禮恩派 (LEG) 2007 Q2 法說會逐字稿

Welcome to the Leggett & Platt second quarter 2007 earnings conference call. During today's presentation all parties will be in a listen-only mode. (OPERATOR INSTRUCTIONS). This conference call is being recorded today, Friday, July 20th of 2007. I would now like to turn the conference over to David DeSonier. Please go ahead sir.

Good morning, and thank you for taking part in Leggett & Platt's second-quarter conference call. I'm Dave DeSonier, the Vice President of Investor Relations. With me today are the following. Dave Haffner, who is our CEO and President; Karl Glassman, who is our 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 our call this morning is as follows. Dave Haffner will start with a summary of the major statements we made in yesterday's press release, and then 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; 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's Web site.

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'll now turn the call over to Dave Haffner.

Thank you, Dave. Good morning, everyone, and thank you for participating in our call. Yesterday we reported second-quarter sales and earnings in line with revised guidance issued June 18. Total sales for the quarter decreased 3% versus second quarter of 2006. Organic sales were down 5%, primarily reflecting lower unit volume. Acquisitions contributed 2% to second-quarter sales. Volume was weak during the quarter in most of the U.S. home-related, retail, office seating and aluminum markets that we serve. However, we saw strength in certain international markets, as well as machinery.

We posted second-quarter earnings per share of $0.33, which included, as expected, a net $0.02 benefit from nonrecurring items. Despite a weaker operating environment, we continued to generate strong cash flow. In May the Board voted to increase the quarterly dividend to $0.18 per share. We have also continued with share repurchases. So far this year we have bought back 5.1 million shares of our stock with, over 2 million of those shares being purchased near the end of June at an average price of about $22.

As mentioned last month, we're in the midst of a strategic review of our business portfolio. This current analytical effort grew from a series of internal strategy discussions that began in mid 2006. In February, Leggett's senior executives and Board of Directors decided to solicit additional insight. As a result, we engaged a premier national strategy consulting firm to provide an independent, thorough assessment of Leggett's business units. We expect this ongoing in-depth review to be completed over the next few months. This current review is broader in scope, more strategic in nature, and more long-term oriented than any of our previous activities. We anticipate a transformation for Leggett & Platt during 2008 as we implement fundamental changes in our businesses. We believe these changes will significantly increase total returns to our shareholders. We will share additional information about these initiatives in the coming months.

Now I will turn the call over to Karl, who will discuss the segments in more detail.

Thank you, Dave. Good morning. In the Residential Furnishings segment, organic sales decreased in the second quarter at rates of decline generally consistent with those seen in the first quarter, primarily due to ongoing soft demand in the U.S. residential markets and very strong prior-year comps in our carpet underlay business. International demand for both bedding and upholstered furniture components remained strong.

EBIT and EBIT margins reflected the soft volume in our U.S. residential markets, as well as operating inefficiencies within our geo components business. Demand in the geo business is ramping up, but has been hindered in part by declines in residential housing development and weather-related factors. As a result, current volume is not yet at anticipated levels, and therefore, is not yet supporting the overhead we put in place.

In Commercial Fixturing & Components, organic sales declined in the second quarter, primarily due to lower demand in office furniture components. Fixture and display volume was roughly flat with second quarter 2006. The volume decrease in office furniture components reflects broad softness across our customer base during the quarter, and generally across all office seating price points. EBIT and EBIT margins primarily reflect lower volume.

We are extremely disappointed with performance in the Aluminum Products segment. Organic sales decreased in the second quarter due to movement of a customer's barbecue grill manufacturing offshore, and lower demand in several markets, including small engines, electric motors and appliances. These declines were partially offset by inflation in commodity prices. Significant declines in EBIT and EBIT margins primarily reflect lower volume and plant utilization. Our Auburn, Alabama facility, as well as a few other locations, are underperforming our expectations, in part -- due in part to lower market demand. Some of the additional restructuring costs reflected in our current full-year forecast relate to an expected consolidation in the segment.

In Industrial Materials, organic sales were down slightly in the second quarter, primarily from continued softness in the U.S. residential markets. These declines were partially offset by inflation in steel prices. EBIT and EBIT margins improved versus second quarter 2006, in part due to a gain from a small divestiture and earnings from acquired companies.

In Specialized Products, organic sales increased in the second quarter, reflecting growth in our Asian and European automotive business, and continued solid performance in our international machinery operations and a portion of our commercial vehicle products business. EBIT and EBIT margins improved versus second quarter 2006, reflecting higher sales and earnings from acquired companies and the absence of last year's restructuring-related costs. These gains were partially offset by currency factors and unacceptable performance at a couple of operations.

