禮恩派 (LEG) 2010 Q2 法說會逐字稿

Greetings and welcome to the Leggett & Platt second-quarter 2010 earnings 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, Dave DeSonier, Vice President of Strategy and Investor Relations for Leggett & Platt. Thank you, Mr. DeSonier, you may begin.

Good morning and thank you for taking part in Leggett & Platt's second-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, the Chief Operating Officer; 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 provide operating highlights. 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 expressed 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 supplement the information we discuss on this call, including non-GAAP reconciliation. 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. We are very pleased with the second-quarter results we reported yesterday. For the quarter, sales from continuing operations increased 15% over the prior year. Unit volumes grew approximately 14% during the quarter reflecting improved demand and marketshare gains in certain businesses. Sales also increased slightly during the quarter as a result of price increases implemented to recover higher steel costs.

Second-quarter 2010 earnings from continuing operations improved significantly to $0.34 per share. In the second quarter of 2009, earnings from continuing operations were $0.12 per share and included a $0.04 per share charge related to the write-down of a divestiture note. The year-over-year earnings increase primarily reflects higher sales and the associated improvement in capacity utilization. We have continued to keep a tight hold on fixed costs as sales have increased. As anticipated, the incremental unit volume we realized in the second quarter generated contribution margins in line with our approximate 30% expectation.

This further reinforces our confidence in the Company's earnings potential as markets rebound in the future. The Company's primary financial objective is to consistently achieve total shareholder return within the top one-third of the S&P 500. From the first of January of 2008 through the 21st of July 2010, we posted TSR of 36%, which ranks in the top 5% of the S&P 500.

We continue to be very comfortable with our strong financial profile. We ended the quarter with net debt at 27.3% of net capital, which is below our long-term targeted range of 30% to 40%. We currently have approximately $350 million available and nearly 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 second quarter was $244 million. We generated $67 million of cash from operations during the quarter. Working capital remains at a favorable 14% of sales and reflects our ongoing focus on optimizing returns. We purchased approximately 2.3 million shares of our stock during the quarter at an average price of $23.17 per share. We also declared a second-quarter dividend of $0.26 per share. At yesterday's closing price of $21.32, the current dividend yield is 4.9%. The dividend remains a key component in achieving our TSR goal.

As has 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 approximate $75 million and dividends will require about $155 million. With those comments, I will turn the call over to Karl who will provide some operating highlights.

Thank you, Dave. Good morning. I'd 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.

Second-quarter sales increased 9% in our Residential Furnishings segment, reflecting unit volume growth in several key businesses. In our US spring business, innerspring unit volumes increased approximately 5% in the second quarter as a result of improved market demand. Box spring units grew approximately 10% during the quarter, reflecting improved demand and marketshare gains.

Unit volumes in our Furniture Components business increased significantly in the second quarter due to marketshare gains and ongoing market strength in motion upholstery. As Dave mentioned earlier, we implemented price increases during the quarter to recover higher steel costs. In the residential segment, most of these increases were in place by mid-quarter.

Demand in the office furniture industry stabilized and appears to be showing signs of improvement. We experienced strong growth during the quarter in our office components business with sales up 21%, primarily from new programs that have been awarded.

Revenues in our fixtures and display business grew 4% during the quarter and continue to reflect solid demand by value-oriented retailers. Second-quarter sales in our Industrial Materials segment increased 28% from a combination of unit volume growth and steel-related price inflation.

As expected, metal margins at our steel rod mill improved sequentially, but were still below second-quarter 2009 levels. The sequential improvement in metal margins reflects increased market prices for steel rod. Second-quarter sales in our automotive business grew approximately 60% versus an extremely weak second quarter 2009. This improvement reflects strong growth in all of the major global markets we serve, including North America, Europe and Asia. Industry forecasts continue to anticipate production growth in all of these markets this year. With those comments, I will turn the call back over to Dave.

Thank you, Karl. In light of continued sales growth, we have raised our full-year guidance. The new ranges are basically equivalent to the upper half of our prior ranges. Sales for 2010 are now anticipated to be between $3.2 billion and $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 between $1.10 and $1.30 per share. We acknowledge the recent weakness in certain macromarkets, including consumer sentiment, but remain guardedly optimistic about market recovery. We are extremely pleased with the progress we have shown to date and remain confident that we are on track to delivering on our long-term strategic goals. With those comments, I will now turn the call back over to Dave DeSonier.

That concludes our prepared remarks. We appreciate 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. Diego, we are ready to begin the Q&A.

(Operator Instructions). Budd Bugatch, Raymond James.

Good morning, David. Good morning, Matt. Good morning, Karl. Congratulations on the quarter. One of the nicest quarters I have seen out of Leggett in a long, long time. Can you talk -- and I know you have given us the overall large factors for the year in terms of earnings per share and overall sales. Could you perhaps drill down a bit now and talk a little bit by segment, by the four segments, maybe what your outlook is for revenues, revenue growth and margin in each of the segments? I know that is one question, David, but one big question.

