禮恩派 (LEG) 2010 Q1 法說會逐字稿

Greetings and welcome to the Leggett & Platt first-quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David DeSonier, Vice President of Strategy and Investor Relations for Leggett & Platt. Thank you. You may begin.

Good morning and thank you for taking part in Leggett & Platt's first-quarter conference call. I'm Dave DeSonier and with me today are the following. Dave Haffner, our CEO and President; Karl Glassman, the Chief Operating Officer; and Matt Flanigan, who is our CFO.

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 will provide operating highlights, and Dave will then address our outlook for 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 website.

We posted to the IR portion of the website a set of PowerPoint slides that contain summary financial information. Those slides are intended to supplement the information we discuss on this call.

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 of 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 all for participating in our call. Notable demand improvement in several of our end markets was reflected in the first-quarter results we reported yesterday. First-quarter 2010 sales from continuing operations increased 14% over the prior year. Unit volumes grew approximately 18%, but were partially offset by steel-related price deflation that occurred in the first half of 2009.

First-quarter 2010 earnings from continuing operations were $0.30 per share. This includes a $0.03 per share net benefit from unusual items, which is comprised of a $0.05 per share benefit associated with the sale of a building and several smaller items that net to $0.02 per share expense.

In the first quarter of 2009, earnings from continuing operations were $0.02 per share and included a $0.04 per share charge related to a customer bankruptcy. The year-over-year earnings increase primarily reflects higher sales and the associated improvement in capacity utilization, cost-reduction initiatives implemented in 2009, and pricing discipline.

As anticipated, the incremental unit volume we realized in the first quarter generated contribution margins in line with our approximate 30% expectation.

Steel costs increased during the first quarter. These increases included further escalation in scrap costs, which compressed metal margins at our steel rod mill. The first-quarter earnings impact from LIFO expense and lower metal margins, combined, was approximately $0.03 per share. Market prices for steel rod have begun increasing, and we expect metal margins to improve in the coming quarters.

As a result of the cost increases, we have announced and are in the process of implementing price increases in our major steel-based businesses.

The Company's primary financial objective is to consistently achieve total shareholder return within the top one-third of the S&P 500. From January 1, 2008, through April 20, 2010, we posted TSR of 49%, which ranks in the top 4% of the S&P 500.

Our financial profile remains strong. We ended the quarter with net debt at 25.6% of net capital, which is well below the low end of our long-term targeted range of 30% to 40%. We currently have over $400 million available and two years remaining on our $600 million bank facility. And we have no significant fixed-term debt maturities until 2013.

Our cash balance at the end of the first quarter was $247 million.

We generated $51 million of cash from operations during the quarter. Though working capital dollars increased in correlation to sales, as a percent of sales it remained at a lean 14.2%.

We repurchased approximately 2 million shares of our stock during the quarter at an average price of $19.75 per share. We also declared a first-quarter dividend of $0.26 per share. At yesterday's closing price of $23.14, the current dividend yield is 4.5%. The dividend remains a key lever in achieving our TSR goal. As consistently been the case for many years, we expect operating cash in 2010 to comfortably exceed the amount required to fund dividends and capital expenditures.

For the full year, we expect operating cash to exceed $300 million. Capital expenditures for the year should be less than $90 million, and dividends will require about $155 million.

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

Thank you, Dave. Good morning. I would like to quickly discuss a few major topics. You will find segment details in yesterday's press release and in the slide presentation on our website that Dave DeSonier mentioned earlier.

First-quarter sales increased 5% in our Residential segment, with unit volume growth partially offset by the steel-related price deflation that occurred in the first half of 2009.

In our US Bedding business, inner spring unit volumes increased approximately 5% in the first quarter, reflecting improved market demand. Box spring units grew significantly during the quarter, reflecting improved demand and market share gains.

Unit volumes in our Furniture Components business also increased in the first quarter due to market share gains and relative market strength in motion upholstery. In both Bedding and Furniture, market demand has been strongest in recent months at lower price points.

As Dave mentioned earlier, steel cost increased during the first quarter; and as a result we have announced and are in the process of implementing price increases to recover the higher cost. Increases of approximately 6% to 9% are being implemented in our domestic Bedding and Furniture Component businesses. Increases at various rates are being implemented internationally.

Demand in the office furniture industry appears to have stabilized, albeit at a very low level. First-quarter sales in our Office Components business increased approximately 5%, a notable accomplishment given current market demand. This volume growth reflects new programs that we have been awarded.

Revenues in our Store Fixtures business grew roughly 35% during the quarter and continue to reflect solid demand by the value-oriented retailers with which we are very well placed.

