禮恩派 (LEG) 2011 Q3 法說會逐字稿

Greetings and welcome to the Leggett & Platt third-quarter 2011 earnings conference call. At this time all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. (Operator instructions). As 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 third-quarter conference call. With me today are the following -- Dave Haffner, our CEO and President; Karl Glassman, our Chief Operating Officer; Matt Flanigan, who's our CFO; and Susan McCoy, our Staff VP of Investor Relations. The agenda for this morning's call is as follows. Dave Haffner will start with a summary of the major segments we made in yesterday's press release. Karl Glassman will provide operating highlights. Dave will then address our outlook for the remainder of the 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 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. As we reported yesterday, earnings for the third quarter were $0.31 per share or flat with the same quarter of last year. Third quarter sales grew 9% versus the prior year from items that brought little incremental profit. Inflation and currency rate fluctuation accounted for the bulk of the growth, and trade sales from our steel mill provided 3% unit growth. Across the remainder of the Company as a whole, unit volume was essentially flat.

We are not satisfied with our results this quarter. Earnings and margins decreased both year-over-year and sequentially. Competitive pricing and customer down-specing, both of which Karl will talk about in this segment comments, are impacting certain product categories. When combined with our efforts to reduce inventory by curtailing production, which also reduced overhead absorption, earnings and margins were under pressure.

Earlier in the year, we had expected overall unit demand to improve this fall. That has not happened, and many of the recent forecasts and surveys from well-regarded sources suggest our economy will be facing head winds for longer than previously expected. We have been too patient and are no longer willing to wait for an economic recovery to bolster earnings. As a result, we have recently initiated additional efforts to decrease excess production capacity, reduce overhead and trim our cost structure.

For the quarter, we generated operating cash of $101 million, which includes the reduction in inventory levels that I mentioned earlier. With ongoing concerns about weak markets, our operating folks continue to closely monitor their working capital levels. We ended the quarter with working capital at 12.5% of annualized sales.

New this quarter was a $30 million current liability associated with an interest rate swap that we entered in late 2010. Excluding that item, working capital was at 13.3% of annualized sales, still well below our 15% target.

In August, we increased quarter dividend by $0.01 to $0.28 per share, reinforcing our commitment to consistent shareholder returns and our confidence in Leggett's strong cash generation. 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 stream of annual increases than Leggett and only two that also have higher growth rates over that 40-year period. Maintaining our dividend track record is very important to us, and again this year we expect operating cash to comfortably exceed the amount required to fund capital expenditures and dividends.

For the year, operating cash should approximate $300 million, capital expenditures should not exceed $80 million, and dividends should require about $155 million.

During the quarter, as planned, we continued purchasing our stock while maintaining our strong financial base. So far this year we have repurchased 9.4 million shares under the current 10 million share authorization. We have also issued 2.9 million shares year-to-date through various employee benefit and stock purchase programs. We ended the third quarter with net debt at 31% of net capital, which is at the low end of our long-term targeted range of 30% to 40%.

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 about 12% to 15% per year.

To date, for the three-year period that will end on December 31 of 2011, we generated TSR of 22% per year on average, which is top half performance.

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.

Third-quarter sales in Residential Furnishings segment grew 6%, primarily from inflation and changes in currency exchange rates. Unit volumes were up slightly versus a weak third quarter of 2010. In our US frame business, innerspring unit volumes were flat and box spring units were up slightly during the quarter. In our furniture hardware business third quarter unit volumes decreased 9% versus the prior year. Again this quarter, we had significant growth in power foundations with units shipments up 46%. EBIT and EBIT margins in the Residential Furnishings segment decreased versus the third quarter of 2010, primarily from higher raw material costs and increased restructuring-related expenses.

Competitive industry pricing and customer down-specing are also impacting EBIT and margins both year-over-year and sequentially. With depressed industry volumes and anticipation of lower steel cost in certain cases, we have reduced prices to retain market share. Also, in an effort to manage their own cost, customers in certain instances have chosen to replace higher-value components with lower-value components.

