禮恩派 (LEG) 2011 Q2 法說會逐字稿

Greetings and welcome to the Leggett & Platt second-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, Strategy and Investor Relations for Leggett & Platt Inc. Thank you, Mr. DeSonier, you may begin.

Good morning and thank you for taking part in Leggett & Platt's second-quarter conference call. With me this morning are the following -- our CEO and President, Dave Haffner; the Chief Operating Officer, Karl Glassman; our CFO, Matt Flanigan; and our Staff VP of Investor Relations, Susan McCoy.

The agenda for this morning's call is as follows. Dave Haffner will start with a summary of the major statements we made in yesterday's press release. Karl Glassman will then provide operating highlights. Dave will 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 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.

Thank you, Dave. Good morning and thank you for participating in our call. As we reported yesterday, second-quarter sales grew 8% versus the prior year from a combination of inflation, currency exchange rates, and higher trade sales from our steel mill. Excluding these factors, sales during the quarter were roughly flat with the prior year.

Unit volumes declined both year-over-year and sequentially in most of our major residential businesses, reflecting continued uncertainty on the parts of consumers and choppiness in the broader global economies. Store fixtures volume also decreased versus the prior year as this business continued to face difficult comparisons related to high levels of remodeling activity by large customers last year in 2010.

The markets where we saw year-over-year growth during the quarter were automotive, office furniture components, power foundations, machinery, and commercial vehicle products.

Earnings for the second quarter were $0.37 per share and included a $0.02 per share benefit from an unusual tax item. In the second quarter of last year, earnings were $0.34 per share.

Operationally we performed well during the quarter given the macro and market demand headwinds. Gross profit dollars increased slightly versus second quarter of 2010, which was our strongest operational quarter last year. Gross margin percentages for the quarter were diluted as typically occurs during inflationary periods when we raise selling prices to recover significant cost increases. EBIT decreased year-over-year as a result of unusually high selling and administrative expense.

Several items led to the increase in SG&A costs. Some of those included the pledge we made toward Joplin tornado relief efforts, professional fees including consulting services associated with growth projects, and tradeshow expense related to a biannual show that many of our businesses attend in Germany. We continue to strive for annualized SG&A costs at 10% of sales or less.

As expected, earnings improved sequentially as a result of price increases we implemented late in the first quarter to recover high material costs. Raw material costs have stabilized since the first quarter, which has allowed pricing to catch up with the higher costs in most of our businesses.

During the quarter, we bought back 2 million shares of our stock bringing our year-to-date repurchases to 7.4 million shares. Under the current authorization, we can purchase up to 10 million shares annually. We also issued 900,000 shares during the quarter through various employee benefit and stock purchase programs. Year-to-date issuance for these programs are at 2.7 million shares.

In May we declared a quarterly dividend of $0.27 per share. 2011 marks our 40th consecutive year of annual dividend increases. Out of all the S&P 500, there are only 11 companies that have a longer string of annual increases than Leggett. At yesterday's closing price of $22.10, the current dividend yield is 4.9%. We ended the second quarter with net debt to net capital at 28.3%, which is below our long-term targeted range of 30% to 40%.

Our operating folks continue to closely monitor working capital levels. We ended the quarter with working capital at 14.3% of annualized sales, below our 15% target. For the quarter we generated operating cash of $54 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, 2011, we have generated TSR of 23% per year on average, which is top half performance. While that is a very good shareholder return, it does not place us in the top one-third of the S&P 500, so we still have some work to do in order to achieve our goal.

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 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.

Second-quarter sales in the residential furnishings segment grew 2%. Unit volume declined in nearly all the segments business units but this contraction was more than offset by raw material-related price increases and changes in currency exchange rates. The only business within the segment that had meaningful unit growth was power foundations. Those operations were up 46% during the quarter.

In our US spring business, innerspring unit volumes decreased 5% and box spring units were down 3% during the quarter. In our furniture hardware business, second-quarter unit volume decreased 12% versus the prior year. Prior year comparisons continued to be difficult during the second quarter in both bedding and furniture as demand was relatively strong in 2010 through midyear and then weakened substantially in the back half of the year. EBIT and EBIT margins in the residential furnishings segment decreased versus the prior year primarily from lower unit volume.

