禮恩派 (LEG) 2006 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Leggett & Platt second-quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (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'm David DeSonier, the Vice President of Investor Relations. With me today are the following -- Felix Wright, who is Leggett's Chairman of the Board; Dave Haffner, who is our CEO and President; Karl Glassman, the Chief Operating Officer; Matt Flanigan, our CFO; and Susan McCoy, who is Director of Investor Relations.

The agenda for our call this morning is as follows. Felix will make a few brief comments regarding the recent management transition. Dave Haffner will start with a summary of the major statements we made in yesterday's press release. Then we will add some further comments regarding major strategic initiatives. Karl Glassman will discuss trends in our various markets. Dave will then address our outlook for the third quarter and the full-year 2006. Finally, the group will try to answer any questions you might have.

This conference is being recorded for Leggett & Platt and is copyrighted material. This call may not be transcribed, recorded, or 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 statements.

For a summary of these risks factors and additional information, please refer to yesterday's press release and the section in our 10-K entitled Forward-looking Statements. I will now turn call over to Felix Wright.

Thank you, Dave, and good morning; and thank you for taking time to participate in our call. I want to take a minute to review our recent management transitions.

At the May Board meeting, we took the next step in a management succession plan that has been in place for quite some time. Dave Haffner was elected CEO and continues as President of the Company. He has been with Leggett for 22 years and is a man of many talents and abilities. Dave has had a number of varied responsibilities which have prepared him for the job. He has served as a director since 1995, Chief Operating Officer since 1999, and President since 2002.

The Board also elected Karl Glassman to be our Chief Operating Officer. Karl is also a man of many talents and abilities. Karl joined Leggett in 1982 and actually grew up as part of a home furnishings family business in Los Angeles. Karl has served in numerous positions of growing responsibility. Since 1999, he has served as President of our Residential Furnishings segment, which is our largest segment and just under half of the Company's business. He has served as a director and Executive Vice President of the Company since 2002.

Dave and Karl are a great complement to each other and will make our Company even more successful in the future. As for me, I plan to be an active employee Chairman of the Board and do whatever is necessary to assist Dave and the management team in accomplishing their objectives. With these comments, I am going to turn the call over to Dave Haffner.

Thank you, Felix, and good morning, everyone. As we reported yesterday, we set a quarterly record for sales and earnings per share in the second quarter. Earnings per share reflect $0.03 of restructuring-related expenses and a $0.06 tax benefit from the write-off of the tax basis of an acquired company's stock.

The restructuring is nearly complete, and we are ramping up volume that was transferred from the closed facilities to our remaining operations. As those efforts progress in the last past half of this year, we will begin to realize a larger portion of the expected annual benefit.

Margins improved in three of our five segments, with significant gains in commercial and aluminum. In May, we increased the quarterly dividend to $0.17 per share. As planned, cash was used in the quarter to fund internal growth, make acquisitions, buy our stock, and pay dividends to the shareholders.

Overall demand is relatively stable, with strength in certain markets and softness in others. We remain optimistic about the full year, but continue to monitor high energy prices and consumer confidence levels, since these factors impact consumer spending on products that contain our components.

Steel costs have increased in recent months and are expected to be higher in the third quarter. We are implementing price increases in certain businesses to recover some of those higher costs. Other raw material costs have also increased this year, but in most cases we have passed these costs along to our customers.

Long-term profitable growth remains our top priority. Within the last year, we have reemphasized product development and launched a companywide initiative that deals with the way we conceive and develop new products. We are expediting these innovation efforts throughout the corporation in close conjunction with existing and prospective customers, to ensure a stream of new ideas and products.

As a part of this strategic emphasis, we are strengthening our development staff. We're very happy to announce that in June we hired Vincent Lyons to fill the new position of Vice President of Technology and Development and head up this product development effort. Vincent brings a wealth of engineering and technical expertise to the Company. His background includes a B.S. in mechanical engineering from Southern University, a master's in mechanical engineering from Stanford, and a subsequent MBA, and extensive experience in the automotive and appliance industries, among other accomplishments.