As Dave mentioned earlier, we have initiated additional efforts to decrease excess production capacity. The activities announced to date in the Residential segment include operations in bedding and carpet underlay.

In the Commercial Fixturing and Components segment, third-quarter sales decreased 5% 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 third quarter of 2010. Our major retail customers have significantly curtailed their current-year remodeling activity.

Sales in our office furniture business grew 7% versus a more difficult comparison in the third quarter last year. We continue to be very pleased with the performance of this business, as the office furniture industry continues to recover. EBIT and EBIT margins in the Commercial Fixturing and Components segment decreased versus third quarter of 2010, primarily from lower fixture and display sales. As part of our effort to reduce overhead and trim our cost structure, we have initiated the closing of one of our point-of-purchase fixture display locations.

Third-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, primarily reflecting weakness in bedding, furniture and store fixtures demand. EBIT decreased versus third quarter 2010, primarily due to lower unit volume in wire and tubing and higher raw material costs. EBIT margins also decreased as a result of a change in sales from intersegment to trade at our steel rod mill. These trade sales have positive earnings contribution in addition to covering overhead costs and have kept the mill running at full capacity while internal demand for steel rod has been down.

However, this sale shift is dilutive to margin percentages, since it increases our reported sales while preserving comparable EBIT levels. Our efforts to reduce production capacity also impact this segment. We have recently announced plans to close one of our six domestic wire drawing operations.

In the Specialized Products segment, we posted 17% sales growth in the third 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 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 for the remainder of 2011 and in 2012.

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

As we announced yesterday, we reduced our full-year earnings guidance to $1.15 to $1.20 range. The decrease versus previous guidance reflects the weaker than anticipated third-quarter results and lower than previous expectations for the economy. For the full year we expect sales of approximately $3.6 billion, an increase of 7% versus 2010. Largely due to inflation, currency fluctuations and trade sales growth at the steel mill, unit volumes are expected to be essentially flat for the year.

And in closing, to repeat myself, we are not pleased with this quarter's results. And as we have done before, we are acutely focused on actions that will yield improved ongoing profitability in the future. With those comments, I will turn the call back to David DeSonier.

That concludes our prepared remarks. We thank you for your attention and we will be glad to try to answer your questions. As we typically do, 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.

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

(Operator instructions) Budd Bugatch, Raymond James.

This is actually Chad Bolen filling in for Budd this morning. As I look at the Residential furniture segment, specifically units for US spring and for furniture hardware, could you give us a sense of how the unit's growth progressed through the quarter? And it does appear that the guidance for Q4 suggests units will be down year-over-year. Is that consistent in bedding as well as furniture hardware? Could you give us a flavor of what your expectations are for each of those businesses?

On US spring, the units were down -- and this is innerspring units -- were down slightly in July and then slightly positive in August and September, to end up essentially flat. To date in October, shipments are up about 2%. So it's just flattish, more of the same. Box spring units were slightly positive in the third quarter, and they also were up about 2% in October.

The outlook for the quarter in US spring is flat, continuation of that. We continue to feel that we have regained the share. You'll remember in our third quarter comments of last year we had noted that we had lost some share. We have regained that share, so we believe that the innerspring portion of the US mattress business is flattish to maybe slightly negative. But we will quickly admit that the innerspring portion of the finished mattress sector is losing some share. So my comments are directly related to the innerspring portion of the finished mattress business.

As far as furniture hardware goes, the demand there was disappointing. July was much softer than anticipated. Saw more of that in August. We saw some recovery in September and continued to see that recovery in the first few shipping weeks of October. As you know, unlike bedding, which is in the trough of its seasonal selling, that furniture should be closer to the peak.

What we think that we experienced is -- and this is somewhat anecdotal -- is a destocking in finished inventory industry -- from a furniture perspective in early third quarter. We saw that at the OEM level. We believe that the retailers were doing the same thing. So we don't believe that we lost share, but we certainly are under some pricing pressures in that industry.

Okay, thank you, