禮恩派 (LEG) 2011 Q1 法說會逐字稿

Greetings, and welcome to the Leggett & Platt first-quarter 2011 earnings call. At this time, all participants are in a listen-only mode. A brief 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, Senior Vice President of Strategy and Investor Relations for Leggett & Platt Incorporated. Thank you, sir. You may begin.

Good morning, and thank you for taking part in Leggett & Platt's first-quarter conference call. I am Dave DeSonier, 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, 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. Then Dave will address our outlook for 2011. 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 supplement the information we discuss on this call, including non-GAAP reconciliations.

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.

Thanks, Dave. Good morning, and thank you all for participating in our call. We were very encouraged to see higher market demand and sales growth during the first quarter. As we reported yesterday, first-quarter sales increased 10%, reflecting unit volume growth and raw material related price inflation.

Earnings per share for the quarter were $0.30, unchanged from the first quarter of last year. The earnings benefit from higher unit volume was offset by higher raw material costs, as previously expected.

We continued to experience strong demand in several of our key businesses during the first quarter, including automotive and office furniture. In contrast, store fixtures volume declined versus the prior year as this business faced very difficult comparisons related to high levels of remodeling activity by large customers in the first quarter of 2010.

During the quarter, we implemented price increases in response to rising commodity costs. The magnitude of the price increases varied by product category, and the timing generally lagged the cost inflation. First-quarter margins were compressed approximately 100 to 150 basis points due to the lag, but should improve in subsequent quarters.

Our end markets have stabilized and appear to be gradually improving. As a result, we utilized a significant portion of our share purchase authorization during the first quarter, and repurchased 5.4 million shares of our stock. Under the current authorization, we can purchase up to 10 million shares annually.

We also issued 1.8 million shares during the quarter through various employee benefit and stock purchase programs.

In February, we declared a quarterly dividend of $0.27 per share and extended to 40 years our record of consecutive annual dividend increases. At yesterday's closing price of $24.54, the current dividend yield is 4.4%.

We ended the first quarter with net debt to net capital at 27.5%, which is below our long-term targeted range of 30% to 40%. No significant fixed-term debt matures until 2013, and we have over $450 million available under our existing bank facility.

Our operating folks continued to do an excellent job of closely managing working capital, which reflects our focus on return optimization. We ended the quarter with working capital at 14.3% of annualized sales.

For the quarter, we generated operating cash of $47 million. We expect operating cash for the full year of over $300 million, which should once again comfortably exceed the amount required to fund capital expenditures and dividends. Capital expenditures should approximate $85 million this year and dividends should require about $155 million.

We assess our overall performance by comparing our total shareholder return on a rolling three-year basis to that of peer companies. We target TSR in the top one third of the S&P 500 over the long term, which we believe will require an average TSR of 12% to 15% per year. To date, for the three-year period that will end on December 31 of 2011, we have generated TSR of 29% per year on average, which ranks in the top half, but not yet among the top one third of the companies in the S&P 500 Index. So we still have some work to do in order to reach our goal.

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

Thank you, Dave. Good morning. In my comments, I will discuss a few segment highlights. You will find segment details in yesterday's press release and in the slide presentation on our website.

First-quarter sales in the Residential Furnishings segment grew 6%, reflecting a combination of raw material related price increases and modest unit volume growth. In our US frame business, innerspring unit volumes decreased 2%, and box spring units grew 3% versus a strong first quarter of 2010. In our furniture hardware business, the unit volume increased slightly during the quarter. The continued growth in this business is primarily due to ongoing strength in motion upholstery, as consumers continue to favor seating with added functionality and comfort.

We believe our residential end markets have stabilized, and while recovery may continue to be somewhat choppy, we are expecting modest overall demand improvements during 2011. EBIT and EBIT margins in the Residential Furnishings segment decreased during the quarter, as unit volume growth was more than offset by higher raw material costs and less income from building sales. We have implemented price increases to recover the higher raw material costs. However, as expected, there was a lag in the timing of the recovery and margins were temporarily compressed during the quarter. The selling price increases vary by product line, ranging from approximately 8% in bedding components to more than 20% in furniture hardware, as flat-rolled steel pricing has increased to a greater extent than rod and wire pricing.

