禮恩派 (LEG) 2007 Q1 法說會逐字稿

Good morning. My name is Sheila and I will be your conference operator today. At this time I would like to welcome everyone to the Leggett & Platt first-quarter 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). David DeSonier, you may begin your conference.

Good morning and thank you for taking part in Leggett & Platt's first quarter conference call. I am David DeSonier, the Vice President of Investor Relations. With me today are the following, Dave Haffner our CEO and President, Karl Glassman the Chief Operating Officer, Felix Wright who is Leggett's Chairman of the Board, Matt Flanigan our CFO and Susan McCoy our Director of Investor Relations. The agenda for the call is as follows. David Haffner will start with a summary of the major statements we made in yesterday's press release and 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 second quarter and full year 2007 and finally the group will answer any questions you 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 & Platt'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 risk 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 the call over to Dave Haffner.

Thank you Dave. Good morning and thank you for participating in our call. Yesterday we reported first-quarter sales and earnings in line with guidance issued on January 25. Total sales for the quarter decreased 2% versus the first quarter of 2006. Organic sales were down 4% primarily reflecting lower unit volume. Acquisitions contributed 2% to first-quarter sales. Volume was weak during the quarter in most of the US home related, aluminum and retail markets that we serve. However, we saw strength in certain international markets as well as machinery and portions of commercial vehicle products.

We posted first-quarter earnings per share of $0.41 which included a $0.07 benefit from the gain on sale and operating results of the discontinued Prime Foam operations. We made progress on several key strategic initiatives during the quarter. In late March we completed the largest divestiture in our history with the sale of our Prime Foam operations. These operations produced commodity foam primarily used for cushioning by upholstered furniture and bedding manufacturers and have annual revenue of approximately $200 million. We retained our foam operations that manufacture carpet underlay. This divestiture is consistent with our previously stated intention to more critically manage our portfolio of businesses.

We will continually evaluate the strategy and competitive positions of our individual businesses and plan to participate only in markets in which we can be a market leader and generate an attractive cash flow return on investment. The sale of the Prime Foam operations reflects this portfolio approach. Although the business is performing well and has some opportunity for growth our market position is small. The product is a commodity and the business is not strategic to Leggett.

We acquired two businesses during the quarter which should add about $80 million to annual sales. The first, Gamber-Johnson is a designer and assembler of docking stations that mount computing and other electronic equipment inside vehicles. With annual revenues of about $30 million this business further diversifies the product offerings of our commercial vehicle products group in the Specialized Products segment and allows us to enter a new higher growth market.

The second acquisition, Nestaway, is a manufacturer of coated wire dishwasher racks and coated wire products for other industries. This business should add roughly $50 million of revenue to our Industrial Materials segment. Nestaway enables the Industrial Materials segment to move further downstream with our rod and wire and also presents Leggett with significant cross segment selling opportunities along with expanded manufacturing technology that can be shared across the Company.

In January we opened the doors to the Idea Center which is our new research and development facility in Carthage. As another sign of our renewed focus on the engineering and product development, we announced our new innovation strategy during the quarter. The new strategy WIN 70/30 will combine Leggett's broad and deep resources with intellectual knowledge to provide a more consistent stream of innovative product developments. WIN, an acronym for worldwide innovation network recognizes the fact that great ideas can come from anyone at anytime. The Company expects approximately 70% of its new innovations to come from within. The remaining 30% will come from external sources such as individual inventors, university research labs, small and large company collaborations, and partnerships.

One element of the network is a new innovation website where anyone can submit ideas to Leggett. To drive innovation across the Company we have also created an engineering Council that will evaluate innovation ideas and identify synergy opportunities across the Company. In addition our recently appointed business development executives are getting their footing and we are beginning to see the influence of their study and recommendations. We ended the quarter with working capital of 20.4% of annualized sales, a notable improvement from year-end levels when they were 21.4% of sales.

Our target for working capital is approximately 19% of annualized sales but this amount will vary from quarter to quarter with the seasonality of our businesses. We continue to generate strong cash flow and the balance sheet is in excellent shape. We ended the quarter with net debt at 27.2% of net capital. And with those comments I will turn the call over to Karl Glassman who will discuss the segments in more detail.

Thank you Dave, good morning. In the residential furnishing segment organic sales were down in the first quarter primarily due to soft demand in US residential markets. International demand for both bedding and upholstered furniture components was generally stronger. Segment EBIT and margins benefited in the quarter from the gain on a sale of our Prime Foam business. Operational improvements from past restructuring activities and the absence of last year's restructuring related costs also increased earnings versus the prior year, but these gains were partially offset by lower organic sales.

