禮恩派 (LEG) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen; thank you for standing by. Welcome to the Leggett & Platt first-quarter 2008 earnings conference call. During today's presentation all parties will be in a listen-only mode and following the presentation the conference will be open for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Thursday, April 17, 2008. Now I'd like to turn the conference over to Mr. David DeSonier.

Good morning and thank you for taking part in Leggett & Platt's first-quarter conference call. I'm David DeSonier, the Vice President of Strategy and Investor Relations, and with me today are the following -- Dave Haffner, our CEO and President; Karl Glassman, who is our Chief Operating Officer; Felix, Wright who is our Chairman of the Board; Matt Flanigan, 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 then discuss trends in our various markets; Dave will address our outlook for 2008; 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'll now turn the call over to Dave Haffner.

Thanks, Dave. Good morning, everyone, and thank you for participating in our call. Yesterday we reported first-quarter earnings per share of $0.25 including $0.02 per share of earnings from discontinued operations. In continuing operations we incurred a penny of restructuring-related cost but that was offset by a gain from a small divestiture.

Versus the first quarter of 2007, earnings from continuing operations declined primarily due to soft demand in our residential-related markets. Higher steel costs also impacted earnings in the quarter; but we have initiated and continue to implement price increases to pass along the higher cost.

Total sales from continuing operations decreased 5% versus first quarter 2007. Organic sales were down 6% in the quarter primarily reflecting soft demand and our decision to exit specific sales volume with unacceptable profit margins. Acquisitions completed in 2007 contributed 1% to first-quarter sales.

Our financial profile remains very strong. We generated $53 million of cash from operations during the quarter; this is lower than in recent quarters primarily due to an increase in working capital. For the year we expect to generate at least $400 million of operating cash with working capital slightly positive.

Our balance sheet remains in excellent condition. We ended the quarter with net debt just over 30% of net capital, which is at the low end of our long-term targeted range of 30% to 40%. We declared a first-quarter dividend of $0.25 per share representing a 47% increase over last year's first-quarter dividend. The current dividend yield is approximately 7% based on a $14.30 stock price.

This year marks the 37th consecutive annual dividend increase for Leggett at an average compound growth rate of over 14%, and we also repurchased 3 million shares during the quarter. We made very good progress on several fronts during the quarter; the divestitures that we announced last fall are progressing well. We are in discussions with numerous potential buyers, both financial and strategic; investment bankers are assisting with the sale of the Aluminum Products segment and four of the other business units.

We continue to believe that all of the divestitures will occur during 2008 and expect after-tax proceeds of at least $400 million. Given the markets interest in small- to mid-sized transactions and the tangible assets associated with these operations, we believe our expectations are reasonable.

In early January we launched a rigorous annual strategic planning process at the business unit level to continually assess each unit's role in our portfolio and ultimately drive investment decisions. We also made progress during the first quarter and are tracking in line with our expectations for improving performance of the store fixtures business unit. We are targeting returns in this business unit of at least the cost of capital levels by the fourth quarter of 2008.

We expect to generate significantly more free cash as we complete the divestitures, improve returns and reduce spending on capital expenditures and acquisitions and we intend to return much of this cash to our shareholders. In the near-term we will need about $300 million annually to cover capital expenditures and dividends and expect annual cash from operations to routinely exceed those requirements.

We anticipate using much of our excess cash to repurchase shares. The Board recently increased our share repurchase authorization for 2008 to 30 million shares or about 18% of the share base. As the divestitures are completed we plan to use the proceeds to repurchase shares. Given our strong consistent cash flow, even during soft economic cycles, we are confident we can meet these priorities. And with those comments I'll turn the call over to Karl Glassman who will discuss the segments in a little more detail. Karl?

Thank you, Dave. Good morning. In my comments I'll be addressing results related to our continuing operations. As a reminder, the businesses we plan to divest are reflected in the financial statements as discontinued operations, so their results are not included in this discussion.

In the Residential Furnishings segment organic sales decreased 11% in the first quarter primarily due to soft demand in our U.S. markets. In relative terms international demand continues to be stronger than domestic demand. First-quarter EBIT and EBIT margins decreased versus the prior year primarily reflecting lower sales. Higher steel costs also impacted earnings in the quarter. We have initiated and continue to implement price increases to cover the higher cost, but generally experience a lag in the recovery.

In Commercial Fixturing and Components organic sales declined 4% in the first quarter primarily due to lower demand for office furniture components and our decision in the store fixtures business to walk away from sales with unacceptable margins. EBIT and EBIT margins were roughly flat with the prior year; a gain from a small divestiture was offset by restructuring related costs during the quarter.