As a further step in this strategic emphasis on product development, we have broken ground on a new technology facility here in Carthage. This facility will be completed by year-end.

Acquisitions will continue to be an important part of our growth strategy, and future transactions will likely be larger than our historical average. We are investigating ways to streamline our M&A process of defining targets, screening for probability of success, and fine-tuning our enterprise valuation model. We think these improvements will help us with the increasing demand for more and larger deals.

Another key priority is to achieve our stated margin and return targets. The three main drivers of accomplishing these targets are improved demand in certain of our markets, realizing the expected benefits from the restructuring, and finding ways to drive down costs through purchasing initiatives, continuous improvement, lean manufacturing, and better asset utilization.

We expect higher margins this year in four of our five segments as a result of operational improvements and lower restructuring costs. Though margins are still below targeted levels, we are progressing towards our goals.

Many of you know that we pride ourselves on our commitment to continuous improvement and lean manufacturing. While we have done a good job in the past, we're stepping up our priority on manufacturing optimization, by adding technical engineering staff that will assist every segment in finding more and better ways to increase plant efficiencies and reduce costs. Now, I will turn the call over to Karl Glassman.

Thank you, Dave. Good morning. Before I comment on segment performance, I would like to mention two recent promotions at the level of Segment President. During this past quarter, Paul Hauser was promoted to President of the Residential Furnishings Segment, succeeding me in that position. He has been with Leggett since 1980 and has headed the Company's bedding group since 1999. Paul is an extremely competent and seasoned sales and operating executive who has my full support and confidence. All three major Residential groups, bedding components, home furniture, and fabric, foam, and fiber, will report to Paul.

Dennis Park, a 27-year Leggett veteran who previously oversaw the home furniture and consumer products group, was promoted to President of the Commercial Fixturing and Components Segment. He succeeds Dave Haffner in that role. Dennis's strong sales and marketing skills, augmented with extensive operational experience, provide him with an excellent background with which to take on this responsibility and drive the business to a new level.

Bob Griffin, who continues to head the fixtures and display group, and Russ Fugate, who continues to oversee the office furniture components and plastic businesses, will both report to Dennis. In addition, Dennis will continue to oversee our consumer products business.

In the Residential Furnishings Segment, once again demand trends were mixed in the quarter. We saw continued unit growth in upholstered furniture components; however, bedding unit volume declined in the mid single digits. Significant inflation in chemical cost over the past year led to higher sales in our foam operations.

Our newly formed geo components business is growing through both geographic and product line expansion and continues to perform very well. The product development initiative that Dave discussed is critical to future growth in this segment. We're currently working with many customers on new product designs.

On last quarter's conference call, we mentioned a new innerspring design that will enable our customers to reduce the foam content in a mattress and therefore lower their cost. This is just one example of the development efforts that are currently underway.

Segment EBIT margins improved 130 basis points during the quarter despite the impact of restructuring-related cost.

In Commercial Fixturing and Components, we were especially pleased with the margin improvement. Though still not at targeted levels, we attained the second-best quarter margins in six years.

Our office furniture components business continues to perform well, posting strong volume gains in the second quarter. Market demand in this business has steadily improved since late 2003.

Volume in our fixtures and displays business is relatively stable in comparison with last year's volume. We believe our fixtures and displays business represents an excellent strategic opportunity for the Company and are encouraged by recent improvements in operating performance. We are well positioned with a broad base of customers and see opportunities to grow this business in new markets.

Although our near-term focus is on accomplishing margin improvements, we continue to consider attractive opportunities for growth.

In Aluminum Products segment, we have made significant operational progress over the past year, with performance improving at several locations. Our second-quarter earnings and margins reflect this progress. Margins exceeded 11% for the quarter despite the pass-through of raw material inflation and startup costs associated with our new die cast facility.

