禮恩派 (LEG) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Leggett & Platt first-quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions).

I would now like to turn the conference over to our host, Mr. David DeSonier. Go ahead, sir.

Good morning, and thank you for taking part in Leggett & Platt's first-quarter conference call. I am Dave DeSonier, the Vice President of Strategy and Investor Relations, and with me today are the following -- Dave Haffner, our CEO and President; Karl Glassman, our Chief Operating Officer; Matt Flanigan, our CFO; and Susan McCoy, who is 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. Karl Glassman will provide operating highlights. Dave will then address our outlook for 2009. 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.

Thank you, Dave. Good morning, and thank you for participating in our call. Yesterday, we announced our first-quarter results. The weakened global economies have resulted in extremely soft market demand. First-quarter sales for continuing operations decreased 28% versus first quarter of 2008, reflecting significant unit volume declines and our decision to exit some specific sales volume with unacceptable margins.

First-quarter earnings from continuing operations were $0.06 per share, in line with our expectations. In the first quarter of 2008, earnings from continuing operations were $0.23 per share. The year-over-year decrease is primarily due to lower unit volumes, which were partially offset by improved margins on selected products as a result of better pricing discipline.

First-quarter 2009 earnings reflect a significant impact from consuming higher-cost steel inventories as steel costs have declined. An additional impact is expected in the second quarter.

The Company's primary strategic objective is to consistently achieve total shareholder return within the top one-third of the S&P 500. From January 1 of 2008 through April 21 of 2009, we posted TSR of negative 8%. Though disappointing, our performance for that period ranks in the top 9% of the S&P 500. We continue to believe that our TSR would have been much lower had we not implemented and made significant progress on our revised strategy.

In this very turbulent financial environment, our strong financial profile is especially notable. Our balance sheet remains in excellent condition. We ended the quarter with net debt at approximately 27% of net capital, which is well below the low end of our long-term targeted range of 30% to 40%. We currently have nearly $600 million available and more than three years remaining on our $600 million bank facility. And we have no significant maturities of long-term debt until 2012.

We generated $115 million of cash from operations during the quarter, as we made progress in reducing working capital. We repurchased approximately 1.3 million shares of our stock during the quarter at an average price of $13.26 per share. Share repurchases are occurring at a slower pace this year, as we carefully monitor economic conditions.

We also declared a first-quarter dividend of $0.25 per share. At yesterday's closing price of $15.12, the current dividend yield is 6.6%. The dividend remains a key lever in achieving our TSR goal.

As has consistently been the case for many years, we expect operating cash in 2009 to comfortably exceed the amount required to fund dividends and capital expenditures. For the full year, we expect to generate more than $300 million of operating cash. Capital expenditures for the year should approximate $100 million, and dividends will require about $155 million.

We made significant progress on our strategic initiatives in 2008, but the one area which we fell short of our goals was margin improvement. This remains a top priority for us in 2009. Improvements should come from elimination of poorly performing operations, improved capacity utilization, headcount reduction and cost cutting, most of which was completed by the end of 2008, by narrowing the focus of our store fixtures business and lower commodity costs. It is imperative that we aggressively pursue and deliver higher margins as part of our effort to improve returns.

And with those comments, I will turn the call over to Karl Glassman, who will provide some operating highlights.

Thank you, Dave. Good morning. In my comments this morning, I am not planning to repeat the segment details from yesterday's press release, but will quickly highlight a few major topics.

We continue to experience weak demand worldwide. In many of our markets, demand seems to have stabilized during the first quarter, but at levels somewhat below what we had anticipated. Office furniture volume continues to decline, consistent with industry data.

We are not forecasting demand improvement in 2009, but we remain focused on factors we can influence and control. The actions we took last year to eliminate poorly performing operations, cut overhead costs and reduce inventory are offsetting some of the impact from lower sales. Late last year, we significantly reduced production in order to bring finished good inventory levels in line with current demand. We accomplished most of the necessary reduction by year-end, and in the first quarter, capacity utilization improved modestly versus year-end levels, resulting in better overhead absorption. The majority of our overhead cost reductions were also completed by late last year, although we continue to tightly constrain overhead spending in 2009.

As we make spending cuts, we are not sacrificing long-term opportunities. We remain focused on new product development and recognize that this important function is critical to our future success.

