禮恩派 (LEG) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Leggett & Platt third quarter 2007 earnings conference call. At this time all participants are in a listen only mode. Following the presentation instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Thursday, October 18, 2007. At this time I would like to turn our presentation over to David DeSonier. Please go ahead, sir.

Good morning and thank you for taking part in Leggett & Platt's third quarter conference call. I am David DeSonier, the Vice President of Strategy and Investor Relations. With me today are the following. Dave Haffner, our CEO and President; Karl Glassman, our Chief Operating Officer; Felix Wright, Leggett's Chairman of the Board; Matt Flanigan who is our CFO; and Susan McCoy, our Director of Investor Relations. The agenda for the call this morning is as follows.

Dave Haffner will start with a summary of the major statements we made in yesterday's press release. Karl Glassman will discuss trends in our various markets; Dave will then address our outlook for the remainder of the 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 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.

Good morning, and thank you for participating in our call. Yesterday we reported third quarter sales and earnings in line with the guidance we issued on July 19th. Total sales for the quarter decreased 3% versus third quarter of 2006. Organic sales were down 5% primarily reflecting lower unit volume. Acquisitions contributed 2% to third-quarter sales. As anticipated, volume was softer in the quarter in the US home related, retail and aluminum markets that we serve. However, we continue to see strength in most international markets, including bedding, furniture and automotive, and portions of our domestic commercial vehicle products group.

We posted third quarter earnings per share of $0.37. There were no significant non-recurring items in the quarter. Our balance sheet and cash flow continue to be very strong. We ended the quarter with net debt at 28% of net capital. In the third quarter we generated a record quarterly high $194 million of cash from operations, in part due to a significant reduction in working capital. Working capital as a percent of annualized sales improved to 19.5% during the quarter. Share repurchases in the third quarter were the highest quarterly level in our history. So far this year we've bought back 9.6 million shares of our stock and reduced our outstanding shares by over 4%.

We are finalizing the in-depth strategic review of our business portfolio. As mentioned earlier this year, the current review is broader in scope, more strategic in nature and more long-term oriented than any of our previous activities. We are very excited about this comprehensive initiative and its strategic value going forward. We will present our final recommendations to the Board of Directors in early November and subsequently disclose the strategic implications and financial details to investors.

As we mentioned yesterday, we will host an investor day for institutional investors on November 14th. And at that time we will discuss the results of the review and our strategic plans. That meeting will be webcast. Now 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 furnishings segment organic sales decreased in the third quarter primarily due to ongoing soft demand in the US residential markets and very strong prior year comps in our carpet underlay business. International demand of both bedding and upholstered furniture components remain strong. EBIT and EBIT margins reflected the soft volume in our US residential markets, including carpet underlay, geo components and fibers.

In commercial fixturing and components organic sales declined in the third quarter primarily due to lower fixture and display demand and our decision to walk away from sales with unacceptable margins. EBIT and EBIT margins were essentially flat. The impact from lower sales during the third quarter was offset by operational improvements, further consolidation of our fixture and displays operations will occur in the fourth quarter and is included in the restructuring related costs that we forecast.

Market conditions remain very challenging in the aluminum products segment, and we continue to be disappointed with our performance. Organic sales decreased in the third quarter due to lower demand in several markets, including small engines, telecom and appliances. Significant declines in EBIT and EBIT margins primarily reflect lower volume, plant underutilization and operating inefficiencies.

Our Auburn, Alabama facility, as well as a few other locations, are underperforming our expectations in part due to lower market demand. Some of the restructuring related costs in our fourth quarter forecast relates to a consolidation in this segment. In industrial materials organic sales were down slightly in the third quarter, continued softness in the US residential and other markets led to lower unit volume, but this decline was partially offset by inflation in steel prices.

EBIT and EBIT margins improved versus third quarter 2006 primarily from operational improvements and the earnings of an acquired business partially offset by the impact from lower organic sales. In specialized products organic sales increased in the third quarter, reflecting worldwide growth in our automotive business and continued solid performance of a portion of commercial vehicle products. EBIT and EBIT margins improved significantly versus third quarter '06, reflecting higher organic sales and earnings from an acquired company. These gains were partially offset by unacceptable performance at a couple of operations.

And 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 a full-year sales decrease of approximately 3% compared to 2006. Our full-year forecast, which is comprised of a 5% organic decline offset by 2% acquisition growth, anticipates ongoing weakness in several of our markets. We currently estimate full-year 2007 earnings of between $1.29 and $1.37 per share. This forecast does not incorporate possible non-recurring costs resulting from the finalization of our strategic review but does include a $0.02 net benefit from non-recurring items and discontinued operations.