We continue to focus on deverticalization as a primary growth strategy. In addition to the program with Briggs & Stratton that we have discussed in prior quarters, we are working with other customers on similar projects. We were recently awarded a program with Black & Decker for some of the components they previously manufactured for themselves. We are installing equipment in our existing Saltillo, Mexico, operations to manufacture these parts. This new program should be ramped up by the end of this year.

In Industrial Materials, sales declined in the quarter as a result of lower volume and selling prices versus a year ago. Volume in our wire and tubing operations decreased reflecting softness in the bedding and U.S. automotive industries. Steel costs began to increase in the second quarter and are expected to be higher in the third quarter. We are implementing price increases to pass along some of these higher costs.

When we forecasted the year, we expected lower margins in this segment. For the past two years, margins have been above our long-range targeted levels, mainly due to higher scrap-to-rod market spread. In the second quarter, the spread was lower than a year ago, and this impacted our margins as anticipated. Second-quarter margins were also impacted by lower sales and new equipment startup expenses.

In Specialized Products, we posted organic growth despite some market challenges. Automotive volume in the second quarter increased slightly versus the same quarter last year. Strength in Asia has helped offset market weakness in North America, particularly in larger vehicles that contain more seats with higher-end features.

Machinery volume was fairly stable in comparison with last year, but our backlog has improved; and we expect increased demand in coming quarters.

Our commercial vehicle products group is experiencing temporary market softness for commercial truck equipment and van interiors. We continue to be satisfied with the integration and performance of America's Body Company, the commercial vehicle upfitting business that we acquired late in 2005.

Geographic service expansion is one of the major growth opportunities of our commercial vehicle business. We are currently starting up a facility in Texas that will enable us to better serve this large market.

Lower segment margins in the quarter primarily reflect restructuring charges and the impact from last year's acquisition of ABC. We generally expect acquisitions to be earnings neutral in the first year. ABC should outperform this typical expectation and contribute slightly to earnings. However, with annual sales of approximately $150 million, and expected margins lower than the segment average, this business will cause a modest dilution of segment margins. We are expecting improvements in the coming quarters, however, and should end the year with segment margins above those reported last year.

With those comments, I will now pass the call back to Dave.

Thank you, Karl. We remain optimistic about 2006 and should post record sales and earnings this year. We raised the lower end of our full-year estimate and now expect earnings of $1.55 to $1.75 per share on total sales growth of approximately 5%.

Full-year earnings growth should primarily be influenced by sales growth, the level of cost structure improvements attained from our restructuring efforts, and our ability to recover higher raw material cost. Restructuring and consolidation activity is expected to eventually increase annual earnings by $0.10 to $0.12 per share. We expect to realize about half of this benefit in 2006.

We also expect a modest amount of income in the last half of the year from nonrecurring items including the restructuring-related sales of buildings, real estate, and equipment.

For the third quarter, we anticipate earnings of $0.42 to $0.47 per share on total sales growth of about 5%. We expect about $0.01 of restructuring cost in the quarter.

Profitable growth for both organic and acquisition will continue to be our top priority for the use of cash. We also plan to continue increasing our dividend and use excess cash to repurchase shares. Our use of cash in 2006 will be consistent with these priorities.

We expect to spend approximately $175 million for CapEx. Dividends will require about $125 million. We currently expect to spend about $250 million in 2006 for a combination of acquisitions and share repurchases.

Cash used for acquisitions will vary depending on the timing of the opportunities. Share repurchases will be lower than in 2005, in part because we do not anticipate as large an increase in leverage.

With those overall comments, I will turn the call back to Dave DeSonier.

That concludes our prepared remarks. We appreciate your attention, and we will be glad to answer your questions. In order to allow everyone an opportunity to participate, we again request that you ask your single best question and then voluntarily yield to the next participant. If you have additional questions, please re-enter the queue, and we will try to answer all the questions you have. Bridget, we're ready to begin the Q&A part of the call.

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

This is [Adam]. A couple of questions, David. What is your proposed response to how you're going to reduce DSOs?

How we're going to reduce Days Outstanding?