First-quarter sales in our Industrial Materials segment increased 7%, with unit volume growth partially offset by the steel-related price deflation that occurred in early 2009. We closely monitor trends in the steel market; and as a producer of steel rod, the increase in scrap cost in recent months compressed first-quarter margins in the segment. Rod pricing has begun to increase; and as Dave mentioned, metal margins should improve in the coming quarters.

First-quarter sales in our Automotive businesses grew approximately 80% versus an extremely weak first-quarter 2009. Automotive industry production rates continue to improve globally. Industry forecasts anticipate production growth in all the major markets for the full-year 2010.

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

Thanks, Karl. In light of an improved demand environment, we raised our full-year guidance. Sales for 2010 are now anticipated to be in the range of $3.1 billion to $3.4 billion. The lower end of this range allows for some risk of market contraction from current demand levels, and the higher end allows for a relatively strong demand environment to continue.

Based on this sales range, we expect full-year earnings of $0.95 to $1.30 per share.

Much of our sales and earnings growth for the next couple of years will likely come from demand recovery in our end markets. Longer term, we believe a 4% to 5% annual revenue growth is achievable. Consistent with the plan we outlined two years ago, we are now beginning to devote resources to this next phase of our strategy.

Achieving this long-term growth objective will require that we continue to prioritize development and commercialization of innovative new products within markets in which we already enjoy strong competitive positions.

We also intend to identify and cultivate new higher growth business platforms, markets that are new to us, and in which Leggett would possess a competitive advantage. We are working with external strategy consultants to help us identify these opportunities.

Both efforts are receiving significant management attention and priority. Both are vital to our longer-term future growth and success.

With those comments I will now 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 reenter the queue, and we will try to answer all the questions that you have. Diego, we are ready to begin the Q&A.

(Operator Instructions) Mark Rupe, Longbow Research.

Hey, guys. Congratulations on the performance, number one.

As it relates to the inner spring units being up 5%, Karl, I believe you mentioned on the last call your initial stab on the 2010 thought process for bedding would be up maybe a percent or two. Obviously, the first couple of months of data from the industry has been better than that.

Do you have a new view on the rest of the year on the bedding front?

Yes, Mark, you are right. We may have been a little bit conservative when we released for 4Q talking about this year. We haven't put a number out there, but internal conversations were probably in the 3% to 4% range now.

ISPA just published a new forecast, which was a consensus of the manufacturers, at 4.5% in units. And we can get comfortable with that.

We're seeing kind of an interesting phenomenon in that units were extremely strong in the first quarter. We think that that may have been correlated to an extremely strong tax refund-related season, significant volume in the lower-end price points. So we are cautiously optimistic, but it feels a heck of a lot better.

Okay. Just real fast, on the Store Fixtures. That is a real 35%, right? Because you had the impact last year in first quarter of the walkaway.

That's correct.

Then 35% is a huge number. I mean, is it all really on the value-oriented retailers' positioning?

Not all, but primarily.

Okay, great. Congrats, guys.

Thank you.

Budd Bugatch, Raymond James.

Good morning, everybody, this is actually Chad pinchhitting for Budd. Let me add my congratulations on the improvement in the quarter as well.

Thanks, Chad.

Sitting in our shoes, as we think about modeling the year, obviously I think the most challenging segment for us is Industrial; and I would imagine it's probably the most challenging forecasting for you guys as well. If you could help us out a little bit there, what does your full-year guidance assume for sales and margin in that Industrial segment?

I guess, just how do we think about units versus pricing and then that scrap rod spread? David in his comments mentioned that you expect that margin to improve. Is that incorporated in the guidance? Does it assume kind of flattish, or is there sort of a range?

Just whatever color or help understanding that segment you could give us would be very appreciated.

Chad, we currently expect -- you're right, Industrial is the most difficult to predict, by the way. The steel volatility over the last few years has been extreme. We expect that metal margin issue to begin to rectify in the second quarter.

We have, as Dave said in his commentary, have announced price increases. We're starting to see scrap moderate. Longer term, we would expect Industrial for the year to be in that 8% to 9% EBIT range coming off a pretty tough first quarter.

Okay, great. That's very helpful.

If I could sneak one other quick one in, Office Furniture Components up 5%. Could you give us a sense for how much of that was organic versus the new programs?

I don't know if you have talked about it before, but are the new programs related to new customer wins, expanded business with existing customers, or a little bit of both?

Chad, as you know, that office furniture universe is relatively small. So they are primarily wins in the existing customer base. And as you know, the BIFMA statistics show that office furniture sales, the expectation is they would be off in that 4.5% to 5% range.