Product development is a plays a key role in improving margins while maintaining or increasing market share in the segment. New designs for both inner springs and box springs have recently been introduced and are being accepted very well by the market. We have also initiated market studies to better understand what consumers value in bedding and will use that information to help guide our development activities.

In Commercial Fixturing and Components organic sales declined in the first quarter on lower unit volumes primarily in the fixtures and displays business. Demand in office furniture components was also somewhat soft in the first quarter. Segment EBIT and margins decreased versus first quarter of last year due to lower sales but operational benefits from past restructuring and absence of last year's restructuring related expenses offset some of the sales impact.

Margin improvement remains our top focus in this segment and we expect progress in 2007 although incremental volume is needed in order to reach the segment's margin target, several other factors should also contribute and are within our control. We should continue to benefit from past restructuring activity. The wood plant upgrade we discussed last year is now complete and should contribute through labor savings and efficiency improvements. Purchasing, pricing and continuous improvement initiatives should also enhance margins. In addition we are addressing a few remaining performance issues.

In the Aluminum Products segment organic sales decreased in the first quarter due to lower demand in several markets including grills, small engines and motorcycles. These declines were partially offset by inflation and commodity prices. First-quarter earnings decreased primarily from lower volume, underutilized capacity and production inefficiencies at certain facilities; a major customer experienced a work stoppage during the quarter and this impacted three of our large operations. Margins were also negatively impacted by the pass-through of higher raw material costs with no incremental profit. We are intensely focused on the volume and efficiency issues.

Several programs will begin ramping up in the coming quarters including additional programs with Briggs & Stratton, Black & Decker, and Whirlpool. These should benefit volume. We are also reacting with cost reductions where we expect volume to remain weak.

In Industrial Materials sales were down in the first quarter primarily from continued weakness in the US bedding and automotive markets. This sales decrease led to lower segment earnings and margins during the quarter. Raw material inflation also impacted segment earnings and margins. In early March the cost of steel scrap increased significantly leading to higher rod costs. We have recently implemented price increases to pass through some of these higher costs.

In Specialized Products organic sales increased in the first quarter reflecting strong demand in a portion of our commercial vehicle products business, growth in Asian automotive and continued solid performance of our international machinery operations. EBIT and margins benefited during the quarter from higher sales and also from the absence of last year's restructuring costs.

With those comments I will turn the call back over to Dave.

Thank you Karl. As we announced in yesterday's press release we expect full-year sales to be approximately 2% higher than last year. Acquisitions should add about 2% to annual sales and organic sales are expected to be essentially flat. This forecast does not include the impact of future acquisitions and/or divestitures. This is typical or as is typical, we are currently evaluating several acquisitions that offer very good long-term potential for the Company. And will very likely complete some of those transactions in the coming quarters. In addition we will continue to review our businesses to ensure that their strategies and profitability still fit well in our portfolio.

Our strategic initiatives should ultimately help drive higher growth rates, but those initiatives are in relatively early stages and will take some time to make significant contribution. We expect full-year 2007 earnings to be $1.60 to $1.80 per share. The decrease versus our prior full-year guidance of $1.65 to $1.85 primarily reflects increased steel cost and expectations that the market softness we are experiencing in certain businesses may persist for longer this year than previously anticipated. The sale of Prime Foam had little effect on the guidance since the gain from the sale is essentially offset by the absence of previously expected operating earnings for this business.

As was the case with our previous estimate this full-year guidance includes an approximate $0.05 for nonrecurring benefits from asset sales and other items. For the second quarter we anticipate an approximate 1% sales increase versus the second quarter of 2006. Second-quarter earnings are expected to be $0.42 to $0.47 per share and include an estimated $0.05 per share for nonrecurring benefits.

Profitable growth, 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 2007 will be consistent with these priorities. During 2007 we expect to generate about $700 million of cash largely from operations but supplemented with proceeds of the Prime Foam sale and continued gradual increase in net debt to targeted levels. We expect to spend approximately $180 million for CapEx with about half related to internal growth and efficiency improving projects, and roughly half for maintenance capital. Dividends will require about $125 million. Remaining cash will be used for acquisitions and share repurchases combined with the amounts for each dependent on the timing of the opportunities.

And with those comments I will turn the call back to David DeSonier.

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

(OPERATOR INSTRUCTIONS).