Yes, Days Sales Outstanding, how you plan to reduce those. Obviously it's been a very challenging year so far. How do you plan to reduce those for the remainder of this year and into next year?

Yes, that's a good question. It is certainly an elemental part of our working capital management initiative that we have within the Company. DSO has expanded somewhat this past quarter.

It is one of those things that you have to do on an account by account basis. We clearly negotiate different terms with different people. Whenever we see an expansion of days outstanding, then we work directly through our salespeople and through our credit department to get those payments made in a more timely basis.

I will say it is something that each and every one of the operating segments and groups are tuned into, because of this working capital management. It is also somewhat seasonal. But we anticipate that we will see our overall Days Outstanding contract somewhat as we get into the back half of the year.

This is Matt. I would also just add that at the pegged point in time of 6/30, there were some timing issues that in fact were taking place. If you had the balance sheet reflecting literally July 15, you would have seen a noticeable pickup in improved DSO, just due to timing. Simply the receipt of payments coming in.

I guess what I mean by that question, [and] expand on it, how are you guys improving the overall buying experience for your customers or your overall selling process to help your customers now configure your products more efficiently? Is it making it a more seamless partnership between yourself and all your customers?

We constantly work with our customers in terms of product development, helping them market their product, pricing efficiency, redesign of existing product. But DSO is not a tool that we historically use to help that process in terms of relationship.

Okay, thank you very much.

Budd Bugatch of Raymond James.

Can you lead me through kind of a progression in Specialized Products? You said you are going to end the year with up margins year-over-year. But I don't think that is a particularly challenging feat, since I think last year the overall margins in the segment were like 4.9%.

When are you going to get -- how soon can you get close to your target of 10 to 11? What kind of a progression should we see in third and fourth quarter?

This is Dave. Part of the margin compression that we are seeing over in Specialized right now has to do with some learning curve, some startup, as well as some timing on machinery sales. Our order book on machinery sales is very good right now. For the back half of the year, we should expect to see, or we will see, improved margins compared to where they are in this recently posted quarter.

The more strategic part of your question is, when can we expect to see those stated targeted margins? We believe that some time next year, once we get ABC fully assimilated into that part of our business, we will be able to approach or meet those targeted margins.

The inclusion of ABC or [CVP] into that the segment doesn't denigrate that overall target?

Yes, Budd, it does; and reading your summary this morning was a point I made to some of the other guys. The margins that ABC has or CVP have are such that they will modestly compress the overall segment margins.

And that is not new news. We knew that when we made that acquisition. As I read your commentary, I realized that that was something that we may not have articulated as well as we should have.

You want to put a number on that, David? What do you think it goes to? What is a realistic target? What do you think the year segment margins will end up?

(multiple speakers) About 6; that includes the restructuring cost in there.

[See], Budd, there were significant restructuring costs as you noted in the quarter.

Yes, $3.2 million, right, in the quarter?

Right.

About 6.5 excluding the restructuring this year, Budd, based on our current forecast.

Okay, thank you, Susan.

Joel Havard of BB&T.

I head another voice talking, and I thought that doesn't sound like a Joel Havard in the background. Do I read this right that there were really no acquisitions in Q2?

The second part of the question, DeSonier, is if you could elaborate, please, on the idea of looking for bigger ones? Is there now sort of a floor below which you don't care about doing, quote, tuck-ins any more? Or is this looking at sort of new territories? Is there a new definition that you could assign to one of the existing segments or new segments entirely? I will let you go where you want to with that.

Okay, you want to talk about sponge first, Karl? And then I will take the last part of it.

Joel, there was a large acquisition for us in early April that we notated in our first-quarter press release and conference call. Sounds a little funny, but it was a second-quarter acquisition.

As regards future acquisitions and capability and capacity and focus, Dave, why don't you --?

Yes, mathematically, it becomes obvious that we need to do larger acquisitions as we go forward. Some of the targets that we have right now that are on the screen or in-process are larger targets, too.