For the fourth quarter we expect an approximate 3% sales decrease versus the fourth quarter of 2006. Fourth quarter earnings should be between $0.18 and $0.26 per share including $0.07 of restructuring related costs. During 2007 we expect to generate about $650 million of cash, largely from operations but supplemented with proceeds from the prime foam divestiture that was completed in March. We have reduced our capital spending expectations for the year to $160 million. Maintenance capital represents roughly half of this total. Dividends will require about $125 million. Through the end of the third quarter we spent approximately $210 million on share buybacks and $85 million on acquisitions.

With those comments, I will turn the call back to Dave 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 and then voluntarily yield to the next participant. If you have additional questions, please re-enter the queue and we will answer all the questions you have. Andrew, we are ready to begin the Q&A.

(OPERATOR INSTRUCTIONS) David MacGregor, Longbow Research.

My question really has to do with the materials business. I guess first of all on the industrial materials it looks like wire rod prices are going up about 40, $50 a ton in November (inaudible) Is this in your guidance?

David, the answer is no, that we have seen increases published in the 30 to $40 a ton range. At this point we don't know to what degree that they will stick. Scrap is not inflating to that degree, although it is inflating gently. So we will see what the market commands. We do not believe that the market is going to accept an increase of that magnitude, so no, there is nothing in the forecast.

Okay, and then can you just remind us again your wire rod business once upon a time I think you were producing about 450 out of a 900,000 ton requirement. Is that still roughly the same?

Our total requirement has come down a bit, Dave, but we are still running Sterling flat out, and I think we are getting about 450.

Closer to 500.

500,000 tons, roughly.

Okay, and then the total requirement is a little below the 900?

It is, it is.

I guess just on the aluminum side it seems you didn't have too much capacity in the US. You still don't have anything really going in Asia. I don't want to steal the thunder on you, whatever plans you plan on announcing over the next few weeks, but is it possible we see you with an expanding presence in aluminum in Asia at any point soon?

We will talk to you in New York about that.

Okay. Just finally, while I've got the floor, the share repurchase plans, you bought 9.6, you were authorized to buy 10.0. Does that imply that fourth quarter is going to be light on share repurchases?

Yes, Dave, that is what it implies. That's what it implies.

Okay. Thanks, guys.

Budd Bugatch, Raymond James.

Question for you on the guidance going forward. You talked about weakness in same location. Should we, when we look at, when we drill down in the segment should we think of it in the same basically same order that you had weakness in the third quarter? In other words residential being the poorest performer in the quarter and aluminum being second poorest?

Yes, Budd. I think that we would expect those macroeconomic trends to continue. There is nothing inherent in the Company that would indicate anything different than that.

It is still positive in the specialized and be the only one of the five to be positive?

Yes.

Okay, and just lastly on residential would you drill down a little farther in that? You said strength in bedding and upholstery and weakness in carpet. Do we still have a fourth-quarter carpet underlay challenge for the quarter?

Yes, but not to the same magnitude. What happened in carpet is that sales -- carpet underlay -- the sales dollars in our third quarter were down 27%. Our units were only down 3%. So a year ago the scrap prices were significantly higher, our average unit selling prices of the end product were significantly higher, and we will not fully anniversary that issue in the fourth quarter.

So then do I take it that your expectation for same location is less than that down 8.5% that you had in the --

You would be in a similar range.

All right. Thanks, guys. Look forward to seeing you in November.

John Baugh, Stifel Nicolaus.

Following up on the residential, first of all is there with the deflation, inflation, deflation carpet underlay was there much impact on EBIT, or was that a pass-through?

The margins were slightly narrowed, yes. It was (multiple speakers) absolute pass-through.

You mentioned carpet underlay, geo and fibers. There was no comment about bedding -- all you made was a comment about international bedding being strong. Was domestic bedding strong, flat, slightly -- down less than the segment and then a comment on the furniture side, as well?

Domestic bedding was down, the negative was much less than the segment. It was down 3.2%. Pieces were down greater than that. We are starting to see the real benefit of the -- our ability to place in the market the premium and proprietary products that we spoke about earlier in terms of the product development initiatives. So that is a good thing, but the demand continues to be extremely soft, offset by an 8% growth in international spring.

In furniture the units worldwide were up significantly; up in the double-digit range. But the dollars were down, let's call it 2%. That is an indication of deflation. The demand is there. The motion category continues to grow.

Okay, and then just a follow-up on the interesting comment about premium because I see generally the domestic market obviously in bedding shifting down right now in mix, foam aside. And yet you are going he other way. So your new product placements and some of the innovations are clearly taking hold of it. What is going on?