Have we got any questions?

Yes, sir. John Baugh, Stifel Nicolaus.

Just curious in the commercial furnishings -- what are you seeing -- I think you alluded to the fact that units were down. What is your prognosis now for that business (inaudible)?

John, it's Karl. We expect growth this year; the units were down in part because as you will remember in our restructuring activities we flushed out some business that wasn't desirable to us. But with the visibility that we have we do expect growth; the majority of that growth will be in rollouts of major programs and more on the remodeling side then they would be in the new store portion of that business. But there is a lot of positive momentum there.

There is also some significant opportunity or uptick John in some brand programs that we are working on in Europe as well as Latin America. Those bolster what we are doing here in the United States.

And flipping over to the Residential Furnishings side for a moment, was there a disparity of performance between furniture and bedding? Was one worse than the other and how were the furnishings piece helped buy what you're doing in Asia?

The first quarter was a departure from our observation perspective was a departure from what we experienced in the last couple of years in that bedding was okay. It wasn't terribly strong but it wasn't weak; but furniture weakened in comparison. From a macro level as you witnessed at the High Point Furniture Market the consensus is that furniture business is down 10% to 15%. That would be the whole furniture universe, including wood and upholstery. We certainly aren't experiencing that in our numbers but from a macro standpoint it seems like furniture is softer than bedding.

As it relates to us specifically we continue to gain share in the motion side of the business which is where we have the largest play and there has been a shift in our business from domestic manufacturer to international. Most of that led by our moving our European business which have historically been shipped out of the United States to our Chinese operations as we continue to grow those Chinese capacities. But in terms of the penetration of the US market at the end of the year it was reported that upholstered furniture was in the 20% to 21%. We think that we are still running in that range so there is not a significant negative shift on our customers' part.

I might add to that, John, that if you subscribe to the theory that domestic business is down 10% to 15% year over year, our units in the United States are down mid-single-digit, but our units' increase in China is over 40%.

Thanks. I will defer to someone else.

Budd Bugatch, Raymond James.

Thank you, good morning. My question goes to the guidance for the year and what has to happen to make that happen with a negative 3.6% or 3.7% internal growth in the first quarter. I wonder how much new acquisition activity has to happen to get to your 2% acquisition growth for the year, and when do you see the internal growth turning? Do you see it worse in the second quarter overall? And do you see it turning positive, you got to see it turning positive at some point to get to the number.

Yes. Well Budd, first of all that 2% does not include any additional acquisitions. So if we make -- which I mentioned in the conference call text there -- so it is likely we will make additional acquisitions during the year but we have not included that in our guidance.

So that is all included -- that is just the flow-through of all the acquisitions that have been made?

Yes sir, yes sir.

And what about the internal growth? When do you see that turning positive and how will the first -- how will the second quarter in your view relate to the first?

In the third and fourth quarter is the answer to your question; in the back half of the year.

And the second quarter will be about --.

About flat.

Flat of internal growth? Or flat for the first quarter?

Flat internal growth. And Budd, I know you know this, I mean the forecasts are our best guesses. We revise those on a monthly basis. We are giving you the most contemporary information that we have right now.

Understood. Thank you very much.

Keith Hughes, SunTrust Robinson Humphrey.

You mentioned in the prepared comments on scrap steel going up, will you be raising price in both the furniture as well as the bedding business to offset that or what is the plans there?

Yes, Keith, we have announced increases to our customer base to pass through that significant updraft in scrap and rod and now what we are seeing is scrap moves to rod very, very quickly. Scrap moves to sheet on a slower basis but it comes in via scrap surcharges. So as scrap bounces on a month-to-month basis, that those input costs change. Tougher to predict on the sheet side than on the rod side, but yes, the answer is if we have announced increases.

Second quarter we have a bit of a lag where we experienced the scrap run-up at our steel mills and in the rod cost in March. Those increases won't be in play and fully effective until the first of June.

Yes, and some of the trade wire counts were effective with shipments April 2. Some of the furniture components were effective shipments May 15.

And just given how weak particularly in the furniture side of the business things are right now, how is that going to be received? How successful, how is it going to be able to get it through, I guess?

It is never received positively as you can well imagine. The backdrop of a soft macroeconomic situation makes it much more tough, but the magnitude of the increase we just have to get recovery. It was too much too fast; so will it be welcomed or has it been welcomed? Certainly not. Will it be accepted? Yes.