In Industrial Materials organic sales grew 8% in the quarter primarily from the pass-through of the earliest portion of higher steel cost. Continued softness in the U.S. residential and automotive markets led to slightly lower unit volume which offset a portion of the sales gains. EBIT and EBIT margins increased versus first quarter 2007 primarily due to higher sales and operating improvements at a few locations.

In Specialized Products organic sales increased slightly in the first quarter. Continued growth in our European and Asian automotive businesses was partially offset by lower volume versus strong prior year comps in the fleet portion of commercial vehicle products. EBIT and EBIT margins were roughly flat with the first quarter of last year. 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 2008 earnings from continuing operations to be between $1.00 and $1.30 per share. This includes approximately $0.05 per share in restructuring-related cost but does not include earnings from discontinued operations nor potential gains or losses from the divestitures. This guidance anticipates full utilization of the standing annual 10 million share repurchase authorization, but does not reflect additional purchases we expect to make with the divestiture proceeds due to the uncertain timing related to those proceeds.

Sales from continuing operations are projected to be about 2% lower than last year. This decrease reflects the planned elimination by the end of 2008 of approximately $100 million of revenue with unacceptable profit margin in the Company's store fixtures business, minimum acquisition revenue and essentially flat sales collectively from operations other than store fixtures.

Our quarterly sales and earnings normally reflect moderate seasonality. The second quarter typically reflects seasonal improvement over the first quarter; the third quarter is normally the strongest period of the year for us; and the fourth quarter is generally the lowest seasonal period. We expect our cash requirements in 2008 for dividends and capital expenditures to be readily funded from operating cash. As I mentioned earlier, we plan to use excess cash from operations and divestiture proceeds primarily to repurchase those shares.

Despite the current market challenges we feel very good about our strategic direction and the initiatives we unveiled last November. We are fully committed to the execution of our plan and believe our actions will re-establish Leggett as a more profitable company, one that consistently generates total shareholder return of 12 to 15% per year on average. And with those comments I'll turn the call back over to David 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, as we typically do 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. Vince, we're ready to begin the Q&A.

(OPERATOR INSTRUCTIONS). David MacGregor, Longbow Research.

Good morning, everyone. Can you just talk a little bit about the pricing pass-throughs that you've undertaken? It seems as though you're getting some traction in certain parts of your business, maybe a little less than others. Where do you seem to be having the greatest difficulty? And then, with respect to those areas where you are getting some traction, do you think you can maintain the pace with what's happening in terms of inflation in that space?

David, this is Karl. It's a challenge. The rate of price increase announcements from our suppliers is unprecedented. We're almost afraid to open the mail at this point. But we have historically been a price leader; we'll continue to do that. We've implemented price increases, they're painful, but, frankly, it gets a little easier over time because of the severe magnitude of what we're attempting to pass through.

So it ranges significantly from a percentage high increase in the wire side of our business; we'll announce another increase there that aggregates to 71% since the first of the year with scrap and rod out of control. We get recovery, there's a lag, usually it's 30 to 60 days in the majority of our businesses, but there's the cumulative effect of the inflation hasn't subsided, we haven't seen a sign of it subsiding. Some industries, as you alluded to, are more difficult to pass through. We don't generally have any long-term contracts. So it's painful but it's an ongoing process.

And you mentioned that you have no long-term contracts. I guess one of my concerns had been the commercial fixture business where you might be having some difficulty getting pass-through. There aren't any long-term contractual obligations then that would preclude success with price pass-throughs, it's more just the balance of competition in the channel?

David, management of that group has done a very good job talking to those customers about material inflations metrics. So there are price change metrics in the majority of those contracts -- and there's not many of them, that tend to be longer-term. Most of that business is on an as quoted sort of basis so you get catch up as soon as you requote. But we got hung a little bit in 2004 in that we weren't as mature in that business and had a lag that we will not experience in this round of raw material inflation.

Great, thanks very much.

Budd Bugatch, Raymond James.

Good morning, Dave. Good morning, Karl, Susan, Dave. Let's talk a little bit about same location sales, I just want to make sure I understand the guidance. And maybe talk a little bit about what you saw through the quarter and what your expectations are, if you get granular by segment, the 11% in residential furniture is obviously a big number. So hopefully you can go down the four segments and kind of give us a feel of what you're seeing and what you're likely to see for the rest of this year.

Budd, this is Karl again. I'll start with the first quarter of '08 versus first quarter of '07, as I've done in the past, give you the major groupings by segment and this is all purely from a sales perspective, it is not units. U.S. spring was down about 10%; international spring was up 7%; furniture was actually the first negative quarter we've seen in a long time, a lot of it having to do with the first bit of softness we've seen in the Asian markets in a long time, but furniture was down 10% also; consumer products was down 10%.