We will experience significant variability in our quarterly earnings this year as a result of steel-related issues. Market prices for steel began to decrease in late 2008, but with the precipitous drop in demand late in the year and our inability to cancel or return higher-priced earlier purchases, we entered 2009 with high steel costs and inventory. First-quarter earnings reflect a significant FIFO inventory impact, as we consumed a large portion of the higher-cost steel, and we expect the remainder to be through the system by midyear.

In the second half of 2009, our cost of goods sold should reflect current market prices for steel.

All of our segments use the FIFO method for valuing inventory, and adjustment is made at the corporate level to convert about 60% of our inventories to the LIFO method. These are primarily the domestic steel-related inventories. Lower steel costs have resulted in an estimated full-year 2009 LIFO benefit of $68 million. This benefit will be recognized evenly over four quarters, and for the year, will essentially offset the FIFO impact recognized in the first and second quarters.

Since the LIFO benefit is not recorded at the segment level, 2009 segment EBIT margins will be unusually low.

As a final steel-related comment, we implemented selective price reductions in the first quarter, but at current commodity costs, we expect to enhance our margins. With those comments, I will turn the call back over to Dave.

Okay. Thank you, Karl. As we announced in yesterday's press release, 2009 earnings per share from continuing operations are now expected to be between $0.60 and $0.90. This guidance anticipates the continuation of weak market demand.

Full-year earnings should benefit from lower commodity costs, previous closures of poorly performing operations, headcount reductions and reduced overhead spending. Sales from continuing operations for the full year are projected to be between $2.9 billion and $3.3 billion, or approximately 19% to 29% lower than in 2008. The reduction from prior guidance reflects weaker market demand than previously anticipated.

Our quarterly sales and earnings normally reflect moderate seasonality. In 2009, our quarterly earnings are expected to be more variable than normal due to the expected mismatch in steel impacts that Karl was referring to. As a result, first-half 2009 earnings should be lower than second-half earnings.

We still intend to use excess cash primarily to repurchase shares. Our 2009 guidance assumes that we repurchase 4 million shares for the year and realize a 2 million share net reduction, including shares issued for employee benefit plans.

And in conclusion, as all of you well know, these are very unusual financial times, but Leggett is well situated to weather this environment, even if it lasts for an extended period. We have long maintained a very conservative financial position, but crucial strategic changes implemented over the past year, including the divestiture of non-core businesses, provide an even greater advantage in this environment. We are very comfortable with our strategic direction and are absolutely committed to the continued execution of our plan. We believe our actions are reestablishing Leggett as a stronger and more profitable company.

And with those comments, I will 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 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 reenter the queue, and we will answer all the questions you have.

Jo, we are ready to begin the Q&A.

(Operator Instructions) Mark Rupe, Longbow Research.

Just had a question on the Residential Furnishings segment. Any color you can provide on how some of the bedding-related business did versus the overall furniture? And then just secondly, on the seasonality going into the second quarter, I know the second quarter last year was very strong for that segment. Just curious to see how the performance might be in the second quarter for that channel.

If we separate the Residential Furnishings segment -- what I'm going to do is give you sales by kind of product category, and these are sequential. So they are sales, not units, fourth quarter to first quarter.

US spring sales were up about 5%. Units -- innerspring units were up 1%. Box springs were off slightly, that were kind of indicative of the market in total. We think the bedding industry was down -- the last [ISPA] number we saw through February was 15%. We think a more accurate number for the quarter was off 20. So that is indicative of our regaining some market share and the de-verticalization that we made in 1Q of '08. So bedding performed well.

International spring was off about 30%. Included in that is us walking away from some poor performing business in some geographies. Furniture was off about 15%. Consumer Products off about 11%. Our Hanes, which is our non-woven fabrics, non-decorative fabrics business, primarily, was off about 30%. There is a little bit of divestiture activity included there also. And carpet underlay was off 12%.

So, as we speak, we think that -- basically feel that the demand trends have softened. First quarter was obviously pretty tough compared to the fourth. As regards to the tough second-quarter comp, we don't see much improvement. We don't see much deterioration. So there is a little bit of a seasonal pickup normally housed around Memorial Day. We will see what happens. But we are guarded in our forecast.

And Karl, wouldn't you say that, generally speaking, the lower-priced products have done better than the premium-priced products?

Very much so. I think that is part of what our market share gain is, is we are certainly picking up market share from the alternative -- pure-play alternative sleep products that are more highly priced. So yes, our customers at every pricing strata have down-speced to a degree and are selling lower-priced goods.

Perfect. Great color. Thank you.

Budd Bugatch.