It is something that we realize and are excited about, the possibility of getting bigger pieces of growth through acquisition of larger companies. Many times those larger companies are very well managed; they are reasonably stable in their development of cash flow and profitability.

We also know that we may have to modify our evaluation methodology somewhat. That was what I referred to earlier in my commentary.

As a result of some initiatives that we have done through the M&A department as well as interacting with each of the segment heads, we are identifying some larger targets. Some of the segments, Joel, have a better probability of making acquisitions than others, because of their market share, et cetera.

But are we unwilling, now, to buy the little ones and tuck them in? Absolutely that is not the case. If there is a good small acquisition. If it is a $10 million or a $15 million deal and it is a good fit and it's got a high probability of performance, meeting our performance expectations, and can easily be tucked in, in a timely way, we will continue to pursue those.

It is just that we want to ratchet up and broaden the scope of the acquisition target range.

All right, Dave, and just to make sure I understand, you are still thinking in ways -- I mean, geotextiles I thought was a little bit of a stepout, going back a year or so ago, although under the umbrella of sort of nonwoven.

Yes, that was the tie, and it continues to be a very, very exciting growth opportunity for us. Both from an acquisition perspective but also, Joel, in that particular case, it is relatively -- I don't want to say easy, but it's relatively straightforward to greenfield operations.

Because of the variable cost structure of that business, if for some reason we greenfield an operation and it doesn't meet our expectation, we can monetize it without having any significant long-term costs.

So we are very excited about that. I don't want to get in front of Karl here, but he and I and Matt are all three on the Hanes board, and we continue to be very excited about what those boys and girls have going over there.

Lastly, when you talk about looking at valuations differently, are you seeing that the market is getting more expensive, or there's some other interpretation of that?

Yes, I probably should have been more direct, Joel. There is a lot of money out there. Obviously, we like to buy acquisitions at the lowest practical cost for our shareholders. Every dollar we don't spend has an infinite return, is the thing I like to say.

On the other hand, we know that in order to compete with some of the financial buyers and as well some of the strategic competitors for those targets, we may have to consider the possibility of monetizing some of the synergies that we normally would not have done.

So we don't want to get out of the hunt here, and as a result of that we will continue to negotiate the best practical price on every one of the acquisitions. But we may have to look at multiples of EBITDA a little bit differently or multiples of EBIT a little bit differently than we have in the past.

Okay, thanks. Good luck.

Keith Hughes of Robinson Humphrey.

I wanted to ask a question on the commercial division. It had some nice margins here in the quarter. If we look specifically at store fixtures, was that a big driver here? Or was it more coming from the office furniture components?

It was a significant driver, Keith. But let me address office first. Office continues to perform admirably. We have seen continued buoyancy in the demand; and our capacity utilization has stayed relatively high. So they are doing well.

But for sure, store fixtures has made a significant, very positive -- and I know some of you must be saying, well, it's about time; I know we are saying that too. But it made a significant turn for the positive.

As you know, we're hoping and anticipating that the third quarter, which is generally their high-water mark will also be a repeat. But it's a combination of things. But the largest impact on this improvement is in fixtures, store fixtures.

In seasonally strong quarters, upper single digit margins, is that something we should see out of the segment?

Yes.

All right. Thank you.

Jay McCanless of Avondale Partners.

First question was on Industrial. I believe you said in your commentary that the scrap-to-rod spread came down this quarter versus last year. Is that correct?

That's correct.

That's right.

What do you expect the trend to be for the rest of the year?

It certainly narrowed, as I said, in the quarter, and we would expect that to be ongoing. That scrap, right now -- as you know, Jay, scrap is priced every month; and it looks like in the out months is relatively flat. May see a slight widening from second-quarter levels, but not to the levels that we experienced last year.

Great. Then kind of a more general question, seems like you all are getting a mixed picture from the automotive industry. Could you all talk a little bit more about what you're seeing maybe in each segment, as far as how well the automotive industry is doing and whether they're going to continue to be a big customer for you guys?