The Hanes businesses or the softgoods businesses were down about 15%, that's reflective of us walking away from some business that wasn't very attractive from a margin perspective. And carpet cushion was down about 20% and we have not quite anniversaried that -- that dynamic that we spoke of in earlier quarters where we had extremely high scrap costs and reflective high selling prices. Our units in carpet were down about 4% in the quarter. So the carpet cushion business continues to perform extremely well, but it's impacted by volume, raw material and reflective selling prices. So that's the big buckets of residential.

In commercial F&D was collectively down about 3%, office was flattish. That reflect though an acquisition. In our historic businesses it was down in the 3 to 4% range. In industrial, good story, wire and wire products up 14% having to do mostly inflation driven. The tubing side of things, which is a much smaller business, was down about 10%, it's kind of a common theme there.

In specialized, automotive was up 6% reflective of extremely strong European and Asian demand. CVP, and this is the continuing operations part of CVP or the fleet side, was down 8%. And machinery was down 8%. So you can -- that 8 to 10% in our base businesses is very much common with the outlier being the carpet underlay side of things -- and relative improved performance at Fixtures and Displays.

Was there much movement in the quarter or was this relatively similar throughout the quarter?

The big area of movement was in U.S. spring and that really is a good story in that in January we were up against our toughest comp that we'll experience in 2008 and we were significantly negative to '07 units. In February we were down just 2%, in March we were positive on one fewer shipping day. There is a significant improving trend there as we gain market share in a decreasing market.

We believe that if the market continues to be negative on units in the 3 to 5% range, that's what the -- kind of the industry consensus is -- that we will be positive on units throughout the year. That we have deverticalized a major user who is a strong regional player who is continuing to make some of their own springs. That was done during the quarter so that's good news.

We've seen a distinct decline in the low priced imports since the Department of Commerce initiated in January the anti-dumping investigations on the innerspring imports from China, South Africa and Vietnam. And then the International Trade Commission in February issued an affirmative preliminary injury determination and a result of those declining imports, we've regained market share and have been able to pass-through some of our higher raw material costs.

So that is a good trend, lay on top of that our product development activities in the Verti-Coil product which the Bonnell -- in most people's mind an innerspring is a Bonnell, the kind of stereotypical innerspring knotted on both top and bottom round headed coil -- us spring people like that stuff -- is about 60 to 65% of the market.

We have introduced a replacement for that category that we call Verti-Coil that is, simply put, a better use of raw material. And as we roll that product out into the industry it's being extremely well received. But, we feel great about our U.S. spring operations. For the first time since 1999 we are running our factories totally flat out full. It feels pretty darned good.

And U.S. spring -- you also deverticalized the major player in furniture, right?

That's correct; that was Berkline, Berkline announced that during the quarter. So that is certainly a good trend at a time when the furniture industry feels a little softer than bedding. So to be able to bring that volume in-house through kind of a co-product development activity between the companies is extremely good news.

And between U.S. spring and furniture, what percentage of residential does that typically account for?

It would be the vast majority. Susan, how would you --?

Two-thirds, I would say.

Two thirds. And so both of those -- do you think both of those will be positive for the year?

No doubt in my mind that bedding will. Furniture has a little tougher challenge, even with taking that Berkline business in-house I'm not ready to say that, Budd. I think they've sure got a fighting chance. Business is so soft in China right now that we're up against some tough comps. So I believe that we will be positive, but I don't want to get too far out on that limb.

I appreciate you asking the question, Budd, because I keep asking it, too.

And I don't give him a very good answer either.

Thank you very much. I'll let somebody else go on.

Laura Champine, Morgan Keegan.

I actually had a follow-up on Dave's questions on inflation-based cost increases. You mentioned in the Industrial Materials that you got some 70% price increases. What's a more average blended price increase that you're trying to push through in Residential Furnishings and what do you think your success rate will be on that?

I'll start with the later, our success rate will be very high as it historically has been. Laura, it's painful, but we don't have a choice. The rate of change is so extreme we have to pass it through, our customers have to pass it through to retail. At the recent High Point furniture market there was a lot of conversation by the furniture manufacturers of the need to go to retail, the bedding manufacturers have to get in line and do the same.

But we have announced approximately a 20% increase on innerspring components. We have also announced that rate or a little higher on furniture hardware. It changes -- the dynamics of the long products and the flat products are different and then the raw material content by product category is different. So it's very much variable, but at this point 20 to 25 to 30% depending on the content is a good range. Those have been announced, they have not all been incurred, so that's the lag situation.