In the commercial fixturing and components segment, second-quarter sales decreased 2% as lower fixture and display sales were partially offset by continued growth in office furniture components. Sales in our fixture and display business decreased approximately 10% versus a very strong second quarter of 2010, which included significant remodeling activity by some of our large value-oriented customers. We continue to be very pleased with the performance of our office furniture components business as that industry continues to show convincing signs of recovery.

Our second-quarter sales in the business unit grew approximately 15%, which is notable since we posted 20% growth in the second quarter of 2010. Comparisons in this business become more difficult in the coming quarters.

EBIT and EBIT margins in the commercial fixturing and components segment decreased versus second quarter of 2010 primarily from lower sales. Second-quarter sales in our industrial materials segment increased 18% reflecting steel-related price inflation and higher trade sales from our steel mill. Unit volumes decreased in both wire and tubing, reflecting weakness in bedding furniture demand and also the second-quarter disruption in automotive production.

EBIT and EBIT margins decreased versus second quarter of 2010 primarily due to lower unit volume in wire and tubing and higher raw material and transportation costs.

In the specialized products segment, we posted 20% sales growth in the second quarter, primarily reflecting continued strength in global automotive demand as well as growth in machinery and commercial vehicle products. Changes in currency exchange rates also added to our year-over-year sales growth during the quarter.

Higher sales led to increased EBIT during the quarter but EBIT margins contracted slightly as these gains were partially offset by higher raw material costs and currency impacts.

Automotive industry forecasts continue to anticipate meaningful global production growth in 2011 even with the impact from the Japanese earthquake and tsunami. The current 2011 production forecast for North America and Europe has increased by approximately one million units in total compared to the forecast issued at the start of the year and the forecast for Asia has been reduced by roughly one million units since the earthquake.

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

Thanks, Karl. In light of the second-quarter demand weaknesses, we reduced the top end of our full-year guidance and now expect sales of approximately $3.5 billion up to $3.7 billion. This represents an increase of 4% to 10% versus 2010 and includes approximately 4% sales growth from inflation. Based on this forecast, we now project 2011 earnings of between $1.25 and $1.40 per share. We expect continued recovery in the economy and our end markets. However, we recognized that recovery can be choppy and have allowed for that potential with this revised guidance range.

And with those comments, I will 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 try to answer all the questions you've got.

Diego, we are ready to begin the Q&A

(Operator Instructions) Mark Rupe, Longbow Research.

This is actually Andy standing in for Rupe today. My question is in terms of the demand and pricing throughout the quarter, were there any surprises there kind of relative to what is in your internal expectations were for the quarter?

Andy, I don't think that there were any surprises as it relates to pricing. We implemented those price increases across our businesses at various rates in the first quarter though --. There weren't surprises there. I would say that the real surprise to us was demand softening. We were more optimistic in April when we last publicly spoke. Everything softened. We were surprised. We expect continued recovery. We didn't expect the choppiness that we experienced from a macro perspective in the second quarter.

Okay, great. I'll jump back in the queue. Thanks.

Budd Bugatch, Raymond James.

Good morning, everybody. This is actually Chad filling in for Budd. Thanks for taking my question. David, your balance sheet remains underlevered relative to your target capital structure and you have signaled a greater willingness to make acquisitions but we have yet to see any real movement. Should we read that as perhaps there's a lack of opportunities that fit the fundamental operating criteria you are looking for or have there been businesses that maybe match the fundamental criteria but maybe not at the price that you'd like?

Then I guess kind of a follow-on to that, does the softening macro environment make you more hesitant to make a deal in the short term?

Good question, Chad. There has been a bit more activity in the M&A department. There have been a couple -- so we continue to look for acquisitions. There have been a couple of opportunities where expectations were higher than what we felt our shareholders should pay for and therefore did not go to closure. There are some continued businesses that we are likely to acquire, nothing of significant size at this point to report. And as you know, we comment on those after we make the acquisitions.