It continues to be an area of focus. As you know, our participation is in Specialized Products that are not so much commodities. We don't get [beat] around product development is the absolute lifeblood of that business from our element of participation.

We are seeing a shift -- that we do a good job of selling the transplants in this country. We also have a strong position in Europe and Asia.

The exposure, right now to the domestic makers is more of an issue. The domestic makers specialize in large vehicles and the SUVs. We're seeing the consumer downsize vehicles because of gas prices. There is a lot of functionality in those large SUVs in terms of our content. So that is where we are seeing some softness.

But we are picking it up, maybe not on the same relative basis, but we are picking that business back up in the Asian markets, where we are seeing pretty significant growth.

Okay, great. Thank you.

Shawn Harrison of Longbow Research.

First question just has to do with a modeling question. The tax rate, what are you expecting for the back half of this year?

For the third and fourth quarter, we are utilizing 32.7% as our estimate. That would put the full-year rate at 30.7% once you weave in the first and second-quarter actual rates.

My second question has to deal with just general demand in bedding. Maybe what are you seeing right now in terms of unit volume trends as you head into the back half of the year?

Then maybe dovetailing into that would be if bedding demand continues to be weak, does that mean that further restructuring could be on the horizon? How long would you wait and see before you would make that decision?

Good question. I promised myself I wouldn't say this, but I am going to do it anyway. Bedding demand in the last three or four weeks has been positive. We have run three positive weeks of the last four, which is a trend, a change in the trend of what we experienced in the second quarter.

The second quarter, May was really a challenge. We saw some strength around Memorial Day that did not carry through. We have seen some residual benefit from the July 4th selling season, and we are moving into the historically strong season, and believe that -- and are seeing -- significant more promotional activity in the marketplace, which drives demand.

If the retailer can get the consumer in the store, they are converting that consumer at this point. So we're optimistic.

As regards -- and I will also say you should not let us off the hook, we are up some against some pretty relatively easy comps. I do not see restructuring in that business going forward. We have shrunk our manufacturing footprint. Our machine level of productivity is right where we need it. We just need a little bit of volume, but I do not expect restructuring in the U.S. Spring operations.

We constantly look at each facility and tweak size and distribution facilities based on where customers are located and how they have consolidated. But there will -- we just don't foresee any significant restructuring in U.S. [frame].

What about on the Fixturing side? Demand kind of looks flattish right now, as you said. Does that kind of fit in with what you had been forecasting so far this year?

Yes, what has happened in Fixturing is we have right-sized our business for the demand that exists today and have sized our business based on today's demand into the future.

We are more optimistic than that and believe that we are continuing to work on new projects. The retail consolidation of several months ago is starting to materialize in more business.

We should have a third quarter because of seasonal growth. But we are right-sized there, but our models show a constant level of demand.

All right, thank you.

Laura Champine of Morgan Keegan.

In your guidance, which is GAAP, how much do you contemplate, if anything, in terms of special gains from sales of equipment, real estate, or businesses related to the restructuring?

This is Matt. As you well know, that is very difficult to predict. We would estimate there is a good chance between now and the end of the year anything from a penny to four or five pennies would be possible.

As you might imagine, we have a number of projects, literally over a dozen that we are working on. The timing of when those might happen is very difficult to predict.

But just as a frame of reference, that would be something we would expect to at least be able to pull together something between a penny to as much as $0.04 to $0.05 I would guess.

But it could be -- we could flop over into next year; and we just don't know for sure. But we are working hard on it; no doubt about that.

So Matt, that guidance range includes the possibility of a penny to a nickel in gains from the sales of things you are divesting?

Yes, it does.

I am not even going to pretend this is a follow on; but can we get unit growth in each of your segments? You have made a number of comments about product categories, but if we could just get overall volume changes by segment in Q2, that would be great.

Just unit growth, Laura?

Yes, sir.

Okay, these are approximate. Residential, roughly negative 2; and this is just unit growth. Commercial positive 2; Aluminum roughly flat; Industrial negative 4; and Specialized up about 3.5.