I'll also say that historically we have given a little bit longer time from announcement to implementation date. We don't have that luxury. At the end of last week we were notified by our supplier of angle iron that they were raising their prices to us in five days. That is not typical; so we have gone -- that's bed frame product -- we have gone to our consumer products customers and have announced a price increase of 14% which is the second increase there, it goes directly to retail and it has a two-week time frame of implementation. So we're kind of in uncharted waters in terms of timing.

And then just secondly, on inventories, it looks like inventories were up some 14% on a 5% sales decline. Can you comment on what drove that increase?

At this point I would love to have as much inventory as we possibly could get a hold of in these times of rising raw material. Yes, our inventories are a little bit long and it generally feels pretty darned good. Those inventories are good and usable, they're tested with frequency. Laura, we feel good about that.

Part of it's inflation obviously and part of it has to do with opportunity purchases, Laura.

Got it. Thank you.

Keith Hughes, SunTrust Robinson Humphrey.

In the industrial segment you had mentioned earlier about the margin gain year-over-year, but volume is still down. What's going on there that allows you to move that up?

The industrial, Keith, will benefit significantly by us pushing these spring plants. We weren't pushing as hard in January as we are now. So that kind of trickle-down effect from strong demand in bedding to industrial is a very good thing. It's allowing us actually to use some additional melt capacity at Sterling all the way back to the rod mill to sell billets, which is a little bit opportunistic but it is a very good opportunity. So we will see increased demand in industrial in future quarters.

I might say, too, that the Industrial Material guys, not only do they periodically sell some extra melt capacity, they also worked arrangements with other rollers to roll that billet into rod for us to take advantage of that mill capacity and pushed the limit, if you will, of our internal ability to make rod. So they do a really good job of working those opportunities.

And finally, the commentary on U.S. spring being up in March, is that primarily due to the deverticalization you talked about earlier, or is that something going on in demand -- high-end to low-end of the bedding business?

Actually I think it's more of an indicator of a higher percentage of these units that were once imported coming back to the United States. So that's the primary driver. The deverticalization was in full force, it happened middle of the first quarter so we had full effect in March. So that's some impact and then, bluntly, we're gaining market share. So it's a combination of all those factors, but I think the change in the import dynamics was probably most notable.

Okay, thank you.

John Baugh, Stifel Nicolaus.

Good morning. A couple things just to clear up. One, the guidance I think was for working capital to be up slightly for the year. So I guess that means in light of the inventory numbers and inflation that inventories would be up somewhat but receivables would be down, is that the right way to look at that?

John, we still -- this is Matt -- we're still in need -- for the full year '08 feel that working capital will provide a source of cash, something between 0 to $50 million and we hope that's conservative and we recognize what the use of cash was in the first quarter. And we've got initiatives on payables, receivables and inventory, all three of those key buckets, to make us feel good about that continuing prediction on our part.

Okay. And then I want to be clear on the buyback. You've got the $10 million and you're going to do that regardless. Is the other $20 million -- does that not occur until divestiture proceeds come in or how would you think about spending that money in front of the cash coming in from divestitures.

John, this is Dave. Generally speaking that is correct, that extra tranche, if you will, of 20 million shares should be correlated to the divestiture proceeds.

Great, thank you. Good luck.

Joel Havard, Hilliard Lyons.

Good morning, everybody. I don't know who wants to take it, but a comment on the SG&A improvement. Obviously a pretty significant headcount shift here at year end. Is this kind of the base load for this volume or are there some nuances behind it we should be thinking about?

Joel, this is Matt, I'll take the first stab. That's about a 10% and we think there's more room for improvement there obviously. Part of the challenge with getting our SG&A at the right level load is a function of continuing to have the operations we haven't yet divested still in the mix. So I think you will see us in even trimmer shape as should be the case near the end of the year and certainly as we roll into 2009 once the divestitures have occurred. And the percent of sales that ought to represent will be less than 10%. You'll recall that historically he had been around that 9% range.

All right, that's very encouraging. Thank you, guys. Good luck.

(OPERATOR INSTRUCTIONS). Budd Bugatch, Raymond James.

A couple of shareholder-related questions. One question that I've gotten was is this guidance and the prior guidance both been constructed on the 10 million share repurchase, which I guess would relate to the prior guidance? That also had the 10 million share repurchase in it, did it not?

That's correct.

Yes.

Okay, just checking on that. The second kind of issue as people are chatting about it is the dividend which is awfully close to what the low end of guidance is for this year. You've raised dividends now for several decades, can you kind of talk about your thought process on that even if you just come in at the low end of guidance?