I think also it gives another bit of pressure on value engineering, value analysis, you know other methods of providing value at lower cost which we continue to have our engineers engaged with our customers on those types of initiatives.

Okay. Thank you. And just one follow-up, you had done some acquisitions sometime ago and I believe it was a landscape erosion control type business. Could you just give us any kind of quick update how that is going and specifically, what are your biggest products in that segment?

Keith, it's a tough first quarter. It seasonally it is as you can imagine a seasonal business, with the volatile weather that we have experienced that frankly the business didn't perform as well from a topline standpoint and we have growth issues, as we consolidate a number of acquisitions, some historic business and some greenfield on top of it. We are managing our way through that. We believe that the sales increases will help us dramatically. That is a business that you better do well in the second and third quarters and we have that expectation.

In terms of the largest products there is a variety. They would be erosion control would be the broadest category, but you would have silt fence which you would see running along highways, erosion control blankets. There is a number of different soil stabilization methodologies. It's a broad range. There would also be some seed and various chemicals. It is a broad suite of products and we continue to add products to that business.

Is that something you would expand out as part of what you were discussing in prepared comments on acquisitions and?

Yes.

All right. Thank you.

Laura Champine, Morgan Keegan.

Good morning. Could you just let me know how the -- I was a little surprised in your comments that the foam business was not considered strategic given that it sells in the two year core in markets in bedding and upholstery. Just as we think about your business units going forward, if you could express why that is not strategic and how you do think about what is and isn't in your various segments.

Okay. Well let me start and then Karl or Felix may want to comment. But one of the challenges we have had with that business over the years is that we are a very small player in a commodity market. We prefer to be a large player in less of a commodity market. And as a very small player we have essentially no leverage on some of the primary raw materials that go into that. And because of the commodity nature it is very challenging to maintain what we believe is a long-term, adequate return on investment. So certainly the industry that it goes into is terribly strategic to us and we will never give up the commitment to the industry. But that particular product we just were such a small non-leveraged player. Those are my comments. Karl or Felix.

The only thing I would add, Laura, I think Dave is exactly right but you are operating in an overproduced or overcapacity industry to where that there could be us and some others drop out and you still got more capacity than the industry can absorb. So for us to try to recapitalize through the entire country to service a customer base which Dave said we were very dedicated to, it did not make sense to make that kind of investments and be that kind of a player.

And Laura it truly is a change in our thought processes in that a number of years ago that we believed that we would look at our customer base and then try to look at every item they purchase and try to fill that need except for on decorative fabrics. And as times passed we found out that we did not really bring any value to that proposition and that it's very difficult to consolidate loads. Our customer base looks at each one of those as independent distinct commodities, that having all of those products in our bag became more of a negative than a positive.

The nice thing about this transaction or one of the good things about the transaction is that we truly believe that the new owners are going to be able to generate or extract more value long-term out of the assets that we sold them then we would, because of some of the products they make and the way they go to market. And we got a very fair price.

Just as my follow on, you know we know that you're looking at acquisitions. Are there also now that you have applied some of these perhaps new bogeys for what businesses are and aren't strategic, are there other potential divestitures that you see in your business lines?

Yes.

Anything of the size of this foam business?

There are some that may approximate that, yes.

Great. Thank you.

Susan Maklari, UBS.

Good morning.

Hi Susan.

Generally speaking it sounds like although the volumes are slowing the industrial end markets are holding up better than the consumer side of things. Can you give us some sense of maybe how the volumes are trending across the business?

To pull them each apart, in the residential side which I guess is an old habit that seems to be where I always start, that bedding was negative in the low-single-digits in the US; in the worldwide market it was positive in the 7% to 10% range. Furniture, where we spoke to, stronger internationally than domestically. Automotive flipping segments, you know industrial so tightly correlates to residential. Automotive North American was soft. You hear announcements of the Big Three, that their volumes off in the 15% to 18% range. We haven't quite experienced that because of our business with transplants. So North American automotive is probably off in the 10% range.

Europe was positive in the 3% to 5% range. Asia was significantly positive. So automotive is a better story than it may appear in the press. Commercial vehicle products, the fleet side of the business which would be -- it is I guess correlated to consumer spending, to a degree a little bit of industrial; that business was very, very good in the first quarter. On the dealer side of the business that business was, continues to be very soft and it probably is more tightly correlated to North American automotive spending than some of, than certainly on the fleet side of the business.