Great, thank you.

Margaret Whelan of UBS.

I just wanted to make sure I congratulate you on the double-digit margin in aluminum.

Thank you, Margaret.

First time in a while. My question, I had two; one of them has already been answered. But trying to get a sense, you gave us a lot of details already on your business overall in the segments. But just your kind of outlook for the next six months, your confidence in the earnings [outlook], and what the biggest risks are. Because it seems like we are getting a lot of mixed signals about the economy right now. And just kind of your costs and your operating leverage relative to the potential (inaudible).

This is Dave, I will take the first stab at that. We have to continue to have that demand, and I know it goes without saying. But if we were to see any significant decline in current demand -- the mix is okay -- but if demand weakens, that would be a significant risk.

We have got good leverage. This restructuring, I don't want to sound vain or coy, but I am very, very pleased with what the operating guys have been able to do with the restructuring efforts. The incremental leverage that it provides the Company is real and significant, and so we are very excited about what that brings to the party.

But we have to continue to have that demand for product. We have to have product going through those plants. Karl, do you have anything to add to that?

No.

I guess, can you give us a sense maybe for your backlogs or something for (inaudible) business?

We don't really deal with backlogs in our businesses to any great degree, other than on the commercial side and machinery, as Dave already addressed. We feel good about the fixture and display load, let's call it, for the third quarter. But most of our demand is transactional.

Yes.

One thing that might -- this really is not the answer to the specific question. But looking at our capacity utilizations as they existed at the end of the second quarter, and then thinking about what our third-quarter forecast is, and I don't have those two documents side-by-side here, but we have seen some really significant or nice improvement in the capacity utilization in fixture and displays. Again, that is right in the sweet spot of the restructuring strategy.

Same with Office Components. Looking down the list here, we have seen stable to modest declines in the bedding group. Home furniture components off just a little bit. Consumer products about where it was.

Sterling steel is down, and part of that is -- we alluded to the fact that their demand for -- the Industrial Materials segment wire demand is down, consistent with the intercompany transfer price. We also had some machinery implementation and startup challenges at Sterling. We have got virtually those behind us now, so it was down somewhat.

Automotive was about flat with where it was last quarter. Karl alluded to the fact that we have done very well in the Asian initiatives in automotive, which have been really a little more than offsetting some of the North American automotive weakness.

So total Specialized Products in general is about flat. I realize that is not the answer to your question.

Well, it gives us a sense for the utilization (inaudible).

And our forecast for next quarter is somewhat of a mixed bag, but we continue to see some improvement in some of those areas that we have been disappointed in the past.

Now the one thing I will mention, and it is just a reminder that our aluminum segment is seasonal. So while it is not impossible necessarily to see a double digit, it would be impractical I think to assume that the third quarter would be double digit.

Okay. Can I just slip in an additional question, just in terms of your expectation for the rate of growth in (technical difficulty)?

I am sorry, Margaret, you're breaking up just a little bit.

The question just over the next 18 months how much do you think upholstery imports, both components and finished goods, will accelerate? (multiple speakers)

We are continuing to see acceleration. We believe today that rate is in the 19, 20%. Over the next 18 months, that close in, probably would not see it move more than a couple points at max.

Get us out four or five years, and we still are forecasting at a 25% range. So we have certainly seen some acceleration in cut and sew. But in terms of upholstery itself, we don't see a significant shift at this point and going forward.

We are actually seeing some increased demand of U.S. made mechanisms and saw some strength there in the second quarter.

Okay, thank you very much. Have a good weekend.

John Baugh of Stifel, Nicolaus.

Most questions have been answered, but quickly on the commercial side on the revenue front, 1% same location. I assume office was up pretty good, but it's a smaller piece of the mix. So again just to be clear, store fixtures volume was relatively flat year-over-year? Or is there some segment in there that was off that I am missing?

Plastics was off a bit, John, although that still is a relatively small piece of that segment. So office was up a bit, not a lot, but up a bit. Store fixtures was up.