So we're probably experiencing a similar thing, so that delta of new programs are probably in that 5% to 10%. So it's been helpful. Our folks have done just a wonderful job of managing both the cost side and the product development innovation part of that business.

Terrific. Well, I appreciate you taking my questions; and good luck on the rest of the year.

Thank you.

Thank you, Chad.

Keith Hughes, SunTrust.

Thank you. Two questions on raw materials. The price increases you referenced earlier, is that in response to the inflation in scrap and other products that you've seen year to date? Or is this you trying to get ahead of the curve of potential future increases that are coming down the pike?

Yes, Keith, thanks for the question. We actually -- step back a little bit. What we have seen on the scrap side of things is inflation since December of about $100 a ton.

When we announced rod, wire, and then steel wire-based component increases, we did so with an expectation that scrap would moderate in May as it normally does and actually fall back a little bit.

So we're not really ahead of things. If scrap was to continue to run, we would have to announce another wire-based increase. If it moderates somewhat, we are probably okay.

It's a challenge, forecasting steel. As you know it is a worldwide commodity. It has become even more difficult now than it has historically been in that ore contracts used to be annual contracts. They are now quarterly contracts.

We've seen extreme inflation and volatility in the Chinese and the European markets to a greater extent even than the domestic markets. So we just flat out don't know.

Keith, this is Dave. I think you know that seasonally there tends to be an increased volume in scrap collection in the spring after the winter months. And as a result of that, there generally tends to be an abatement in the cost of scrap in the springtime.

We have built that into our forecast. But as Karl says, if we don't see that, then we will be back at the drawing board. But right now we have built that into the forecast.

Okay. There are stories that with the change in iron ore pricing that steel could go up significantly. So just to hear you -- right, if that would be the case you would have to probably raise component prices again, correct?

That's correct.

That's correct. Absolutely.

And the second part of that, if we go more to just the rod spread pricing, is there any reason if that scenario were to play out that you wouldn't see the normal spread? It might contort for a month or two, but would it not revert back to normal as it is doing right now with further inflation?

Keith, we are not real sure what normal spreads are. They are certainly wider today than they were in the 2001/2002 time frame; and not as wide as they were in 2008.

So we would expect that over a longer time frame that the spreads would be greater than they were at the turn of the century and not as wide as they were in 2008. But to try to pin it to a new normal, we don't know.

But we do know that the steel industry is consolidated. That there is less manufacturing capacity around the world. It truly is a world market, and we have an expectation that those spreads will be acceptable to us.

Okay, thank you.

John Baugh, Stifel Nicolaus.

Good morning and my congratulations as well. Terrific results.

Quickly, in the Residential Furnishings, you mentioned share gain. Can you mention or tell us when that occurred, when it anniversaries? And then if you back that out what you were seeing in Residential? And then I have a follow-up.

John, the share gain in Residential that we spoke to is -- inner springs I think we are holding our own. There hasn't been loss or gain.

Box springs that we have a share gain because of picking up that Sealy business, it will anniversary to the most part in the second quarter.

On the Furniture Hardware side, that is relatively new business that has come back to us. There are some dynamics, kind of multifaceted dynamics happening on the motion upholstery side in that we picked up some business at the expense of some low-price, low-quality mechanism manufacturers in China who put some product into the market, into some of our furniture customers' product that didn't perform very well.

So we have gained that business back. Most of those wins took place in the latter part of the fourth quarter. We won't anniversary that really until 1Q 2011. We should continue to benefit through the rest of this year.

We are also experiencing, as the market does, the continued growth of motion at the expense of stationary. So that is also driving the category in total.

Karl, following up, two things. One, what was your best guess at what Residential Furniture as a market, excluding the share gain, was?

And then I am curious; it looked like year-over-year the contribution margin was right at 30%. And yet you had steel inflating and it sounds like still a negative mix shift. Am I right about that, and thinking that it could have been slightly better had those events not occurred? How do we think about that contribution margin going forward? Thank you.

On the contribution part of the question you're dead on. It was around 30%. We have an expectation that it will be greater than that once we get past this steel issue.

As it relates to Furniture, we think the industry in 1Q was probably -- on the upholstered side that we participate in to a much greater degree than stationary even, on the motion side -- we would expect that it was probably up in the 10% range.

Great. Thank you very much.

You're welcome. Thanks, John.

Joel Havard, Hilliard Lyons.

Thank you. Morning, everybody. Karl, you have made a few comments today about the inflation pressures coming your way, the price hikes are passing through.

Is the environment changing, specifically with regard to the length of the timing curve that it takes to see these coming your way and your ability to pass them through? What I am getting at is -- is there sort of a -- is there more of a fundamental shift or change in the historical trend there?