Good morning, David. Good morning, Karl and Matt and everybody else. Let me just kind of drill down and get your outlook kind of by segment maybe for the year, and any comments you want to make on some of the other internal segments would be helpful, as well. But I know that your crystal ball has got to be cloudy, but how have the individual segments factored into the overall revenue expectations?

Just real quick to run through the segments. For the full year, if you midpoint our revenue guidance, you would expect residential to be down mid-teens, call it 15%. The other segments all off in the ballpark of 30% or so. And then from the midpoint, you can decide where you want to be in the range. But that is sort of how you get there.

Is there any other comment you would like to make on any of the other segments in terms of some detail?

Budd, why don't I go ahead and finish this, and the rest of the segments? Again, this is a walk from 4Q to first Q, sales only, not units.

Store Fixtures were off about 30%. Remember, there is a little bit of divestiture activity and some wisdom in walking away from some unacceptable business. Office Components was down about 35%. There is a little bit of divesture activity there also, housed around our aluminum business, when that left us. But as you know, that industry is extremely depressed. Wire was down about 20%. The -- really the tough story is in specialized. Automotive was down 46%. Machinery was off about 25%. And the commercial vehicle product business was down about 35%.

And that is fourth quarter to first quarter, not year-over-year?

That's right. No, I'm sorry. I apologize. That is a walk -- Susan just gave me that look, but -- I misspoke. That is all -- all of the numbers that I gave you and gave Mark were first quarter '08 to first quarter '09. I apologize for the miscommunication.

That's very helpful. Thank you. That's perfect.

Budd, this is Dave. Just to reiterate, and you already well know what is happening in office and contract, but -- and we see that same deterioration continuing. And then it is anybody's guess in automotive, depending upon what sort of ultimate demand and build and number of weeks of shutdown and that sort of thing. So neither of those, automotive or office, look very attractive throughout the rest of the year.

John Baugh, Stifel Nicolaus.

Good morning, Leggett team. I know it is hard to generalize; you are in so many products and industry groups. But I am curious as to whether or not, if you are generalizing for your business, you thought there was a material amount of inventory reductions going on at your customers' business in, say, December and January that maybe caused business even though sell-through furniture and bedding hasn't been any better in the last 60 days; I'm not sure it has been worse.

I'm just curious as to whether you are seeing in your numbers any kind of either a stabilization or a lift even from run rates in December/January that may have been caused by some level of inventory reductions by your customers.

John, in different parts of our business that we do believe there was some inventory purging. Not so much in residential. To a greater degree, there was a purge in internationally purchased, upholstered furniture. But there is -- as you know, those businesses are really pretty working capital inventory related efficient. We have not seen a significant uplift in the third period as compared to first and second. Haven't seen any deterioration, but not a lot of inventory sensitivity.

In some of our other businesses, though -- automotive is an example -- in that area, that there certainly is some inventory purging going on. We think that impacted office, as an example. Some of our wire-based inventories. So it is a mixed bag. But I don't want to leave you with the feeling that we think things are getting markedly better.

Okay. And then on the pricing quickly, I'm interested in the bedding side here. With all the increases and decreases, what is going to be your unit trend versus price per unit trend in bedding in calendar '09?

Boy, it is tough, because you have to look at it quarter to quarter. Where we -- there wasn't a lot of -- we started our inflationary uptick in 2Q '08. So we haven't comped really to that. So what you will see is our sales should start to look even weaker, because we have some minor deflation versus inflation on a year-on-year comparative standpoint.

We have reduced some selling prices in line with raw material reductions in the first quarter of this year. We expect that we are at the bottom of that. You should expect -- hold us accountable for increased margins in those businesses. We continue to work with our customers, but our profitability is not acceptable at this point.

Thank you.

Keith Hughes, SunTrust Robinson Humphrey.

Thank you. A couple questions. First, on the LIFO benefit this year, if prices stay where they are at this point, would that benefit evaporate in 2010?

Yes.

Okay. Second question. Within the Specialty division, you listed off some numbers there, but moving forward, is the automotive going to be the biggest source of weakness, or can you not really distinguish among the products?

Year-on-year, automotive will be a source of weakness; sequentially, it should not be. The reason for that is that inventory purge. We've seen a little bit of uptick in automotive just recently -- that significant downtime that the manufactures took in December/January. We believe that North American automotive has been on an annualized run rate from a production perspective in the 4.5 million to 5 million vehicle range. Current estimates are sales anywhere between 8.2 million and 9.5 million. So that business probably should improve somewhat through the year, but still on a year-to-year comp, it is going to be tough.