Storage products -- now I am giving you some unit information. Storage products, I think, was off slightly. And point-of-purchase was off slightly. That is the way it goes, John.

Okay, then briefly back on the Residential Furnishings side, you mentioned, I think, that it was down in the second quarter. Can you give me a sense of trend there? Did it decelerate as the quarter went on? Give us a picture in July.

On the bedding side, as I said, we actually saw some improvement on a comp basis as the quarter went on and continue to see that at this point.

Furniture itself went through its normal seasonal slowdown, with the trough being (technical difficulty) working into those early July holidays. We are seeing recovery post those facility shutdowns.

The furniture industry tends to shut over the 4th of July; the bedding industry doesn't, so it causes a little bit of a different dynamic. But we continue to see relative strength.

Great, thank you.

(OPERATOR INSTRUCTIONS) Allen Zwickler of First Manhattan.

First and foremost, I want to congratulate Felix on a great career.

Thanks, Allen, very much.

Amen, Allen.

Now to the more important stuff. If we were playing baseball, guys, what inning would you say you were in, in the total restructuring of Leggett & Platt at this point?

I would say probably the eighth inning, and we are ahead.

When we come out of whatever it is that we are in, which is kind of hard to figure out -- for me anyways, and I'm from New York -- what do you think the Company is going to look like on a cost basis?

Do you feel now that you're in the eighth inning if kind of the economy just grows a little bit -- and again I am not trying to be an economist, but just trying to understand -- do you foresee that you're kind of got this Company at the right level relative to sort of a slow-growing U.S. and maybe a little faster international scenario? Would that be a good categorization of what is going on now?

This is Dave. I would say yes, in a one-word answer to that question. Especially with the fact that you said in a slow-growing economy, I would say absolutely. We have got it properly sized.

A good bit of the consolidation plan took into consideration, though, what we were going to need not this just this year or two years from now, but five and seven years from now. As our demand grows, what is the best way to increase our productive capacity beyond what it currently is with the restructuring?

We did that in an intelligent way. So what I am getting to is the leverage that we enjoy now on incremental volume is significant. And the cost to add incremental capacity going forward for some period of time will be reasonable. Therefore, we should not see a significant reduction in that leverage.

That is what I was getting at, the CapEx versus the depreciation. Meaning if one were to forecast out the next few years, is there any reason to believe that there's going to be any spikes in CapEx based on new products or new technology, just in general?

I would not say spikes. I mean, when you take a look at us spending a 170 or $180 million for CapEx in the current or near-term years. But that said, you should expect to see us spend a significant amount of money which would be expensed money on product development.

To the extent those new products require unique and special equipment, yes, we will capitalize that. But in my mind, I don't think you should expect to see our capital expenditure go appreciably above our depreciation and amortization.

Okay. The last question which you touched on a couple of times is just the bedding industry in this country. It seems like it is one of the industries that goes through at least five different owners per year. Where do you see that all now? I am going to just say the current owners. Is it somewhat stable? It is just kind of hard to follow.

You're right. I think you should expect some continued consolidation with the private equity groups coming in and taking a larger role. As you know, Sealy is now a public company. But you should see more private equity holder investment in the bedding industry and further consolidation in an attempt to attain manufacturing efficiency.

Well, what I am asking is, is the current group -- and again, I don't pretend to know who owns what anymore -- but is the current group of companies or owners doing more or less business with you than the prior group? You know what I am trying to say? I'm just trying to understand, when you talk about your bedding business, I don't know whether that is a function of the market or that is a function of that the customers are doing more or less with you. If you could clarify.

I do understand. Thank you. It is a function of the market. The change in ownership has in no case that I can think of cost us any market position at all. It actually has helped us in some respects in that we are dealing with a consolidated voice, as to historically a number of different licensees who were fragmented in their buying activities. So no, it has been a net positive for us from that perspective.

Thank you.

Okay, there are no further questions at this time. I would like to turn the call back over to you for closing remarks.

We will just say thank you, and we will talk to you again in another quarter.

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