We continue to closely monitor commodity trends, and while certain of our input costs appear to have stabilized, we will adjust pricing further if we believe sustained changes in costs have occurred.

In the Commercial Fixturing & Components segment, first-quarter sales decreased 9% as lower fixture and display sales were partially offset by continued growth in Office Furniture Components. Sales in our fixtures and display business decreased approximately 20% versus a very strong first quarter of 2010, which included a high level of remodeling activity by some of our large, value-oriented customers.

We continue to see convincing signs of improvement in the office furniture industry. First-quarter sales in our office components business grew approximately 20%, reflecting both market recovery and new programs that have been awarded. Our comparisons in this business are becoming more difficult as we anniversary share gains and early stages of market recovery in 2010.

EBIT in the Commercial Fixturing & Components segment was flat, and EBIT margins improved versus first quarter of 2010. The impact from lower sales was offset by a gain associated with the sale of a building.

First-quarter sales in our Industrial Materials segment increased 19%, reflecting steel-related price inflation and higher unit volumes in all major areas of the segment. EBIT improved slightly, but EBIT margins decreased versus first quarter of 2010. The earnings benefit from higher sales was largely offset by higher raw material costs and the absence of a divestiture gain in the first quarter of last year.

Price increases have been implemented to recover the higher steel costs, and as a result, margins should improve in subsequent quarters.

In the Specialized Products segment, we posted 28% sales growth in the first quarter, reflecting continued strength in global automotive demand, as well as growth in machinery and commercial vehicle products. Higher sales and a reduction in an unusual cost led to increased EBIT and EBIT margins during the quarter. These improvements were partially offset by higher raw material costs.

Automotive industry forecasts continue to anticipate meaningful global production growth in 2011, even after considering the tragedy in Japan and its impact on the industry. The industry's 2011 forecast for Asia has been lowered by approximately 1.3 million units, but this volume is expected to be recovered in 2012. Supply-chain disruptions outside of Japan are expected to be resolved within the next few months, and as a result, full-year 2011 production in North America and Europe is not expected to be significantly impacted.

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

Thank you, Karl. Given our solid first-quarter results and our current view on inflation, we increased full-year guidance and now expect sales of approximately $3.5 billion to $3.8 billion. This represents an increase of 4% to 13% versus 2010, and includes approximately 4% sales growth from inflation.

Based on this sales forecast, we now project 2011 earnings of $1.25 to $1.50 per share. We expect continued recovery in the economy and our end markets. However, we recognize that recovery can be choppy, and have allowed for that potential with the lower end of our guidance range.

We are moving into the third step of our strategic plan, which envisions long-term average growth of 4% to 5% per year. For the next couple of years, growth should exceed this level as our markets continue to recover. Longer-term, we recognize the need to supplement the approximate 2% to 3% growth that our markets typically produce with other opportunities. This additional growth should come from both new product innovation and development of new growth areas.

Some of our growth will likely occur through carefully screened acquisitions. Beginning last fall, we stepped up our solicitation activity and are beginning to see some new opportunities enter the pipeline. These targets must meet stringent screening criteria, including high confidence and value creation, and sustainable, competitive advantage in attractive markets. Disciplined growth takes time, so we are not expecting significant benefits from these efforts for a while.

And off script, before I pass the microphone, I would like to mention that today, we are celebrating Susan McCoy's 25th anniversary with the Company. She is such a dedicated partner to all of us and provides excellent investor relations service. Thanks, Susan, for all you do, and congratulations on this noteworthy milestone. I know you didn't know I was going to say that.

And 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 again 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.

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

(Operator Instructions) Budd Bugatch, Raymond James.

Hello, everyone. This is Chad, pinch hitting for Budd, who is traveling this morning. First of all, let me just offer my congratulations on the quarter, and also, probably more importantly, my congratulations to Susan. And let me just say thank you for all the help that you've given us over the years. It is much appreciated.

Thanks, Chad. Appreciate it.

I guess my first question, given the magnitude of the beat, at least relative to what Wall Street was looking for in Q1, a $0.075 increase to the midpoint of your full-year guidance seems conservative to me. First of all, is that a fair characterization? And could you just give us some insight into some of the key puts and takes and your thinking in crafting that outlook?

It could be conservative relative to that performance. But again, we do the best job we can to put together the forecasts that come up from the bottom of our organizations from every one of our profit centers, who are in reasonably good communication with our customers. And then we stir it up at the top here and come up with what we think is a reasonable range. And we hope it is a little too conservative, but it's our best guess.

And the comment I made about the lower end of the range is we have pretty good memories here, and we have had times in the past where we've started out of the gate very quickly, to use an analogy, only to wane in the back half of the race. We are not necessarily anticipating that, but we want to be able to encompass that, should that occur.

Okay, fair enough. And I guess, Karl, you had innerspring units were down 2% in the quarter, box springs were up 3%. I guess from your point of view, what is your best guess on what the innerspring market did from a unit perspective in the first quarter, and explain whatever variance there is relative to what your performance was, if there was one.

Good morning, Chad. In honor of Susan's anniversary, I am going to let Susan answer all the questions. (Laughter)

Thanks, Karl.

She didn't know I was going to say that either. As you remember, the industry -- and Leggett is a large subset of the industry -- was up against some very, very difficult comps, in that the first quarter of 2010 was abnormally strong because of heavy promotion activity.

So we are pretty satisfied to get through the first quarter with that negative 2% on units, 3% up in box springs. The 3% up in box springs I think is maybe a sign that the middle price points of the bedding industry is starting to recover a little bit, which is good news for all of us.

So -- but in terms of the industry, it is difficult -- our view of the industry is that innerspring mattresses was probably up 1% to 2%. And as you see ISPA data over the next few days, obviously, it will be tweaked up, because the specialty guys had another fantastic first quarter. But from an innerspring standpoint, that 2% to 3%, I think, is our best guess of the industry and strengthened as the quarter went on, March significantly stronger than January and February.

Okay. And what -- maybe at a guidance midpoint, what are you thinking innerspring units do for the year, or maybe a range of expectations?

When we started the year, we were using expectation of 3.5% on innerspring -- or call it innerspring mattresses. We still feel strongly that that is a good number. Like I said, just getting through that first tough first-quarter comp was our biggest hurdle. So we haven't changed our position on that.

Okay. Thanks, guys, for taking my questions. Thank you again, Susan. And I will defer to others in the queue.

Mark Rupe, Longbow Research.

Good morning. This is Leah Villalobos in for Mark this morning. I would also like to extend my congratulations to you on the quarter, and to you, Susan, on your milestone. We also certainly do appreciate all of the work that you do there.

Thanks, Leah.

If I could just get back to the bedding industry for a second and talk a little bit more about the performance we saw with international springs. I think you had a pretty easy comparison there, but if you could talk a little bit more about that performance and what you saw in terms of units, and if there was much of a currency impact there.

It is an absolute mixed bag. I'm going to give you units by region. Canada was off about 8%. It strengthened late in the quarter also, but it was somewhat disappointing. Latin America was extremely strong at 20% growth. That signals growth in our Brazilian and Uruguayan businesses, which we are very pleased about. Europe was up a remarkable 4% in units. It was up significantly more than that in currency, as there is a better mix of product there. The low end has been much more compressed than the high end. The pocket coil volume has been extremely good in Europe. And there was earlier selling price inflation in Europe than there was in North America.

Our Asian volume was off about 35%, and that is our walking away from some very low-margin business. It is relatively small. If we break it down in magnitude of absolute units, Europe is obviously larger than any of the other regions.

So it was all over the board, but we were certainly pleased with our international spring. And the individuals that run those facilities are faced with the same raw material inflation issues that we are in the United States, and their ability to have pricing discipline and pass through that inflation in a very difficult environment is commendable. They've done a fabulous job.

Leah, this is Matt. I would just add on your foreign exchange question -- last year's first quarter versus this year's first quarter for the entire Company, not just bedding, was only $3.4 million higher in sales -- last year's quarter versus this year's quarter -- due to currency. So basically, a benign effect in the first quarter.

Okay, that's very helpful. Thank you very much. And then in terms of pricing in the Residential segment, how much of the price increases did you actually realize in the first quarter? And I understand that there is still some being implemented in the second quarter. So how kind of should we expect you to realize in the second quarter as well?

Of that 6% growth in residential, the majority of it was actually related directly to inflation. But to your point, the pricing increase, the velocity increase as the quarter went on, virtually all of that pricing was in place at the end of the quarter. So we should be fully recovered as we enter the first day of the second quarter.

Okay, great. Thank you very much. I will defer to others.

Keith Hughes, SunTrust.

Thank you. A couple questions. One, the growth in Specialized was just astounding, specifically given the comparison it was going up against. Is this sort of pace sustainable for the year for these three businesses? You talked about automotive a little bit. I guess my question more is machinery and the Commercial Vehicle product sales.

Keith, I think that comments from our business that, as I said in the prepared remarks, offices, it is going to be difficult for them to continue to grow 20% going forward. Automotive is going to have its challenges. [From a second] -- domestic -- I should say North American and European automotive is going to have a little bit of a challenge in second quarter, just because of the Japanese connectivity. But that volume will be pushed out to third and fourth.

But it will continue to grow. The indexes all say that automotive should grow about 10% in those markets. So we feel really pretty good. I need to correct myself -- it is 5% worldwide on automotive.

And as it relates to machinery, it was a good quarter, but we expect that as our customers become more confident that we should see continued machinery growth. As it relates to the commercial vehicle products, that business performed very weakly in the first half. I started to say terribly -- and I apologize for that. But the performance and the demand was really weak in the first half of 2010, so we expect continued growth in commercial vehicle products.

Keith, this is Dave. It goes without saying, though, the higher you get, the more difficult it is to get even higher. So that sustainability will continue to grow well, but it gets harder and harder to do that, obviously.

You mentioned machinery should continue to be good. Is that machinery going to bedding customers, or what customer there?

Primarily bedding.

Primarily bedding, okay. And within the -- Residential and production volumes, what do they look like in the quarter versus last year -- or production rates, I should say -- versus last year in US spring and in the furniture group?

In terms of our internal production?

Yes, I mean, did you ramp it up, ramp it down? How did it look versus last year?

No, it was pretty steady growth as the quarter progressed in both furniture and bedding.

Okay. And final question, Karl, you made a comment that you thought the box spring units being up 3% was a sign -- perhaps a sign of the middle tier bedding coming back. What would that number -- why would you come to that conclusion with that number?

Because of the concentration of customers where box springs are continuing to be sold. They tend to be middle price points. Promotional tends to be on a wood foundation anymore, as our customers [despecced] over the last few years. So as box springs rise at a greater rate than mattresses, I think that is a sign that the middle price points are starting to pick up some velocity.

And remember that the power foundation [that] you call it adjustable bed business has been incredibly strong. That is part of the strength that you saw in the Specialty guys. That business for us is up 50% in units in the first quarter. That volume, albeit small, takes a little bit away from box springs. It is replacing the box spring. So boil that all together, and it is the first sign that -- and obviously, we hear that same thing from our bedding manufacturer and our retail customers.

And the adjustable bases, that would be reported in the Residential division?

Yes, they are.

All right. Thank you.

John Baugh, Stifel Nicolaus.

Good morning. Well, well, well, what a surprise. Another lifer at Leggett & Platt. Just a testament to your work ethic, Susan, and the culture at Leggett. Congratulations.

My questions are as follows. On the Residential Furniture side, was there a gain by Leggett & Platt in market share or some unusual customer or benefit, or is this indicative of the overall motion, and I guess, to a lesser degree, stationary category?

I think the category continues to grow. The furniture industry was also up against some pretty tough comps in the first quarter. There's some promotional activity around that product line, as you know, John. And the category just grows.

As the consumer continues to be more casual in their lifestyle and our content is much higher in a motion product than it is in a stationary products, so those lifestyle trends, which we expect to continue well into the future, are good for us.

Great. Thanks. And I think you mentioned the 100 to 150 bps of lag in costs, but is that inclusive of the relationship with scrap and rod? What is going on between scrap and rod? How did that play through the quarter, and how is that playing into April? And how did that shape your forecast for the rest of the year?

The 100 to 150 basis points is the collective steel overhang that we experienced during the quarter, and Karl will comment on the spread.