With those comments, I'll turn the call back over to Dave.

Thank you, Karl. As we announced in yesterday's press release, we expect full-year sales to decrease approximately 2% compared to last year. Our full-year forecast, which is comprised of 4% organic decline, offset by 2% acquisition growth, reflects continued market weakness. We have yet to see any significant catalysts that will appreciably increase demand. This forecast does not include the impact of future acquisitions and divestitures.

We estimate full-year 2007 earnings of $1.28 (company corrected after call) to $1.44 per share. This estimate includes $0.07 of restructuring in the fourth quarter, which is $0.05 more than was anticipated in our previous guidance as we more quickly undertake some of the required changes that we have identified.

For the third quarter, we expect an approximate 2% sales [decrease] versus the third quarter of 2006. Third-quarter earnings should be $0.32 (company corrected after call) to $0.40 per share.

No significant restructuring costs are anticipated in this third quarter estimate. Profitable growth is 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 has been and will continue to be consistent with these priorities. During 2007 we expect to generate about $650 million of cash, largely from operations, but supplemented with the proceeds from the Prime Foam divestiture that was completed in March, and continued gradual increase in net debt to targeted levels.

In response to our weaker markets, we've reduced our capital spending expectations by $20 million, down to $160 million. 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.

We're often asked, what's different? What changes are being made to drive the Company forward? We've talked about these things recently, but they warrant repeating.

We're completing a significant business model review. I discussed this earlier in my comments. It's material and it's different. We've increased our focus on product development and added business development directors that are working on organic growth initiatives. These projects have long leadtimes rather than overnight impact, but we believe they will produce significant results.

We're taking a new look at our long-standing incentive programs, arrangements that have been in place for many years, and we'll be making changes to those programs to more effectively reward managers for adding shareholder value. We have a greater willingness to make necessary changes to the portfolio. Just 90 days ago, we completed the largest divestiture in our history with the sale of our Prime Foam operations.

We've had a far more active share repurchase program in recent years. During this past quarter, we achieved our second highest level of quarterly purchases, buying more than 3 million shares. As significant shareholders ourselves, we are acutely aware of and appreciate our investors' interest in seeing measurable progress. These are some of the drivers that we believe will make that happen.

And with those comments, I'll 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 any of 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 have. Mary, we are ready to begin the Q&A.

(OPERATOR INSTRUCTIONS). Shawn Harrison, Longbow Research.

A quick modeling question before I get in my more detailed question. Just the tax rate for the remainder of the year, as well as the diluted share count you're starting the third quarter with.

From a tax rate perspective, you should assume about 31.5%, both in the third quarter and the fourth quarter. And diluted share count, double d, you may have a guess on that.

I would guess that it would go down 2 million in the third quarter, 2 million in the fourth. Those are rough, but for modeling it's good enough.

My question more has to deal with just international expansion, as well as you look to, it sounds like, restructure the operations pretty significantly in '08. You're losing -- you're seeing good growth in the international markets; you're losing volumes on the aluminum side offshore. Can you do acquisitions while restructuring, especially internationally, expanding the business? Is it an either/or type of proposition? Restructure only, right-size the business and leave acquisitions until later? Or can you do both, and achieve high levels of success in doing both?

We can do both, but we're being much more critical of those acquisitions. They will be primarily in areas that we have better insight into the long-term core competencies and fit with the portfolio. We're not turning acquisition activity totally off, but we are being significantly more critical as we go through this phase.

I guess the base of my question is -- my concern is you continue to -- there's the potential for continued losses of business overseas, or you miss the opportunity for the better growth in these overseas markets because either you don't have the footprint that you would like overseas currently, or you won't be able to get the footprint because you're focused then on the restructuring.

Without -- there are certain things that I cannot say, as you can appreciate. But I might give you some comfort -- it may give you some comfort to know that two of the what we believe are very significant opportunities that we're investigating right now in acquisition activities are overseas. There are several others of course, but two of the ones that we see appreciable long-term value are overseas.

Thank you. I'll circle back later in the call.

Budd Bugatch, Raymond James.

I'm most concerned about residential, which is, obviously, still the largest segment and an important part. Karl and Dave, can you give us a little more granularity of what's going on in residential, and perhaps give us a flavor of that 2% drop in sales for the year, how much will be accounted for by residential, at least in your crystal ball, if it has any clarity to it?

