Upholstered Furniture has slowed. The conversations today that our customers have tend to be much more cut and sew oriented than they are mechanism and the upholstery process-oriented.

So you know it is that number 15%. We hear a lot of numbers. We hear people speculate that it will go to 30. We don't believe that is the case. We believe it is in the low teens now and may move to the high-teens, but there is not a significant shift afoot.

Okay. I want to keep (inaudible) and take more than my time --

Let me specific -- I am sorry to interrupt you -- let me specifically answer a question you asked and I did not answer. And that is that, do we see our manufacturing capacity in the United States at risk? And the answer is no.

Good final point there. At my last question was, does this mean that you are increasing the volume of mechanisms that you are making overseas and shipping to the U.S., or is this being matched up in overseas production?

We are increasing the number of mechanisms that we are making overseas, but we are not shipping mechanisms and mechanism form to the United States. Our customers are exporting furniture, finished furniture, to the United States and other markets out of Asia.

Got it. Thank you very much. Good luck, guys.

Budd Bugatch, Raymond James.

I won't risk the wrath of John this time by asking one question with multiple parts. John, that is for you.

My question, Karl, let's go to the big picture of bedding and kind of address maybe the whole landscape competitively, and what is going on with units, because we entered this quarter thinking that units were going to start seeing better growth, and I actually think we had a couple of positive weeks in this quarter if I remember right.

You are correct. May we were on positive pieces for a string of five weeks in a row on a year-to-year comp. June softened. To give you the macro landscape and I will take this opportunity to make the point that Felix brought up as regards to industry statistics, the industry association earlier this week published data that suggests that through May mattress shipments or the total mattress shipments, be they inner spring or not inner spring, are up 3.1%. We believe their data and their methodology is terribly flawed and believe that their statistics and the methodology they used to gather statistics are incorrect.

We have said that our unit shipments in the second quarter were off slightly as low single digits. We believe the industry is negative in units as much as 5%, and I will walk you through our logic.

The largest player in the industry, Sealy, publicly announced last week that year-to-date their sales were up 2%. With their marketshares in excess of 21%, up 2% is a key indicator. Simmons last announced their unit shipments at the end of their first quarter. They have not announced second quarter yet. But at that point, they announced units were down 15.2%. I am sure that they have had some gains since then, but it is kind of difficult to recover a 15.2% negative, especially in statistics that were published two months later from an industry perspective.

We know that the next two players in the industry, Serta and Spring Air have been focused on manufacturing efficiency and looking at margin improvement per piece. We believe in both cases their shipments are down as you know that we have a nice position with both those two manufacturers. We believe that the data skewed from another perspective in that when you dig into the bowels of the ISPA published statement they break out shipments by regions. Again through May, mattress units in the Northeast are off 3.3%, North Central off 1.6%, up 11.8% in the South and negative 5.9 in the West. The South happens to be the region that they weight the heaviest at 48.2%. We believe what is driving that is one of the 19 contributors to the ISPA statistics. We will call it a nonbranded very very good customer of Leggett & Platt whose volume is up significantly this year.

Skewing that data but what ISPA does is they input or impute the growth of the respondents knowing that Serta is not a respondent but that they impute that data in this large player to assume that the rest of the industry is growing at that same rate, all the while that that one company is gaining significant market share. So it does not add up.

The next question that people ask with frequency is, where is Alternative Sleep? If your data, Karl, is based on a significantly larger market sample than ISPA's, which is less than 50% of the industry units and you say volume is down 5%, it must be Alternative Sleep which you don't have visibility to.

Well, Tempur-Pedic announced their results last night, and they are gracious enough -- they are by the way a very good customer that is doing an excellent job of driving their business -- but they are gracious enough to breakout their unit shipments by period domestic and international by productline. And they state in their data that their shipments in the first quarter of '05 were 111,000 pieces, the second quarter of '05 86,000 pieces. Added together 198,000 pieces. If I give them 25% growth for the remainder of the year, knowing that they grew 23% in pieces in the second quarter, that totals 446,000 units, which is slightly less than 2% of the 22.5 million mattresses that will be shipped in this country this year. So Alternative Sleep is growing.