Okay. And the final question on the dividend, you highlight in the press release and in the prepared comments of how you can pay the dividend at the current rate from operating cash flows. If you have to -- if you can't be funded from operating cash flows, is that going to be the signal to you you will have to lower the dividend payout rate? Or what is going to be the metric?

Well, obviously, Keith, if for some reason we were unable to make $0.25 per quarter from normal earnings for a long enough period of time, that would be a signal. Our goal, of course, and we've stated this, is to pay 50% to 60% of our earnings out. And if we are at $1.00, that means we need to get to $2.00 per share.

We have a plan we think will get us there, but obviously, if for some reason we failed to significantly improve our EPS, then we would have to give some consideration to that. But at this point, there is no reason to believe that we won't continue to maintain our dividend and our record.

Okay. Thanks a lot.

Keith, this is Dave DeSonier. Just wanted to make sure on your question about LIFO, when that benefit evaporates, I think you understand that as well the FIFO hit that we are currently seeing in the segments will also evaporate. Those two things basically offset.

Joel Havard, Hilliard Lyons.

Need a history lesson, guys. I don't know who will want to take it, but wanted to get your thoughts on how the used product market in fixtures looked during the last big recession. And as a follow-up, how the reconfigured fixture business for Leggett might be positioned to compete in that kind of environment.

Joel, historically, there hasn't been a real strong secondary market in used fixtures. Most of these fixtures are somewhat customized, and Leggett has specialized more in a custom than a catalog sort of business area. So there is some just standard fixtures that probably are moving around the infrastructure with a softening in retail.

I will say that our store fixtures demand looks reasonably good. That is a good story for us. We are very well-positioned with the right customer base. And we have not seen the used fixture market encroach our current book of business.

Karl, that helps a lot. I guess, could you characterize, then, how much of Leggett's reconfigured post-restructuring fixture business is front-of-store versus back-of-store/warehouse and storage? Are you just out of the racking and all that now?

Essentially, yes. It is most -- the business that remains is primarily front-of-store.

Okay, all right. That helps a lot. And as my second question, Matt, if you could go into a little bit more detail on the tax issue in Q1, and how that might feed through the rest of the year to get to the annual rate implied in the comments this morning.

You bet, Joel. As you know, the first quarter was 52%. It really does directly correlate to where the mix of the earnings came from throughout the Company. In general, the mix of earnings domestically was a little higher than originally estimated and outside the US it was a little lower.

As you get into the second quarter, we will still have a tax rate, as best we can tell, that will be above the 39% we see for the full year right now, again, partly because of this impact of FIFO that we've been referring to, and the fact that the second quarter will be, again, a bit depressed by that impact.

Then as you get to the back half of the year, since we are estimating a full-year tax rate of 39%, the back half, both of those quarters should be less than 39%, obviously.

Okay, so a combination of geography and FIFO effect?

Exactly.

Good luck, guys.

(Operator Instructions) Budd Bugatch.

Just a couple, two of them. One is a housekeeping question. The LIFO accounting goes away in a couple of years, Matt, right? When does that happen?

Well, they are talking about it, but right now it is 2014 when that would actually take hold.

Okay, take hold then. And also, Karl, could you give us a little bit of comment about how you feel about the store fixtures business in terms of margin performance and what is the likelihood of that for the rest of the year?

Actually, Budd, I feel pretty good about it, because we are positioned with the right customers. The steel has helped us. We are sharing some of that with our customers. But we are being able to improve our margins that way. Our plant consolidation, while it continues, the majority of that impact was in the first quarter. We really feel pretty good about the store fixtures business and the long-term -- or the stated target of covering our cost of capital. We are on schedule.

I would say we probably took too long to narrow our focus, and were not disciplined enough early enough in some of the pricing protocol. And that is primarily my fault.

Okay. And lastly -- I appreciate the fact that there were no callouts this quarter. Do we look for that for the full year, too? Are there anything down the horizon you see that might have to be called out in terms of expenses or --?

Budd, there was about $0.01 of restructuring in the first quarter; we expect about $0.01 in the second quarter, and we are not going to talk to you about it.

Thank you very much.

We are not showing any further questions at this time. I will turn it back to management for any closing remarks.

We'll just say thank you. We appreciate the attention, and we will talk to you again next quarter.

Ladies and gentlemen, thank you, and this does conclude the Leggett & Platt first-quarter earnings call. You may now disconnect.