In terms of the metal margin on scrap to rod, it is -- it normalized, actually, late March, first of April. So we are back to those historic metal margins or spreads. They were terribly compressed in December and January, and as the quarter went on, that they normalized. And we expect them to be at a normal -- if there is a normal in the steel industry anymore -- for the remainder of the year, and it is embedded in our forecast.

Lastly, on the retail store fixtures, I understand the tough comparison with the year prior. What is your outlook for that business in units going forward? And I'm not necessarily thinking about '11, as I am with the glut of retail space in general and the threats of Internet sales continuing. Or is that just not a concern on your part in terms of longer-term volume trends? Thank you.

John, the outlook for the year is a little questionable at this time. You will remember -- and you made reference -- that 2010 first quarter really was an anomaly. So we do expect 3Q in 2011 to be the strongest quarter, as it more typically is.

I think that we think that the fixture demand may be a little soft for the year. We've gained some market share, and it looks like the retailers are not as aggressive. Where the value-oriented or the promotional retailers became very, very aggressive in the early part of last year, we don't see that demand. Though we see maybe more normalized, but possibly at a somewhat lower level. But we are hearing significant optimism about 2012.

But we know that industry is volatile. It is almost impossible to predict units, to the other question that you had. But it is so directly correlated to consumer confidence that we will see. There is just not a lot of visibility in that market.

I will say, though, that our people are doing a wonderful job performing in those businesses. We have gained market share. I think the quality of our relationships with our customers are at all-time highs; the manufacturing efficiency of our facilities. We are really pleased to be in that store fixtures business.

Great. Thank you.

Robert Kelly, Sidoti & Company.

Good morning, everyone. A question on, I guess, the phasing, particularly in Residential Furnishings. You had a tough comp in 1Q, an even tougher comp for 2Q. Do you expect units to be positive in the Res Furnishings category during 2Q?

Bob, slightly. I would say that you roll furniture and bedding together, and from a unit perspective, we would see somewhat of a repeat, maybe a little bit stronger than 1Q, from a comp perspective. You will see top line stronger than that because of the full impact of inflation.

Right. And if I recall, last year you started to see the slowdown towards the end of 2Q. Is that correct? And was April and May your toughest comps of the year? And how do you think about the year-over-year monthly comparisons?

Actually, what we saw was the first real disappointment we felt last year was around the Memorial Day sales holiday. That is when we started to become a little bit concerned. And then as we built -- this was more of a bedding issue than furniture issue -- as we were building the Fourth of July, there was a lot of skepticism.

So you're right. It was a lack of follow-through after Memorial Day, June compressed and then July and not so good, because Fourth of July just didn't materialize.

Understood. Thanks. And then just as far as the raw materials story you've been discussing for the past few quarters. When you talk the inflation that you are planning to cover with the price increases that are going into effect during Q2, is that scrap in your Industrial Materials segment, or are you still trying to cover the increases in raw that you are running through the other businesses?

It is more the downstream. Where scrap was recovered in part earlier in the first quarter -- scrap moves first, then it flows through the value chain, moves into rod and then wire. So if you step back from the whole thing, we've implemented four rounds of wire price increases.

We are pretty well recovered -- we are recovered on the scrap inflation. On the downstream materials into wire and then into the fabricated elements of each product, that recovery was achieved later in the quarter. But for all intents and purposes, we are recovered now.

Bob, this is Dave. Some of the most aggressive inflation we experienced in flat-rolled products, master coils and slit coils. So it was across the board on steel products, but included flat-rolled products.

Dave's right. That is why the comment that our furniture hardware inflation was -- on a percentage basis, was higher than on our wire-related products, because flat-rolled moved faster and higher than the inflation on the long or wire rod products.

And we actually expect that inflation to hold on for a longer period of time. We may not be done yet on flat products. We don't know. We feel -- our sense is that we are topping out in overall steel inflation and feel reasonably comfortable that we won't have to pass through anything else. But visibility in steel is very difficult.

Understood. Thanks, guys.

(Operator Instructions) It appears there are no further questions at this time.

Okay. We'll say thank you and we'll speak to you in July.

Everybody have a good weekend.

This concludes today's teleconference. You may now disconnect your lines at this time, and thank you for your participation.