David Ferry in his article of I believe July 18 believes that Alternative Sleep was 4.1% of the units in the industry. We think that number is correct. So the numbers don't tie. I apologize for the long-winded response, but at some point we've got to defend ourselves. I do encourage any of the analysts to contact their major bedding manufacturers, and they are offended by the data that is published by the industry association. I cannot -- a couple of them have made comments that they must be in a different industry. So anyway. That is my long-winded speech. Now what happens from here?

That is very complete, and I thank you very much. And it is a shame that we don't get I guess rational numbers out of the industry, and I know there are issues that are still to be addressed I guess. But I guess from the standpoint of the public market, we would love to have a way to get the data that makes more sense.

Well, we appreciate that. The sample size is too small, and the extrapolation of that small sample size to the rest of the industry is irresponsible the way it is done.

But anyway the question is where do we go from here? As you know, the inaugural Las Vegas furniture market is next week. It will be the first opportunity the bedding manufacturers have had to participate in a national market in some five years. We know that a number of those manufacturers will become more promotional in their offerings and more aggressive in their offerings. We also know that a major nationwide retailer is in line to heavily promote in the third quarter.

We are really optimistic about the bedding industry going forward, and we believe that it is near-term. We have been working with these customers as they respect, remerchandise their product, trying to deal with steel inflation, petrochemical-driven foam inflation, and there has been -- as Felix said, our business has been unsettled, but boy, our bedding manufacturers business has been unsettled for the last few months, too. We believe that they are coming out of it, and next week should be very interesting.

Okay. And just to violate David's rule, but can you put a number on what you think the unit growth might be in the second half in bedding?

We are dealing with some relatively soft comps in the fourth quarter, but I am going to tell you I don't know. I believe that they will be positive, but I cannot give you a number. So much of it is timing and acceptance of those introductions.

I understand.

And I violated Dave's rule by talking too long, too.

Margaret Whelan, UBS.

Your description of the ISPA data makes (inaudible) seem like the (inaudible). But recognizing that there is a lot of moving parts in this quarter -- I know it is harder for you to manage -- my observation is that you're sitting on too much capacity, and you have been saying I think for the last 12 or 18 months that you have about $500 million of sales capacity that you're not using. At what point are you going to go in and take some of them out?

This is Felix, and Dave may want to weigh in on part of this. We think that unutilized capacity is probably slightly north of 300. It is not at 500 we don't believe at this point, but it is still slightly north of 300, and we have still got the bulk of it that is sitting over in the Fixture and Display business. That is probably somewhere in the $150 million range.

And again being repetitive of what we are saying and our patience like yours is waning at this point, but that is a market Dave alluded in his comments about the segment, that we have got some programs that caused some inefficiencies in the fixturing part of the business because of some startup deals. There is some of that stuff that is probably in the $35 to $50 million range revenue-wise and etc., and it is one of those markets that if we take too much of that off-line and we misread the marketplaces when it comes back on, we're not going to be able to capitalize on it. Because that is something you just cannot stop one quarter and start another quarter. So that is where we are still taking a little bit of a penalty in that.

Now in the residential side, what Karl is talking about, obviously when we started looking in May, we thought our capacity utilization is going to look good, and then all of a sudden here comes June and things start waning off. We still think that is going to come back and utilize some of that capacity. But there is probably going to be a little bit of further consolidation in some of the aluminum plants that we have got that we may tackle in the third quarter. But as far as taking off any major productivity or major capacity, Dave, I don't believe we see it happening in third and fourth quarter.

No. In fact, if I could just back up a second there on the aluminum comment, while there is going to be a consolidation of an underperforming plant, we are going to move that volume, virtually all of that volume, move the equipment to a more efficient facility so that it really won't be a capacity reduction play here in aluminum.