Aluminum was difficult. We experienced a tough quarter because of a year-on-year of comp where a year ago we had significant barbecue grill business. Today we have less business with charbroiled taking that business offshore. Hiccup with the work stoppage at Harley-Davidson. We expect that business, that business has recovered well but we had a three-week period where we experienced sales being softer to the tune of $3 to $4 million. That was a tough process for us. We had to lay off 325 of our employee partners spread between three locations. So that demand in aluminum was challenging. Industrial spending is negatively impacted aluminum. We expect some recovery near term but it was a tough quarter.

I might mention though that the Whirlpool business in that segment is on target. We are in full production on one of the programs. The second program will ramp up in late '07 and the third program for them will start in the first quarter of '08. So we have got some bright light on the horizon here.

The commercial we spoke to that demand. We expect some seasonally, the first quarter is always the toughest, but really a lot of positive things happening there but you are probably tired of hearing me say that. Office was soft in the first quarter. It's the first tough quarter we have experienced in office components in quite some time.

What about in terms of the Brigg's plant? Is there any update on the volumes there, how that is progressing?

Yes, Susan, we started to see some additional take from Brigg's in the third period and had forecasted that based on their manufacturing forecast to continue to pick up. The lawn and garden side of their business showed some early strength because of the early spring and slowed slightly, but we are continuing to bring more Brigg's business to us based on the original agreement. So things are trending positive albeit in a pretty tough market. That small engine market continues to be a challenge for not only Brigg's but the others that play in that field. That business is correlated to an expectation of the hurricane season which is a little bit of a challenge. The hurricane, initial hurricane forecasts were that we would experience a difficult hurricane season which will force those engine suppliers to build. Hard to comment on our expectation for hurricanes, but we expect that the business to pick up.

Okay. Thank you.

Shawn Harrison, Longbow Research.

Good morning everyone.

Hi Shawn.

Hi Shawn.

Just a quick clarification, first off. The prior guidance was excluding the $0.05 where we are looking now at $1.55 to $1.75 is excluding kind of one-time benefits, the full-year earnings?

Well, if you, yes, there is a nickel in there for nonrecurring items but there is also and I think most people would back out the $0.07 that came from disposing of the Prime Foam operation. So if you are looking at discontinuing ops it is $1.48 to $1.68.

I guess I am just trying to -- what was the prior guidance?

Oh. Prior guidance was if you back out again the nonrecurring, prior guidance which included Prime Foam, was about $1.60 to $1.80.

Okay. I just wanted to be sure on that point. My second question is somewhat multifaceted with margins. In regards to as you are looking at all of your businesses at this point in time, the margin targets you have set out there for the to reach on a normalized basis, do they seem attainable? And the reason I am asking that is you have got a rising raw material cost environment, you are looking to raise prices. There is the risk of de-contenting. Demand is still weaker than you would like. What does it take other than volume to get you there? Is volume the only answer? And then how does the option of looking to sell nonstrategic businesses have a role into reaching those margin targets?

Shawn we still feel good about our targets on a long-term basis. The headwinds that you made reference to were real in this current year. But as we analyzed the segments the divestitures help achieve those targets and will continue. Obviously compromise our growth targets slightly, but managing this for the long term they are the right strategic things to do. So we still feel comfortable with those targets.

We continue to hit our forecasted levels and regards the improvement of our -- that are a byproduct of our restructuring activities -- so we need a little bit of time for those benefits to continue to inure to us, but we still stand by those targets.

We continue to pick up some margin differentials Shawn from some continuous improvement, TBS type activities as well as some corporate purchasing activities. Those have not hit full stride yet, so we are continuing to see some improvement there. Just augmenting what Karl said and specifically to your question of dispositions, the answer is yes, mathematically if we dispose of something we will redeploy it. Our plan is to redeploy it into a higher growth, higher margin and maybe higher technology segment than what we dispose of.

Is further restructuring being considered at this point in time for some of the operations where utilization rates just aren't where you would like them to be?

Yes. Not nearly Shawn, not nearly to the extent that we did before. But because we have got you know 300 operations, there tends to always be an opportunity somewhere. Karl as chief operating officer should really address this, but the answer is yes. We have still got a few that we think make sense to either consolidate or pare back and in doing so we will enhance the margins.

There are four facilities that are currently under very critical review. We do not expect significant charges from any of those, but we have to get improvement in those facilities or they will no longer be part of the family.

Okay. And then just the last part of this question, we kind of touched on demand but getting back to an earlier question, demand looks like it is going to have to ramp significantly in the back half of the year. How much of that is orders that you have in hand versus just you working off of customer forecast? I am guessing -- what I'm trying to get to is the certainty of kind of the levels of demand you are seeing in the back half of the year.