I guess what I want to leave you with, Chad, and you can relay this to Budd is that we still believe that there are some good acquisitions to be had for the Company and even though the market does tend to put a bit of a bias or more conservativism into your valuations, I think that you should expect to see some acquisitions between here and the end of the year.

Terrific. Thank you and good luck to you on the rest of the year.

Keith Hughes, SunTrust Robinson Humphrey.

Thanks, I have a couple questions on the office furniture business, you referred to the tougher comparisons in the second half of the year. It looks like you are up 20% the second half of '10. What kind of growth rate are you looking at for the second half of '11 on top of that?

Good morning, Keith. We would expect 10% to 15% growth because of the difficult comps that we feel like we are extremely well placed. There continues to be buoyancy in that market. We really feel good about our position.

Okay, then moving over to the acquisition, the answer to the last question, with the types of deals that you are in the ballpark for now, are they more bolt-on size or would they be larger than that or potentially larger than that?

Keith, this is Dave again. The ones that we are in diligence on are ones that we would include into existing businesses.

So that wouldn't be like a new segment or anything like that, right?

That's correct, but as you know and we've spoken about it before, we are absolutely open to the idea of buying a completely new business group or theoretically a segment.

If you were to find something that big, wouldn't that upset the mantra you have had for several years now of the dividend and share repurchase being the primary vehicles of cash flow usage?

It would have some bearing on the way we assess that, but because of the borrowing capacity that we've got and the cash generation that we have and that would be included with the acquisition, it isn't absolute that it would have -- would force us into some other dividend protocol.

Yes, Keith. This is Matt. Certainly make no mistake, our passion for the dividend and that growth record remains intact for sure. And then relative to share repurchase activity, if we have better places we can allocate our shareholders capital that would create significant value, that's what we are in business to try to do on our shareholders' behalf and we will look for those opportunities.

Okay, final question in mattress and furniture sales within residential. As you look at July, any real change in trend from what you saw in second quarter?

Keith, we are seeing the normal seasonal uptick in units in terms of comps to last year -- it gets a little easier. So I would say that we will probably finish July in the flattish range, which certainly is an improvement over the second quarter.

Okay, thank you.

Robert Kelly, Sidoti & Company.

Good morning, thank you. Just a point of clarification I guess on the guidance reduction. on the top end. Was it the shortfall relative to your internal plan during 2Q that caused it or are you kind of below plan or expecting to be a little bit below plan in the second half of the year?

Bob, this is Dave. I will start. As Karl mentioned earlier, the thing that surprised us a bit is the relative softness in this past quarter. So the demand was lower than what we had expected previously and that has had some effect. That coupled with the fact that there isn't any absolute clear positive signal that says things are going to get meaningfully better. And then I guess coupled with the fact that we are relatively conservative, it just seemed prudent for us to go ahead and bring that top end down a bit.

We would love to do better than that, but it's a combination of what we experienced and no clear signal that things are going to get meaningfully better in the back half.

Right, understood. You have talked for a couple of quarters about the easier -- relatively easier comps in the second half of the year. I was just trying to get a sense of if you no longer think they are easy into H '11.

They are easier for sure because of the sort of lopsided business demand that we had in 2010 but -- so they are easier in the back half for sure.

Great, just one final one. You put through successfully a bunch of price increases to try and cover the raw material inflation. It sounds like the softer than expected demand in 2Q, you mitigated a lot of that cost price mismatch. But are you expecting -- if demand is close to trend or close to your expected -- expectations in the second half of the year, do you expect to catch up with your margins? You are talking about a 120 basis point improvement sequentially in 2Q compared to 1Q. Is that kind of the expectation built into the second half of the year?

Yes, Bob. We expect to continue to improve our margins. We are so volume-sensitive right now we just need the volume. We have an expectation at this point that our flat steel costs will soften in the back half. That should in itself help our margins slightly, but we need the volume to be able to run through the assets to get that yield.

Understood. Thanks, guys.

Herb Hardt, Monness, Crespi.

Good morning. Given the level of your shares, is there any thought towards accelerating the buyback so you won't be paying $30 a share in a year or two?