And then on a broader basis to augment what Felix said, we have really scrubbed our third and fourth quarter forecast pretty raw, and we think they may be a little conservative, but we should not take any capacity off stream right now based upon what we're seeing. Now your question was when would we -- it would have to get a lot more bleak than it is right now.

Because the way I'm looking at it is, that if you reduce from 500 to 300 million of excess capacity, though your margins are still declining, so the leverage is being offset by the higher commodity costs across all the businesses?

That is certainly true. And in a competitive environment that we are working in because sometimes when you catch an industry that is either in consolidation or an industry that is in disruption, you go through a period of time where people manage for cash flow rather than anything else, so I think we've got a little bit of that in there. But commodity cost is certainly a big portion.

Can I just ask a follow-up to that? What was the trend from April, May, June and into July now by business, and why are you feeling that you have to scrub your numbers and that you're really well-positioned from here?

By business unit?

Yes, if you would not mind, that would be great.

I'm not sure I would be able to give you statistics, but Karl has already mentioned the history and our recent past history and what we expect to see in bedding. I think Upholstered Furniture, I know you are very tuned into that, we see continued strength in Upholstered Furniture. Office -- let me jump down to commercial. Office -- pardon me?

Okay, office furnishings. That continues to improve modestly. As you know, the last 90, 120 days we have seen some sustained and positive improvements there. Our plastics operation goes pretty much hand-in-hand with our office components because a large percentage is sold intercompany. Our problems there, of course, are cost of raw materials, so we expect to see some modest improvement, continuing improvement in plastics.

Fixtures and displays, I know you know that the third quarter is kind of the bellwether quarter. We have -- maybe I will take just a second and mention that these new programs, which I mentioned earlier, which do have some initiation and startup costs correlated to them, I and Griffin and the staff are very excited about some significant new programs that we have with customers that would include H&R Block and Canadian Tire and CVS, Dollar Tree, Sterling Truck that add up to a substantial amount of new business for us, part of which we will enjoy late this year but more so next year.

But anyway third quarter is always a good quarter to judge Fixture and Display. Our orderbook looks good there. And then, Karl, do you want to talk about the rest of residential?

So much of that I agree with your statement that furniture -- as the furniture manufacturers come out of their July shutdowns, the furniture -- Upholstered Furniture industry -- seems to be pretty strong. So much of that other business moves from what gives us support to bedding and furniture. So as those businesses strengthen, I would expect the Residential Furnishings to come with it. Other than the carpet underlay business and units continues to be strong because of the housing data that is being published.

You did not address aluminum.

Yes, aluminum, looking at that third-quarter forecast, we're going to see our capacity utilization come up, and we will have a consolidation expense which we baked into our forecast. But business continues to be buoyant there. We continue to gain some market share, and without mentioning the company that I recently joined the aluminum guys with, we continue to get relatively large companies asking us to consider being program managers for their company, basically assist them in all their casting procurement, producing whatever we can internally and then helping them source those that for whatever reason need to be sourced in other parts of the world where we are not.

That aluminum business, it is okay. There is not a significant problem there. We have got an underperforming facility which needs to be consolidated.

And then automotive real quickly, we are hoping that we will see some improvement in the OEM production. As you know, we supply basically everybody, and so if the big three lose some business to the other folks, then we tend to pick it up elsewhere. We are expecting relatively stable volume there in the forecast. And then wire, as wire and tubing, as our residential furniture business goes, so does wire. And tubing really falls residential furnishings and automotive.

All right. Will, that is pretty comprehensive. Good luck with the second half.

(OPERATOR INSTRUCTIONS). Laura Champine, Morgan Keegan.

This is actually Danna Getske on behalf of Laura. Listen I wanted to ask you guys considering that you are implied -- your guidance for '05 implies same-store sales growth of about 1.5 to 2.5%, how much of that same-store sales growth is pricing driven?