Let me break down and give you a better view of the segment in terms -- and what I'm giving you is the sales variance second quarter '07 versus second quarter '06 that will give you a clear picture. U.S. spring was off about 5%. International spring was up 14. Wood, which is relatively small, was up 3. Adjustables, the consumer side, was down 8%. Furniture was flat, with strength in the international markets offsetting some weakness in domestic. Consumer products was down 12%. The carpet underlay business was off 18%, indicative of falling selling prices and soft housing demand. And our fibers business was off 18%, and that's a combination of some changes in our customers down-specking. People tend to look at our residential business and say that where we're off is in furniture and bedding, and that's not really the case. With the strength in our international bedding business, we feel pretty good about that. It's those ancillary businesses that are closer to the consumer where we're feeling some softness.

And forward-looking, Karl, what are your --?

We expect continued strength in the furniture side of things. And I believe over the long-term -- the U.S. bedding demand has been very weak since the Fourth of July holiday. As the year progresses, we're up against softer comps. From a pricing standpoint, we would have anniversaried the year-ago price reductions to better compete against those lower Chinese prices at the time. So I don't forecast the softness in the U.S. spring demand from a sales perspective into the future.

Budd, I've got -- while Karl was speaking, I was looking at our forecast, which roll up into these numbers that we give. Residential collectively for the whole year is going to be about 5.5% down organically. That's -- we were down 4.7 in the first quarter, 7.1% in the second quarter. For the full year, we think that's going to be about 5.5%.

So that's about where it was for the first half, right, David?

That's correct.

Is there not much change, you're not seeing much change? And in the consumer side of that, do you see any improvement? Or as you went through the second quarter, was there any change month by month or period by period, or is it just --?

Actually, we felt like we were seeing some strength in June, and then have seen some relative weakness in the first few weeks of July. So it's hit and miss, and it is extremely difficult to predict.

I've heard that story before from you, Karl, I'm sorry to say.

I'm sorry I'm so consistent.

I'm looking for a trend.

So are we.

(multiple speakers) positive side, not on the inconsistency side. Thank you very much.

Laura Champine, Morgan Keegan.

You mentioned that the aluminum business is underperforming expectations, I'm guessing in a number of locations and with a number of customers. Can you attribute that to one thing? Or can you talk about generally what the issues are with the aluminum, and what you might be able to do to increase your margins in that segment, which were really disappointing in the quarter?

We can attribute the analysis of the second quarter year-on-year to the loss of that Char-Broil business that went offshore. We certainly told all of you that it was leaving. And in the second quarter of last year we had the end of that business. So it made the comp very difficult. So that's the one thing that we can point to, and that business is just gone. So we have to deal with the absence of that business. We've replaced some portion of it, but have not replaced all of it.

The bigger issue right now -- macro economic issues. It is across the demand cycle, or the visibility of that whole business at small engine; it's a little bit of appliance softness; it's new programs that are rolling in that haven't developed any significant traction yet. And quite frankly, we have too large of a U.S. manufacturing footprint in the aluminum business, and we are taking aggressive steps to better utilize our assets.

That's what I was -- Karl was referring to earlier in his commentary. Part of that additional $0.05 that we are forecasting is associated with a consolidation initiative within that segment. And looking at the revised forecast for third and fourth quarter on margins, we are projecting increased margins in the third quarter and the fourth quarter. You may recall that the third quarter is always -- tends to always be a depressed quarter in aluminum because of significant July shutdowns for our customers. But we should see improved margins in both the third and the fourth. That's not saying a heck of a lot when you look at the margin that we posted in the second quarter. But they are improved significantly.

Dave, you talk about Q3 being up, you mean sequentially. Is that correct? Not year-over-year.

Yes. I'm sorry. Yes. I should have clarified that.

John Baugh, Stifel Nicolaus.

I'm going to stick to the residential area. Did you say adjustables were down 8%? And if so, is that the business that's at least partially tied to selling frames to Tempur-Pedic? And then, additionally, you mentioned that furniture was flat. I assume you were down domestically and up out of your Asian plants. Can you give us some kind of feel for what a flat revenue in that area means for profitability, given that shift from domestic to offshore? Thank you.

On the adjustable side, yes; there are a number of large customers of that business. Tempur-Pedic, as you mentioned, is certainly one. Select Comfort is another large customer in that adjustable bed business. We have not lost market share. We see that indicative of a consumer that is probably a little wary of spending significant dollars on a bedding purchase, and we've seen that in some of the Select numbers, contradicted a little bit by Tempur's release of last night. So it's just -- we draw -- correlate between that adjustable bed demand and our consumer products demand, which is bed frame and headboard related, which I said was down 12%. So there's just some tough headwinds there. I'm sorry; what was the other part?

John was asking, as we shift volume from our domestic operations to our international operations, what's the effect on our margins?