Karl, do you want to try to answer that one big question?

Good morning, Budd. It is a little bit of a challenge to forecast. Our guidance, as Dave said, anticipates a continuation of this recovery. We expected when we gave our initial full-year guidance back in January that the recovery would be choppy and we expect that going forward. Obviously, the comps get a little bit more difficult as we get deeper into the year. But as I break it down by segments, as you know better than probably anybody on the call, the bedding industry has somewhat of some seasonality to it where the season starts to pick up mid-May in anticipation of Memorial Day, runs basically through mid-September after Labor Day.

We are seeing that seasonal pickup. The fourth of July was reasonably strong. What we are not seeing is significant follow-through post the advertising related to those major holidays. Whereas units through the year are up 5% through the end of the second quarter, that comp might get a little tougher. Business has been a little softer the last couple weeks.

Furniture continues to be strong. We are blessed there in that we have had some marketshare gains that are somewhat significant as manufacturers and retailers start to reward us for the quality of our products.

And also, as Dave made mention, that we are starting to see some real strength in the motion upholstery segment. So that business is good, continues to be good.

Carpet underlay in residential is probably the biggest area of concern. That business continues to be soft. The demand in residential softer -- I'm sorry -- in hospitality-related demand softer than residential and we don't really expect any real recovery there. Hospitality probably won't recover until sometime mid to late next year. So that business is a challenge. We are starting to experience some raw material cost inflation. They have announced and implemented two price increases now. So we expect better performance out of that business in the back half than we experienced in the second quarter, but it is a challenge.

As we move over to the commercial side, you heard the comments on the office business. We couldn't be more pleased with that business. It is a tough, tough environment, but the manufacturers are open to new designs. The consumer seems to appreciate those new designs. We certainly have marketshare gains there. We are optimistic that the market will grow through the remainder of this year and certainly you know the BIFMA forecast show growth, forecasted growth in 2011.

Store fixtures is -- certainly we expect continued growth there. It has been an odd year for store fixtures. As you will remember, we had an abnormally strong first quarter. Second quarter was a little softer than first. We expect third quarter, from a demand perspective, to parallel second. So it looks like our first quarter may be the strongest quarter. That has changed in the demand cycle of store fixtures as it becomes more of a replacement product then correlated to new production. That business is good and my comment as it relates second to -- the third to second and then first to -- second to first was a demand comment. But from a profitability standpoint, we expect continued improvement as the cost savings take hold.

As we move to industrial, the demand side of it is highly correlated to residential. The metal margin that exists at Sterling is now back to where it should be. So it is better going forward than it was a year ago third and fourth quarter.

Automotive is the stellar performer in specialized. Certainly strong worldwide demand. We don't expect any softening. The comps get a little bit more difficult. As you remember, we were 80% up first quarter, 60% second quarter. Don't expect that kind of growth going forward. But automotive demand is strong. Our automotive folks did a wonderful job of reducing their cost structure. So that business is performing very well.

Machinery was a good solid second quarter. We expect that demand to continue. Commercial vehicle products we have spoken of in the past. We started to see some strengthening in the second quarter and are pretty optimistic about a solid back half in CVP.

So roll that altogether and we feel pretty darn good. What we don't know is what demand will look like going forward. But as Dave said, our cost structure is in place, so give us an order and we feel pretty darn good about it. And that answer was much longer winded than your question.

Keith Hughes, SunTrust Robinson Humphrey.

Thank you. Just following up on the last discussion. I think you said springs were up 5%, a little softer in July. Were they down year-over-year in July, just up less, any kind of color --

Flat.

-- would be helpful. Flat?

Flat. Yes.

Is that seasonal factors associated with that or you think demand is just a little weaker?

They certainly sequentially were stronger because of the seasonality that is inherent in the US spring business. I just think the consumer is probably a little balky.

Okay. And then the strength in upholstered furniture, particularly motion furniture, do you think that is share gain or you think that is the industry?

Both.

Both, okay. And I guess final question, if we look longer term, when we get into a more certain demand environment, moving up the debt level to the targets you talk about in every press release, is that going to come primarily through share repurchase or would some M&A activity play a bigger role than it has been in the past?

Keith, this is Dave. If we move into that range, it very well could be correlated to some acquisition activities. Certainly not uncomfortable moving into the lower end of that range to repurchase shares, especially at what appear to be compelling prices. But more than likely, we will utilize the generation of our operating cash and tap into that debt for acquisitions or hopefully some increased productive capability for generic businesses. But acquisitions would be first in line before we would do that to share repurchase.

All right. Thank you.

John Baugh, Stifel Nicolaus.

Good morning. Congratulations. The question on the contribution margin, you are famous for wide ranges and you have got a pretty good one in there still, about the range of contribution margin. I think it has been around 30% year-to-date, correct me if I am wrong on that. And I am just curious what could cause you to be at the higher end or lower end of the 25% to 35% range on contribution margin?