Most of that will be pricing driven.

Okay. So considering that, I was just wondering what actions you might be taking to try and hold on to market share in the face of perhaps flat to slightly down unit growth?

I will comment on it first. Obviously where there is more capacity than demand and competition heats up, we will do several things. One, we will look incrementally at what we can do to pricing to gain new market share, knowing full well that our overheads are going to be for the most part already fully absorbed with previous volumes. So we will look at things incrementally pricing-wise.

Another big advantage that Leggett has in many cases is that we bring more than just price, commodity pricing or product pricing to the party. We will go in with a customer and work with them in value engineering for spec modification, while maintaining their form, fit and function requirements. So we come to the party with design and value administration, if you will. Those are a couple of things that we do.

Okay. Thank you.

John Baugh, Legg Mason.

Budd, you tightened your question up, but you still listed a 10 minute plus answer.

Thanks, John, for monitoring me.

His power is amazing. Just following up on that question, if I hear you right, your guidance for the second half for same location is essentially flat in units if I heard the answer to the last question right. And you just got through a detailed explanation of by segment or business unit really of how volumes looked good. Are you just making an overly conservative forecast, or am I missing something there?

John, we have got some deflation that is in this assembly, and we have got some mix that is in this that is skewing the units or the piece data that we are looking at that is making it hard to put the numbers totally together. But those are the two biggest factors, Karl and Dave, that I know of that are impacting (multiple speakers)

So when we look at the second half flat, same location guidance, it is actually there is some positive units, but deflation and mix -- I guess that is price per unit -- (multiple speakers)

That is right, John.

Okay.

That is exactly right. We have had a lot of things in residential bedding, for example, that because of the huge run-up in steel that we have got a lot of people that are making the same amount of pieces or maybe more, but our volume to those people in sales dollars is not as good as it was two years ago.

John, in the furniture hardware side of things, we would expect it to continue in that we are passing through these lower steel prices. As a matter of fact, we probably got ahead of ourselves in the second quarter and reduced our customers' prices more quickly than we actually received lower raw materials cost. But we would expect that to continue into the second half.

Okay. And I'm going to cancel my ISPA subscription, but that did not help a whole lot this quarter. Let me know if and when I need to resume that subscription.

Well, thank you for canceling. We will let you know when you need to renew.

All I will say is I think you can trust our data.

Good luck, guys.

David MacGregor, Longbow Research.

Good morning, gentlemen. It is actually ShawnHarrison here for David. Just heading back to the commercial fixtures question, I have another question. It seems like maybe your gaining a little bit of market share there over the coming quarters with these new programs. But how would you characterize I guess end demand overall? I mean the past few years, it has been I guess pretty static. And it does not seem like it is improving too much. It seems like you're gaining share.

Excuse me, Shawn, I think your analysis is probably correct that we still have got less capital deployed by these retailers than we would have either anticipated at this point or they would have done in the past. Now obviously, when you start talking about the big boxes, they continue to roll out to new stores. We participate with that very good. But when you talk about a lot of softgoods, retailers, you talk about a number of the other categories, such as department stores and etc., there is a consolidation. There is things going on. It looks like it may be positive for us. We don't need any more square footage. We have said before we just need for them to retrofit and update and etc., but there's still a lot of dollars that have not come to the forefront yet to be spent. Some of those, Dave was speaking about earlier, some programs we are beginning to see, and we are just in part of the startup. Part of it is going to be in 2006, but we still have not seem that capital deployment come forth from those retailers that we think would get us back into that 6, 7, 8, 9% growth in capital dollars being spent.

Felix, that was pretty much what I was going to say. Let me also remind Shawnthat there has been some of the competition in that industry that have failed and have filed for protection or actually gone out of business. And so some of that pickup that we have seen has been due to fewer competitors. That said, there is plenty of capacity and plenty of competition out there. Things appear to be modestly better, but do we think the floodgates are open to Felix's point? No, we are still waiting for improved demand in the foreseeable future.