Sorry about that. What's happened is we've said in previous quarter that we have moved our domestic business -- the business that was produced domestically that was shipped to Europe, we transferred that business to our Chinese operations because of a lower cost structure. It's labor-related. But also freight factors from China to Europe versus the U.S. to Europe. So that's been part of that switch. It is not negative to us from a profitability standpoint. It is neutral.

Keith Hughes, SunTrust Robinson Humphrey.

I had questions on the strategic initiative that you talk -- or strategic review you talked about in the release. Was this the type of analysis where you had a consultant go business by business and talk about or look at where the competitive position and what the future was? Or specifically what was involved here?

It's ongoing. But this whole thing started without any input from independent consultants or service providers. And we were significantly through a portfolio review, and decided that we would like to get a real live, unbiased, relatively high-powered group involved to help us. The things that it includes, some of the things that are included, were more thoroughly investigating each unit's long-term growth and profitability profile, and then looking at their mid to long-term potential for developing shareholder value, or analyzing things such as demographic impacts and international influences. We're being more critical on our pricing protocol and leverage. We're looking at SKU rationalization more than we ever have before. We're also looking at more critical capital allocation methodologies, which are going to be significantly more correlated to returns on investment. We're also, as I mentioned, asking them to comment on assisting us in modifying our compensation and incentive programs to align them more with return on assets that are deployed, and simultaneously shareholder value. We will be in the upcoming months identifying possible additional divestiture and consolidation targets, and re-prioritizing those things that we clearly identify as high-growth, long-term parts of our portfolio. It's a relatively broad and multifaceted analysis, and it's just so important that we felt strongly that we wanted to get objective and unbiased input.

Even before this, you had announced and looked at divestitures, divesting some business and closing plants. But this sounds significantly larger in scope, the results of this. Is that fair to say?

That's fair to say.

Would we see some sort of announcement of the results of this study towards the end of the year? Will this come out sort of piecemeal? How's that going to work?

It's likely that you'll hear something towards the end of the year which will be broader in nature and give some of the basic elements of the analysis. The execution plan will be more piecemeal. But you can expect to hear something towards the end of the year.

Marc Heilweil, Spectrum Advisory Services.

(technical difficulty)

[Keep going], Mary.

(OPERATOR INSTRUCTIONS). Shawn Harrison.

Just wanted to touch on the office and contract in the fixtures business. The fixtures business was a little bit stronger than I anticipated. If you could just kind of talk through demand trends there, as well as just demand trends in the second half of the year related to the office and contract. And then also just additional restructuring. Looks like $0.05 of that $0.07 in the back half of the year is for the aluminum. What is the other [2.5] targeted at -- $0.02 targeted for?

Not all of the $0.05 is aluminum. A piece of it is, but not all of the $0.05 is, relative to -- well, Karl, (multiple speakers)

Back to the restructuring point, that remaining $0.07 will be split, most probably, between some continued activity on the fixture side of the business; aluminum certainly will be impacted, as will specialized. So it is primarily in those three segments.

And the one-year payback in terms of what you're looking at (multiple speakers)

It will vary by each one of those activities. In some cases the payback is instantaneous because it eliminates lack of profitability, [though] I'm not prepared to give you that data yet. We're not far enough along.

They'll be handsome paybacks for those expenses. With regard to office and contract --

Office and contract was -- we hope that the second quarter was an aberration. The first quarter was pretty strong year-on-year. Second quarter softened. June we saw some strength. It's tough to predict that business. It had been moving -- really had solid performance all of the prior two years. So we expect flattish through the rest of the year. But like many of our businesses, there's not a lot of visibility there. And you asked on the F&D side of things -- we expect good demand there. As you know, as we've said in the past, we've picked up some significant business. That business is -- those businesses are being extremely well-run. We have reduced negative surprises. We've reduced our manufacturing footprint. And as long as demand is there, which we forecast into the future, you should continue to see improved performance.

Budd Bugatch.

Just want to go back on the residential. Thank you for giving us kind of a business unit breakout of that. But if I look at that and try to parse it out based upon the way that the groups are (inaudible) that, then what you've told us -- and I just want to confirm that I'm right -- that bedding overall was down about 2%, furniture down about 4%. And then, really the bulk of the decline, or the biggest percentage decline, was in the fabric, foam and fiber group of that (multiple speakers). Is that right, Karl?

Your bedding number is right. Furniture was flattish.

With the beds, too? Because the beds were (multiple speakers)

I don't group it that way. (multiple speakers). I just don't look at it that way. But, yes; with that calculation, you are right.

So really it is the consumer. Anything that is close to the consumer is really giving you the biggest problem right now.