I know it's traditionally taken you all some time to absorb it and some time to pass it back through. Is that curve getting tighter?

Actually, Joel, it's an interesting question. It's not taking us longer to pass it through.

There is a higher percentage of that pricing is geared to -- is indexed, especially on the Store Fixtures side of things where, you'll remember, when we went through the inflation in 2008 we were exposed to a greater degree on Store Fixtures, and our teams have done a really good job of allowing for raw material inflation metrics in their pricing. So it's recovered more quickly and more effectively.

On the more core Residential side of the business and Industrial, no; we are passing through at about the same rate.

If there is a difference today, it is the magnitude and the variety of inflation. From our finished bedding and furniture customers' standpoint not only are they getting it from steel but they are seeing it -- everything petrochemical-based.

So they are getting foam increases, fiber increases. The leather guys are seeing huge inflation in hides. Cardboard. All the MDFs. So it is a challenge.

Historically the retailers have said to the manufacturing customers, we won't let you pass through. Our manufacturer customers are in a squeeze. They have to pass it through at retail. The magnitude and the velocity of this, retail has to move this time.

You guys have been around the industry long enough to have some perspective on that. Is this a harbinger or reminder of events going back two, three decades? I know you guys aren't all that old, but --

I'll let Dave answer that question, Joel.

Everything is relative, Joel. Actually I don't know how to answer that question. I do not think so, but I really don't know. And I apologize for being -- sounding like I am sidestepping.

No, that's fair. I guess maybe put it this way. Is there -- are you describing a way of structuring your bid that is more flexible? Or are contracts themselves allowing for a more updated pricing as needed?

We have asked all of our operating people to contemplate the value of indexed pricing, wherever it makes sense for their respective segment and their customer. Of course, there is safety on both sides of that, going up and going down, respectively. So we have seen more of that, as some of our customers want to now lock in less volatility for periods of time.

I would say though, and this is probably the extent of my salesmanship, if you look at the significant inflationary impacts of petrochemical products -- and as Karl said, our customers are catching it from every direction. And one of the advantages -- even though we experience inflation in steel -- one of the advantages that a combination of spring, wire, and air has over petrochemicals is it's net less expensive.

So we continue to innovate ideas and products, not just for bedding but for various of our customers, which include wire and wire systems, to help our customers reduce the amount of foam and/or fiber-type products that they have to use. That will continue to be one of the high priorities for us.

Okay. Guys, thanks and congratulations as well and best of luck.

Mike Smith, Kansas City Capital.

Well, good morning. And good job.

I notice that your SG&A continues to decline. Is there much more there you can do, or have you done it all?

Mike, this is Matt. I would just add that it's been running about $90 million a quarter, as you have seen. And certainly as sales potentially increase from this point you should see us have a chance to migrate as a percent of sales to around 10.5%.

For example, here in this past quarter it was just a tad over 11%. So we will see some more gearing there.

As Dave and Karl are both quick to remind all of us, as we see business come back, we sure need to work hard on all of our cost pieces to ensure that we don't have creep take place there inappropriately. And SG&A will be one area we watch very closely in that regard.

Thank you. I have one other question. I don't know that I am last on the line. I generally am.

Go ahead.

I'm slow. Star one, kind of hard to find. The other question was, I think you went through it in your prepared remarks, but what type of financing do you have available on your commercial paper and your various lines of credit?

Mike, we have $600 million bank facility that matures in April of 2012, so it has two more years to go. It is fully available in that regard. Right now today as we sit here, we are using about $100 million of it for actual commercial paper borrowings; and about $100 million or a little less than that for some typical letter of credit needs.

So we have a little over $400 million at the ready for any liquidity needs we might have. It's a very strong group of banks led by JPMorgan, and we feel great about it.

Just out of curiosity -- I know you have got your planning that you put in place in November of 2007; and you have executed on that five stars. Considering the current economic environment, are there any acquisitions out there that are coming to you with a tin cup?

Well, Mike, this is Dave. The M&A market certainly is not frothy. However, it is getting more interesting. I will put it that way.

I think there are no significant acquisitions in the near term that we are planning. On the other hand, we're seeing more and having more interaction with some companies. I think that is a direct result of companies that want to sell their business are seeing improved performances and therefore easier to ask for higher prices.

On the other hand, on the volume side, I think companies are getting more comfortable that indeed the improved results are realizable. So we don't have anybody with a tin cup suggesting that we should buy them out of fire sale, but we are starting to talk to a few more companies than we have in the past.

Thank you very much.

Fred Speece, Speece Thorson Capital Group.