Given the order forecast you have and the order book you had in the second half, is it safe to expect further margin improvement into 2006, that extra 100 to 150 basis points you were hoping for this year that is just not going to appear?

Well, the extra 100 basis points will appear this year. That is down from what?

I thought it was 200 to 250 -- (multiple speakers)

I'm sorry, his question was the next 100 to 150 over the 100 you said.

Yes, yes, yes. I'm sorry.

Is that going to happen in (inaudible), that's what he wants to know.

Yes, and then some.

Okay, is some of the variance this year just it looks like it's related resin cost. But steel prices are falling off and you would assume based upon your contracts that that should be helping margins in the second half of the year in that segment.

Yes. We still have some, as I mentioned very briefly, we still have some inefficiencies associated with some consolidation initiatives. A lot of those tied to the RHC Spacemaster. We are about to get a stranglehold on all of that. And then the startup costs, I don't want to lay it all off on new programs, but as I hope you can appreciate, when you initiate a new program and then until you get that fully ramped up, your margins are depressed. Then we have some shifts. We've got three startups where we have actually shifted some business from the United States down into Mexico. Those had some onetime not to repeat expected costs in the back half. So there is several elements to why I and we have decided to change that forecast from 200 to 250 down to about 100.

Okay. And then just lastly, you mentioned negative mix and kind of deflation. Is it primarily related to the residential segment? Or are you seeing that across multiple business lines? I know industrial is, you know, essentially tied to what you're seeing in residential, but is it commercial fixtures as well?

There is some of that in commercial fixtures, yes. We have seen a lessening in demand of certain higher-margin items and an increase in demand of relatively lower-margin items. So there is some of that in commercial fixture and display specifically. In office and contract, I don't think that is quite as effective. And then as Karl has mentioned, obviously mix has some impact in residential.

Shawn, you can take that fixturing part of the business and you can have some people all of a sudden switch from maybe wood componentry to wire componentry, and there can be some mixes to start to happen there that may not carry the same margins.

Just overall in this deflationary environment, I know prices, it took what, 18 months, before you essentially caught up to what you were seeing in terms of higher material costs. Can this deflationary environment last the same amount of time, do you think?

Well, I think this, obviously, we're giving back and trying to help these customers promote their products and etc. And is this a deflationary period that we are in? I don't think there is any doubt about it that the bias for steel is still flat to maybe slightly negative because of the world demand and etc. But obviously, as we saw happen before, we have some huge Asian markets that turn on a dime over a four or five-month period and create a huge demand again; that thing could change. But we think that if we were looking at from now and looking into '06, we would say flat is what we think the majority of that steel products are looking like for the rest of this year and into '06.

Barbara Allen, Avondale Partners.

I'm actually going ask two questions but I don't think I will challenge Bud's record on the response time. The first one is, the shifting down the price point side to customers, do you think that this was an accumulated thing, they just sort of hit the wall on it in this quarter?

A question is bedding for you, Karl.

From a bedding standpoint, Barbara, I do think that it is an accumulation into the quarter that has been truly building. It started in the third quarter of last year when we hit them with the last cost increase, significant cost increase. And there has been kind of a remerchandising that has taken place from then to now. And I think that we were at the end of it in the second quarter. What gives me confidence in that is this relaunch of new lines next week in Las Vegas. They have tweaked about all they can at this point.

So is it fair for me to draw from that that as you're passing through the lower costs maybe they will start shifting back up?

I believe that there will be some of that because the bedding and furniture industry is very cyclical. And as a new bottom is hit, a manufacturer will break out of that and add more componentry back to a product the others have to chase, and the cycle begins all over again. I think it would be premature to indicate when that will start though. I think that because the styles change over a couple year timeframe, that I think we've kind of reached stability for the next couple of quarters.