John, thank you for giving me the opportunity to clarify. What I should have said more clearly is what we are seeing in the vast majority of our pieces, which are tend to be the lower end, the lower end is still where the pieces reside. We are getting more value out of some of those pieces because of our ability to increase the height of the product. But I absolutely agree with your thesis that the top end of the bedding industry is soft, that the middle is softer yet. It is the low end or the lower end price points, those opening price points where the velocity is at this point.

Thank you.

Joel Havard, Hilliard Lyons.

This is [Carol Kimple] I am in for Joel Havard. I was wondering do you anticipate another share repurchase program either in the fourth quarter if you complete this one, or early in 2008?

We can't comment on that, Carol. As you know, we do have authorization for this year of 10 million shares, and we've consumed the bulk of that already.

Okay. Thank you.

Laura Champine, Morgan Keegan.

On the strategic review I thought originally we were supposed to hear back in late summer, so if I am recalling correctly we've pushed back the timeframe on that a little bit. Could you comment on why that review is taking a little bit longer than previously expected?

Laura, we have consistently said in the fall or towards the end of the year. So I'm not sure exactly how you came to that conclusion, but I will comment that the quality of the analysis was absolutely crucial to myself and the rest of the management team and our Board of Directors. And rather than speed, we are dedicated to the proposition of completeness and quality. We feel comfortable with the analysis that we've done now.

And then on the -- just as a follow-up on the commentary on the residential same location sales trend down and some of the puts and takes there, it looks like you mentioned deflation in furniture components. Is that Leggett lowering prices, or is that once again a deteriorating mix shift to the down side?

Primarily a deteriorating mix shift.

Thank you.

Keith Hughes, Suntrust Capital.

This is Judy for Keith Hughes, and I think you just answered my question on the raw materials. You said you saw the inflation in steel prices in industrial segment; but could you go over on the residential you saw increases in the foam prices, is that right?

Yes, as you probably remember we are out of that prime foam business; but yes, the inflation has been announced to our customers both furniture and bedding in prime polyurethane foam of about 10%. It was announced effective October 1, which gives us -- and it's not fully implemented yet -- gives us a little bit of a heartburn because here again our bedding and furniture customers have to deal with raw material inflation. And in the bedding area in particular they still haven't dealt with the inflation that came from a flammability perspective. Our bedding customers desperately need to raise their prices, as will the furniture customers, and we are concerned of the impact that that will have to us as component suppliers.

Karl, you might comment on aluminum and resins.

Yes, resins and aluminum both are really generally flat. We are seeing a slight uptick in resins and aluminum itself is flat.

Steve Searl, Conning Asset Management

Just one question with respect to the strategic review. Can you give us a sense how important maintaining your tier 1 commercial paper ratings are as you look at the various aspects of that?

We consider those very important, certainly. We have a $600 million commercial paper program that we use in general about half of that most of the time. So that is very important, as is our long-term debt rating of A.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Budd Bugatch.

You drilled down for us some and thank you in residential -- maybe in fixtures and display can you characterize the office demand versus the POS in the fixtures side?

The office side was about, down about 3% and the F&D 4%. So there is just general softness.

Okay, and you expect that to continue in the fourth quarter, too, Karl?

We don't see any real indicator that would suggest that it will change significantly either way. We basically have forecasted sameness.

It surprised me a little bit in office because the BIFMA numbers have been slightly better. Can you kind of characterize what you see going on? Are you losing any share there? The numbers would suggest you are, but I know that they could be misleading in some way.

Yes. They are a bit misleading, and I know you know this and I apologize for repeating myself to you, but we are predominately engaged in seating components. And the BIFMA data, when they classify or subclassify their data seating components gets all kinds of -- anything you sit on tends to get in there. And so we truly have not lost any market share; contrarily we've gained a bit of market share with some new programs.

As you know, the office furniture industry isn't always directly in phase with the rest of the economy, and I read your commentary on Knoll this morning. But we haven't lost any market share. The problem with correlating to BIFMA and even the subcategory of seating in BIFMA, is that we don't make wooden chairs, we don't make certain other type of seating systems.

Okay. All right, thanks Dave, thanks Karl.

Management, at this time we have no additional questions in the queue and I will turn the conference back to you for any closing remarks.

I just want to thank everybody for the patience and really, really look forward to seeing you and talking to you in New York next month.

That concludes all we've got. We'll talk to you in a month. Thanks.

Thank you, management. Ladies and gentlemen at this we will conclude today's teleconference. We do thank you for your participation on today's program. You may now disconnect and please have a pleasant rest of your day.