Yes. It's the consumer side, and then the geo disappointment. And you've done a good job of writing a lot as regards to the weather-related issues. You take the slowness in housing development and weather, and geo is underperforming our expectation. We got ahead of ourselves in that business, in terms of investing in what we still believe to be a high-growth area. But our timing probably wasn't real good, and our execution hasn't been perfect either.

That's the way life is.

Seems to be.

If you can start to predict the weather more accurately, (multiple speakers) other jobs for you.

[Beverly McCune], FBP.

My question is regarding the fiscal year '07 guidance. Just looking at the June 18 guidance versus current guidance, it looks like you narrowed the range a bit, and then kind of revised down by $0.02 on the lower end. I just want to understand what part of the business deteriorated further since June 18 that makes you feel compelled that you need to revise down a little bit? Is that across the business, or some particular segment?

It's relatively broad-based. We continue to see softness in that demand. And looking at the projections here, with the exception of aluminum, we expect to see a modest improvement. And in specialized products, we expect to see continued improvement. And the other three segments, namely residential, commercial and industrial materials, have softened somewhat.

Is it especially the first couple weeks in July that it's worse than the last two weeks in June?

Yes (multiple speakers) yes, but that's not abnormal. We bake in a depression in the month of July in several of our business units, because our customers have extended -- historically have extended shutdowns and what have you. More customers this year are expanding their shutdowns; instead of being down one week, they'll be down two. Or instead of being down two weeks, they'll be down three. And they don't make those decisions until relatively close to a shutdown period. So July is always a depressed month, generally speaking.

[Allen Zwigler], First Manhattan.

I'm not going to ask a weather-related question, but I certainly love to hear how the weather is. Anyway. Internationally, could you just talk about the bedding business? You made mention of some of the growth, but I just would like to get some sense of the size of it, and -- you've talked about it occasionally -- where in fact it is geographically. If you can shed a little light on that, just so that we could frame it in terms of how it looks.

The strength that we've experienced on a year-to-date basis is geographically broad-based. There's strength in Europe. The European economy certainly is stronger than it was a year ago. It tends to be more Scandinavian than Southern Europe. If there's softness in Europe it's in Spain. We have taken a significant position by de-verticalizing a maker user in Brazil. That business is performing extremely well. The Chinese operations are continuing to show some growth. A lot of that growth is product that's produced in China, shipped into Australia. So we're seeing piece growth in Australia also. It certainly is broad-based.

Just sizing. If you don't want to give out by region, what's the size of the international bedding business these days?

We do not break out sales below the segment level.

Well, I understand that. But I'm just trying to -- when you talk about a robust business versus other businesses that aren't, I think it would be helpful to try to -- considering that the U.S. business really has changed quite a bit -- you'd have to admit that -- I think it would be helpful for us to have a notion as to what's going on in the rest of the world.

That's a legitimate -- absolutely legitimate question. And we need to give him and the rest of the listeners a feel for the fact that we have a relatively small market share in relatively large markets in Asia, which is a developing market, and then just a feel for -- in units, if you will -- our international unit sales versus our domestic unit sales.

About 44% of our total produced pieces in the world are international.

So that's fairly substantial, then.

Correct.

So wouldn't that be meaningful enough that you'd have to put that into some filing? I just don't get what the secret is. I'm sorry.

We are obligated through the SEC rules to report at the segment level and no lower than that. So, no; we're not obligated in a filing to divulge our sales or profitability at any particular business unit.

But I'd like to put a positive spin on that. Because we -- we have a relatively significant percentage of the European market, but we have a relatively insignificant percentage, or market share if you want to call it that, of Asian and South American markets. So those represent significant opportunities for us, and we continue to see improved operating performance -- not just unit sales, but operating performance in those markets.

And I know you asked specifically about bedding, but I want to seize the opportunity to complement our automotive group in that our international automotive business is continuing to gain significant momentum. And thank goodness, if you will. Because here in North America, as the automobile demand has suffered, we've seen significant growth in other parts of the world.

We see wonderful opportunity outside the boundaries of the United States and North America. We have relatively small investments made at this point. And part of what you should expect to hear us talk about in the future are carefully placed additional bets around the world as we gain market share and potentially move ourselves in the supply chain.

Just a final. On an overall basis, are the margins in selling those kinds of products outside the U.S. similar, higher, or lower than they are in the U.S.?

Similar.

Gentleman, I'm showing there are no further questions. I'll turn it back to you for any closing comments you might have.

We'll just say thank you, and we'll be talking to you again in another quarter.

Thank you so much. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation. At this time you may disconnect.