Barbara, and this is Felix. I think another thing that we are seeing here, when we are looking at $2.50 gasoline, which is a direct tax each week, I think we have got a number of consumers that have just lowered the price point in their mind as to what they will pay for that set of bedding or that upholstered chair or whatever it might be or etc., from where they were before. So I think that is one thing that has helped drive this mix down some.

That is a good point. The last question, Felix, is I was intrigued by your comments on the acquisition pipeline. You said they are healthier and so forth. I hope that does not mean you're going to have to pay up for these?

Barbara, does it mean that we have got to pay up to where we obviously don't have both short-term and as you know within the first year, we like for these to be accretive. Our long term, where we cannot think that they will make a good return for our shareholders. No, we are not going to do that. But I think as the companies get healthier, they have gone through the same doggone thing that a lot of us have gone through in this last 36 months or so. But our courtship has continued to be there. As they have gotten healthier, they look better, and etc., and are better. Yes, we are going to be paying more for those but our returns are certainly going to be probably more consistent and not as much risk in them as they had if we had tried to pull the trigger and bought that 36 months ago. No, don't expect us to overpay or try to push just to make acquisition growth. This is real improvement in the companies and our database that are giving us more comfort that we can step up here and make some acquisitions and do some things in the industries we serve.

I never thought you would throw away your discipline.

Thank you.

And I'm pleased about the pipeline. Looking forward to more announcements. Thank you.

Karru Martinson, CIBC World Markets.

I was hoping that we could talk a little bit on the outlook for the chemical and raw material front, since that seems to be the one that is not coming down. I was wondering is the pushback on pricing for foam materials coming from really the manufacturers who can't take anymore or is it just kind of like you're looking around and you're seeing that there is still a great deal of excess capacity and people are pricing for volume rather than trying to recover costs?

It looks like the raw materials costs at this point, from a foam input standpoint has stabilized. And now that it appears -- you better than I realize how volatile that is -- it appears that there is some stability that there are manufacturers that are out trying to regain volume. So there is downward pricing pressure as people try to fill capacity.

Are we looking at potential price increases from Dow? As oil prices have gone up, the feedstocks were very weak going through the second quarter. You know there has been a lot of talk or early rumblings as part of the game of announced one pushback and so forth. Are you seeing any of that?

There are not any currently announced increases but the foam chemical industry changes direction extremely quickly.

Absolutely. I just wanted to clarify one thing, in terms of the promotional activity that you discussed from bedding manufacturers for the third quarter, are you being asked to contribute margin in order to generate these volumes or is this a program that is being kind of entirely borne by the bedding manufacturers? I was just wondering in the sense that you mentioned that you had kind of given back a bit more on steel due to the decline in steel pricing. I was wondering if that was tied into the promotional activity by the bedding manufacturers?

We are constantly working with our customers to merchandise their product line with our componentry. So in many cases there are new components with new applications. So it is not a price reduction of an existing SKU. It is developing new SKUs that meet different marketing strategies.

But there is one other portion of that too. With our big major spring operations, if we can wind up and drive more pieces through the same assets, we can give our customers a lot of help in trying to drive their promotions and still not completely hurt us too bad. So yes we do step up and try to help them, but hopefully if we drive the pieces through, it's not going to have a huge impact on us.

Okay, so it is more than offset by the volume?

Yes.

Jeff Kobylarz, Citigroup Asset Management.

I just wanted to understand a little bit better about that commercial activity in this third quarter. Is it across the board, all retailers do you think or maybe more promotional? How would you explain that?

It would be speculation. The bedding industry that I was making reference to when I made my comments in itself is very promotional. Promotions truly drive consumption of what is a deferrable purchase, and the point of origin of that promotional activity typically lies in the manufacturer. So as the manufacturers become more promotional, we would expect the retailers to accept and drive that promotional activity through their distribution channel. But at this point we don't know that. We will know a heck of a lot more a week from now after the Las Vegas market concludes.