The thought process of continuing to raise the dividend?

Yes, sir.

Absolutely, that's our plan.

Okay. And I think, Matt, you had said about 4 to 5% this year would be kind of the right expectation. Do I recall that properly?

Well, I think for this year, from our perspective, Budd, now a running rate for a full dollar, $0.25 a quarter, we feel we've brought forth a dividend increase for 2008. We look at it every quarter obviously, but I think it's fair to assume that a quarter each -- $0.25 each of these quarters for the rest of the year is kind of our expected game plan and our guidance and our cash flow expectations are in sync with that.

And that's versus $0.72 last year, so that's (multiple speakers).

Yes, I understand that, Dave. But the next increase won't be of that magnitude, it'll be --?

Absolutely right, that's correct.

Mid single-digit kind of range? And my last question, I heard something that I wasn't sure that I knew which was that you were selling billets out of Sterling. I thought that all the production out of the melt furnace was internally used. Is this new or did I miss something before?

No, it's not a new -- an absolute new practice. There have been times in the past where we've generated billets and sold those billets into the trade. But we do so in a way that generates a nice return, if you will, on the assets that we've got employed because it's incremental volume going through that melt shop.

And the tonnage going through the melt shop is -- refresh me. Was it 550,000 tons.

That's correct. 500,000 to 550,000 tons.

And what percentage of that might you sell of that, Dave?

Well, I would say -- the ability -- that melt shop has the ability to make 900,000 to 1 million tons. But I'm not sure that was your question.

But that's interesting. Is that on the weekend -- still on the weekend basis, the off-peak basis?

That's correct, weekends and extended weekends. We could run more if we wanted to run it full out. Of course that's not our plan. Which there are advantages -- I know you know this and Dave McGregor and I have talked about it in the past too. There are advantages to keeping a limited number of SKUs whether they be melts or melt in combination with rod sizes. And so you've got to be careful that you don't just screw everything up with too many SKUs.

Sure, well, you do that very well. Thank you very much. Great.

Keith Hughes, SunTrust Robinson Humphrey.

Regarding the extra 20 million shares that were approved by the Board, once you get the divestitures done, are we looking at just an open market purchase share transaction, a Dutch tender offer or have you made any kind of -- have any thoughts on that topic?

Matt, you may want to talk too. We've talked about an accelerated share repurchase, Dutch tender, normal daily maximum, and at this point we believe that we will go ahead and make those purchases on a daily basis up to what we feel is a prudent or limited amount. That idea could change, but we've thought about all of those, Keith, and that's where we're at today. Matt?

That's exactly right, Keith.

Thank you.

Barry Haimes, Sage Asset Management.

Good morning. I just had a question or two related to commercial fixturing, just trying to understand that part of your business a little bit better. Because we have seen some weak retail numbers out of F.W. Dodge. And I wonder if you could just give us a sense of how long does your backlog typically run in that business and has backlog been stable or is it starting to decline some? And then the second question or part of that is if there is -- retailers close stores, is there a secondary market for any of those fixtures or they typically get scrapped? Thanks.

Thanks, Barry. This is Karl. The backlog so to speak, most of the fixture business that we do has a high degree of custom element to it, so there's not a significant backlog. What we're doing is working with a retailer and talking about specific defined program rollouts. So there's some repeat business but that's not the heavyweight portion of that industry.

Fortunately in this tough retail demand environment we've taken significant capacities off-line. Our restructuring of that store fixture business is well ahead of schedule; that on the previous call we had talked about a consolidation of our wood plant and our metal plant that are discreetly different activities, those are taking place. We have seen some softening demand trends. We think there might be a little bit of movement from the second quarter to the third quarter. We do not see any program cancellations whatsoever. So it's a challenging market, but fortunately we've taken capacity off-line do better align ourselves with a forecasted demand of softness.

Thanks. And then as most of it is custom, I take it then there's not much of a secondary market, is that how that works?

No, there's really not. I mean, there's not a lot of fixtures that get put in inventory, they're defined by a customer pole. Inherent in that industry is a little bit of delay from time to time, but a walkaway of fixtures is not common at all. Jeopardized inventory historically has not been a problem in that industry.

Thank you.

Thank you. And at this time there are no additional questions. I will turn it back to management for any closing remarks.

We'll just say thank you and we'll talk to you again next quarter.

Ladies and gentlemen, that does conclude the Leggett & Platt first-quarter 2008 earnings conference call. I'd like to thank you for your participation and for using ATT teleconferencing. You may now disconnect.