Shawn because of the nature of our business there is very little orders in hand for future shipment. On the fixtures and display side would be the truly the only exception to that. But most of our business is done on a transactional basis based on forecast after a lot of consultation with our customers.

Okay. Thank you.

Thomas Claugus Graham Partners.

One thing I guess what I'm interested in is your international plans. Obviously if you saw the stock markets yesterday and just looked at what is going on like the demand shifted to the outside of the US. You guys still have a lot of assets here. I am a little bit confused when I read your K and what the strategy is. What is your international sales and what is your international manufacturing footprint look like? And what do you guys think you need to do going forward on that? As a percentage.

The percentage of sales outside of the United States in 2006 was 21%, Thomas. Now a good bit of that is located in Canada and Mexico, but we are starting to have a significant amount of business in Asia, China more specifically. That said our total investment in Asia right now is still under $250 million and the return on that investment is significantly higher than our corporate average, which means that we have placed several good small bets or investments. It appears that there are several other significant opportunities for us.

Obviously we have to take into consideration the likelihood of a rising RMB and transportation and logistics and all that, but we have been very, very pleased with our international activities. This past year has been one of significant improvement in our bedding and furniture operations in Europe as compared to past performance. So it would be reasonable to assume that our, that Leggett would grow its international portion at a greater rate than the domestic portion. But that is relatively easy to assume because of the overall size of the business here.

Thomas, this is Felix. One thing you asked about the assets that are here in the United States. We still have a very good customer base, both from the upholstered furniture side and also from the bedding side. And I was fortunate enough yesterday to attend part of a bedding conference in Dallas, that it does appear that the majority of the bedding in the opinion of the major bedding manufacturers are going to be manufactured in this country in finished form and etc. With the customer base that we have in upholstered furniture in this country that continue to assemble their products here, don't see a lot of pressure on assets or assets having to be written off that we have in our manufacturing here.

Are you there Thomas?

I appreciate it.

Sheila?

(OPERATOR INSTRUCTIONS).

Sheila, I think we are probably finished if there isn't anybody else there.

Joseph Tuite, Caveat Capital.

I have just got a big picture question here and concerning the next -- looking out the next 3 to 5 years and your target and reconciling those with past performance. And based on your guidance we are looking at probably 280 to $290 million in net earnings from continuing ops which are flat with 1999's earnings on revenue that is $1.6 billion higher. Now I know we had some economic issues in the early part of the decade but arguably the last three, four years the US economy has been in excellent condition. And a lot of it has been carried on the backs of consumer confidence and consumer spending. So I am just trying to understand if and we have had and Leggett has really been challenged over the last three to four years. We have had a couple of restructurings and I am just trying to understand if the economy really can't get any better regarding the US; how do we achieve this 10% EPS growth over the next three to five years if the economy was to worsen a bit?

It would be a challenge. It would be a significant challenge if the economy were to worsen. What we have done, Joe, we have asked everyone of the segment presidents to develop their margin targets based upon those primary things that drive value into their segments. Volume and capacity utilization of course are paramount in that but as well as purchase leverage, capacity utilization efficiency, continuous improvements etc. Those margins are not at our historical high water marks but our business portfolio has changed somewhat, too. So if for some reason the demand would pull back, we would have a challenge meeting those margins. We are anticipating relatively normal operating circumstances when we make those predictions.

And if you go back to 1999 to today in terms of where did all those sales come from, the bulk of that came from acquisition activity and inflation; not nearly as much as we would like from organic sales. Which is why you see such a renewed emphasis on innovation, product development to drive that organic sales formula much higher from this point going forward. That is a big part of the challenge and opportunity that we have got laying ahead of us.

Okay. Well, best of luck. Thanks.

Thanks.

Shawn Harrison, Longbow Research.

Two quickies. Tax rate guidance going forward.

31%.

Okay. Second would be just we talked about rising steel scrap costs, but any other raw material headwinds that we should be made aware of?

We continue to see a little bit of inflation in stainless and aluminum sheet, not nearly to the magnitude that we have experienced in the past. The petrochemical related costs seem to be relatively stable right now, but you know it depends on what happens with a barrel of oil. But steel is certainly the biggest area of concern at this point.

Thank you very much.

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

We will just say thank you and we will be talking to you again next quarter.

This concludes today's conference call. You may now disconnect.