Thank you. So it is nothing that has occurred this month of July it sounds like? You think the activity will kickoff after Las Vegas?

Yes. I think the origin in that will probably be back-to-school promotions, which tend to be middle of August forward.

Allen Zwickler, First Manhattan.

You did not think you were going to get away that easy did you? I came in late, so if you have answered this, just please tell me and I will move on. Could you just discuss a little bit about what is going on in China generally in terms of your business and how that is building up overall?

Karl, do you want to take that one?

The activities in China tend to at this point still be centered around residential and some automotive supply businesses. There will continue, as we said in the past, there will be increased activity into some of the other areas of the Company, specifically fixtures and displays and aluminum.

But going back to residential, we are continuing to see increased volumes but probably at a decreasing growth rate.

Okay. And secondly, just in terms of the Fixture and Display business, just an update in terms of the customer list, what types of products are you seeing or not seeing that you would have been expecting? I'm just trying to get a flavor for where the business is going, whether it is the retailers that are not updating, whether it is the actual companies that, you know, new product introductions -- do you know what I'm saying? I'm just trying to get a read as to what is driving that business these days as you see it.

This is Dave Haffner. I would say that the big box and discount retailers are more forthcoming with their expansion plans, their change of product mix, their aggressiveness and spending. The more traditional retailers are more withdrawn. The specialty stores are even more so withdrawn. The point of purchase is a mixed bag. Beverage is starting to increase significantly, and as we get towards the holiday seasons, that will improve. I wish I could give you a more specific and bifurcated or separated answer to your question, but it is really a mixed bag depending upon the retail space that is involved.

This is Felix. I do think we're having this happen to us because the retail environment is in a little bit of a disarray. Some consolidation in other places. We're having probably some upset. You take products whether it could be cosmetics, whether it could be jeans or whether it could be something else that drive some things or, as Dave mentioned, about some point-of-purchase, people doing that.

There probably has not been as much promotional dollars spent there as we were seeing three and four and five years ago in those respective categories. So that probably has been a little bit of a tweak that just like the softgoods retailers, the smaller retailers and etc.

But I think we are seeing more strip malls, we are seeing more of the major discounters, as Dave is talking about now, that we are seeing that redeployment of that that is starting and hopefully some of the product brands are going to wind up and have to spend more dollars also, which certainly could be helpful to us.

I guess one other area that I would mention is drug stores or medical environments. We are seeing significant activity in those types of environments. I don't know if that just a demographic thing or what have you, but we are seeing more positive activity in drugstore environments.

And part of that comes from the standpoint that there is so many other of the used to be over-the-counter drug that now there have got to be behind the counter drugs. So this is causing a reshuffle or a relook at that entire category, which is going to be good for us.

And if I could sneak one more in in the spirit of this call, is the fact that you're buying more shares I think that is very positive. But let's say you were to go and start to acquire some companies. Would that potentially lessen your appetite in general? Just so that I understand what the mix is of repurchasing versus keeping -- buying when things are available?

Well, as we tried to define in September of last year, that the cash we are going to generate plus over a three-year period or so of moving that leverage back up into that lower end of our range, we were going to balance that between obviously growing the business, acquisitions, dividends and stock repurchases, etc. And if we hit a period to where that we felt like that there were a number of good acquisitions that could provide long-term shareholder growth, yes, we would reduce share repurchases and make those acquisitions.

But we are going to continually rate that -- most things of generating that cash is going to be increasing the leverage and obviously generating the cash from the operations. So it is going to kind of be of a mixed deal, but we are going to sure want to grow this Company as one of our first criteria, and we will utilize the cash to buy the stock back with what we have got left over.

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

No, we will just say thank you, and we will look forward to speaking to you again next quarter.

This concludes the Leggett & Platt second-quarter conference call. Thank you for your participation. You may now disconnect.