John, it depends on the mix of businesses. There is a greater or less contribution margin in each one of the businesses and that is why we give ourselves the latitude of the wide range. We hope we are going to be famous for accuracy at some point, so that wide range helps that sometimes. The other thing is remember that we are now dealing with some inflation and don't expect a contribution margin of 30% on the pass-through of steel inflation.

John, this is Matt. To your earlier question, it has been 30% approximately up to this point this year.

And with the mix of business, since that is influential -- I mean your residential has been fairly strong in the first half and you are at 30%. So I mean as you look at your mix of business in answering that question say for the second half, which you have some visibility towards, not a lot, would that mix stay similar or strengthen, be weaker than the first half if you had to guess?

We don't expect the contribution margin to be less in the back half than it was in the first half.

And just as an example, John, if office furnishings were to ascend the way we are feeling it going, going up, the way we feel it is going, that would help that average margin.

That's just one example where there is significant differences between those incremental contribution margins.

Okay. And then just as a follow-up on steel, you have raised it. Could you refresh us again on the magnitude and then comment on the rough impact on second-half sales across the Company and any margin comment as it relates to what you have got versus what you have incurred?

From -- sequentially from second quarter to -- I'm sorry -- from first quarter to second quarter, there was about $20 million of steel inflation that -- with that, we get margin recovery, but, as I said earlier, we don't get an incremental margin on any of that. We were about 50% -- we were fully recovered at the end of the quarter. About halfway through the quarter, we were recovered. So that should give you some ability to develop forecasts.

Thank you.

Robert Kelly, Sidoti & Co.

Good morning, everyone. A question now on the steel-driven price increases. It seems that scrap has started to moderate, move down a little bit. What does that mean for margins in each of the individual segments in the second half of the year? Is that type of outlook cooked into your current 2010 forecast?

It is baked into that forecast, Bob. What happened to us is, on the first-quarter call, we had concern that there would be continued -- there would be a second round of steel inflation and counter to that now, it looks like steel has kind of topped out a little bit, which that helps us. We are not dealing with the lag obviously going forward. But the spread at the Sterling steel mill, that metal margin is back to normal levels. We don't expect there to be much of a regression in selling prices.

Understood. But doesn't that imply margin expansion for the second half?

It does certainly in the Industrial Materials segment as it relates to that steel mill. We are back to normalcy.

Okay, great. And then just following on I guess the question a couple questions ago, how important is the bounceback -- first off, what is utilization in your commercial furniture business? How important is that to the contribution margin, that being a more normalized level of demand?

The utilization in -- when you say commercial furniture business, I assume you mean office?

Yes.

The utilization at the end of the second quarter was about 43%. So there is plenty of available capacity there. Thus, the comment Dave made about increased contribution margin capability in that business as the economy recovers.

Thanks, guys.

Joel Havard, Hilliard Lyons.

Thank you. Good morning, everybody. Guys, in the past, you all have talked about an ongoing study to identify longer-term, higher growth, higher profit, potential fields of acquisition that were maybe outside the existing core. What progress is going on there or has that really gone on hold as we have worked through the challenges of sort of the previous 18 months or so?

Joel, relative to pure acquisition, we've really contracted or pulled that back by design.

I know as far as activity, but I am talking about the strategic analysis process that was underway previously.

Right. And that is where I was going. We looked at what we could do externally and what we could do internally. And so while we've pulled back, we still are looking for those types of things in acquisition candidates. What we haven't restricted is our internal investigation relative to some of the products that might provide those higher technical content, higher margins, intellectual property, etc.

An example of that type of work, which continues to gain momentum, is the nonconductive power transfer work that we are doing with Fulton Industries. We have called it eCoupled publicly. That continues to gain significant steam.

We have also asked some of our teams to go out and look into various industries such as alternative power, aerospace, what are things out there that we might be able to make that would use some of our core competencies and provide some of those positive attributes that you just mentioned and simultaneously increase our capacity utilization.

We have found some of that business. Some examples are in our Machinery Products group and so we continue to look for that. And if we are able to find more of that and it consumes a substantial amount of our unused capacity, that is a very good thing. It gets us to full capacity utilization quicker and we will be investing more money for productive capacity sooner, but the returns are substantially better. So we haven't given up on that. We have taken a more cautious tact at acquisitions in those areas.

Okay, and Dave, is that to say that analysis continues, but there is nothing particularly in the pipeline?

Well, I really do -- I don't want to overplay this eCoupled thing, but this is not a minor product. This is going to be a significant opportunity for all of the companies that are involved in it and we are getting closer. We are already selling some of that product and you may recall, we produced the componentry on the primary side and the other devices have the secondary coils in them and virtually all of the telecommunication companies are in that technology consortium and are preparing their strategy and their product launches. So there are some things that are coming to fruition in the not too distant future.

Very good. All right, thanks, guys. Best of luck.

(Operator Instructions). We are not receiving any requests for further questions, so I will now turn the conference back over to management for closing remarks.

Okay, we appreciate your attention and we will talk to you in about three months. Thanks.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.