Herb, this is Matt. We certainly are always mindful of an accelerated buyback scenario, if at some point we feel it's compelling. We don't believe that's the case right now. We will certainly continue to get excess cash, free cash flow back to our shareholders if we don't have better places to put it.

For the full year, as you read in our press release, we do anticipate to use our full authorization from the Board, which is 10 million shares, and at least at this point in time, we don't have a different expectation.

Herb, this is Dave. I would reiterate what Matt said and I would also say that I would have been disappointed if you hadn't asked.

Well, we don't want you to forget. Thank you.

Karen Lamark, Federated Investors.

Good morning. I wanted to go back to the dividends. I appreciate that you have debt capacity and the dividend is very important, but your payout ratio is still running about twice your target. And with the continued challenges in the business momentum and the tough macro environment, especially of 2012 is another sort of subdued year of recovery, at what point do you have to revisit your dividend policy?

Karen, this is Matt. I will start. First of all, I'm not sure you are twice our stated payout ratio. We have 50% to 60% is what we have put out there for a long time is where we intend to navigate back toward. If you just look at the second quarter, I know that's not a real good metric, but if you look at the $0.37 we just earned and we are paying -- we paid out $0.27 on July 15, that's about a 73% payout ratio. Certainly not particularly proud of that but we are certainly making some headway.

And for the full year at the midpoint of our guidance if we are going to pay something around $0.27, $0.28 sort of range for this year in those quarters, that continues to have us below 90% as a payout ratio. We are very mindful of the fact that our earnings continue to be well south of $2 right now and we are paying more than $1 every year. So until that math lines up, we are going to out of kilter on our payout ratio. But having said all of that, our free cash flow continues to strongly support our current rate of dividend payouts and expected growth. And again from my perspective, I don't see our mind set on that changing with what we are seeing currently for sure.

Yes, and to underscore that point and also going back to Keith's question about the effect on dividends that major acquisitions might make, there's really nothing that we see that would cause us to want to change our dividend protocol. We are proud of that history. The cash generation of the Company is awfully good. The key is just exactly what Matt said is increasing the EPS, and that is directly tied to increased unit demand and capacity utilization, Karen. So feel comfortable with the dividend is the signal.

Okay, if I could follow up with one separate question. You indicated that higher SG&A was in part due to professional fees related in part to some growth projects. Can you give us a little bit of color on what all you were considering as well as whether or not this is a planned activity or expense at the beginning of the year? Thanks.

Yes, Karen, good question. We believe that it is really important to periodically get some extra and independent sets of eyes to help us investigate ways that we might either penetrate existing markets more deeply or participate in markets that we don't currently participate in. And on an ongoing basis, we will periodically do that. We think it's healthy. We have had some good experiences in the past, so it was something that we had contemplated although this particular quarter had a larger amount of expense than what an average quarter would have in it.

It is -- and we are also not limiting -- I should say we are not limiting those investigations to just here in North America. We are looking globally, so expect to have some ongoing service expense associated with consultants or other research organizations, but not at the quarterly rate that we just experienced.

Terrific. Thanks and good luck.

(Operator Instructions). Mark Rupe, Longbow Research.

This is Andy in for Mark again. Thanks for taking my follow-up. Just quickly on innerspring units being down 5%, do you feel that's a pretty fair reflection of what you've seen just from the market as a whole or were there any changes maybe company-specific changes or any changes in your customer base that play in that number?

No, Andy, I believe that we are trending with the market. Certainly non-innerspring is taking some share from innerspring in the full market. Our participation in non-innerspring is very small of the total mattress market. But I think that our numbers replicate the full industry, maybe not the ISPA statistics, remembering ISPA statistics cover the large manufacturers that make up only 65% of the universe. So when you see that data, it may not correlate with our comments or our being up 5% in the quarter. But we believe the industry from an innerspring perspective was off that -- close to that 5%. We have not lost share.

Okay, fair enough. Thank you very much.

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

We thank you for your participation and we will talk to you again next quarter.

Thank you. Ladies and gentlemen, this concludes today's conference. All parties may now disconnect. Have a great day.