Yes, thank you. This new platform, are you thinking of a new segment or acquisitions within the current segments you have?

Fred, this is Dave. We are not limiting our thought process to having something being absolutely brand-new and a new segment. In fact, a couple of the products that we are looking at right now are significant extensions of existing product lines that would be service to a broader range of prospective customers. Namely older, less ambulatory customers.

On the other hand, we are looking at absolutely brand-new businesses. And if one of those is large enough, whether it be an acquisition or a combination of an acquisition and some internal product development, we would in fact initiate that as an independent business unit, probably ultimately growing into a business segment.

Thank you.

Jon Evans, Edmunds White.

Can you just talk a little bit about the tone of business and how you saw it progress through the quarter? Because when we talked or we see some of your customers, they have all talked about their business being extremely strong and actually getting better as they went through the quarter and as they have gone into April.

So could you help us out and maybe talk about how order trends were for you as you went through the quarter, and if you could give us any inlook into April?

Jon, this is Karl. It varies by business; but overall January certainly was a little slow out of the gate. We saw pretty significant momentum build in February and March, at least on the Residential side.

And I made reference to this earlier, that the more promotional products sold extremely well. And we think that there might be a correlation there from what our customers were telling us to unusually high tax refunds. Thus, the lower-end, more promotional business.

Business since the Easter holiday has slowed a little bit, which in Residential is the normal cycle, that we usually slow a little bit, Furniture and Bedding, going into Memorial Day. There is not a lot to trigger to promote off until the Memorial Day weekend.

Automotive on the other side came out of the gates extremely strong. Obviously they are dealing against some pretty darn easy comps. But that business continues to stay strong, and the CSM forecast continue to ratchet up for domestic production. They have just upgraded last week again. So it seems like that customer is out there.

Some of the other businesses? Industrial is so correlated to Furniture and Bedding, that demand continues to hold. Inventories are relatively low. There might be some advance buying taking place in the next few weeks as price increases are implemented.

Overall, I would say things are a little softer, as they normally are.

Okay. Thank you for the insights.

You're welcome.

(Operator Instructions) Keith Hughes, SunTrust.

Yes, just a follow-up here. Your comments on the Commercial Furniture business -- or Component business stabilizing, are you starting to see some signs from customers of order activity heading into particularly the non-office type space? Is there any sign of that? Or is it just sort of flatlining at this point?

Keith, I would say it is flatlining. People are more optimistic because the rate of decline has leveled; and we do think that we have bottomed. But there is not a significant enthusiasm for growth at this point. There is a lot of secondhand, high-quality product out in the marketplace.

But there are -- a lot of those office customers are doing a really good job from a new product innovation standpoint. NeoCon here in the next month or two will be interesting. We expect a lot of launch activity there to try to reinvigorate volume.

But until occupancy, rent rates increase, we see white-collar employment grow significantly, that we think we flatline.

Okay. Thank you.

John Baugh, Stifel Nicolaus.

Quickly, steel deflation going forward for the rest of the year, how does that map out quarter by quarter?

No deflation. We have anniversaried the deflation. The first quarter year-on-year was the last of the deflation. You will see inflation really starting this week.

Okay. As you mentioned, 6% to 9%, how do we map that during the quarters? It's obviously being implemented during the quarter. Do we get half of it roughly in this quarter, and then should we be thinking 6% to 9% inflation in those key product areas in Qs 3 and 4?

Yes, I would say that it would be safe to model half of it in 2Q.

Great. Thank you.

You're welcome.

Fred Speece, Speece Thorson Capital Group.

Yes, are you seeing any easing or any change at all in the availability of credit of your suppliers or customers, where you're concerned or where you have to help out?

Fred, this is Matt. No, we are not seeing that be a problem at all. I would guess that they are probably seeing credit a bit easier to obtain now than they did three to six months ago, as most businesses are seeing a bit more buoyancy in their business.

But no, that has not been a trend that we are troubled by at all.

You have not changed your allowance for doubtful accounts at all?

We have not.

Thank you.

John Baugh, Stifel Nicolaus.

Just having a field day here. You had one business unit, I believe, still for sale. Could you just update us on that, please? Thank you.

Yes, John, that's correct. That's our Storage Products business unit. We are nearing finalization of that transaction. It has not been closed. We are in some final negotiation.

We would like to think that it would be done by circa the end of May, no later than the end of June.

Great. Thank you.

Ladies and gentlemen, there are no further questions at this time. I will turn the conference back over to Mr. DeSonier for closing remarks. Thank you.

We appreciate your attention and we will be talking to you next quarter. Thank you.

Thank you. This concludes today's conference. All parties may disconnect now.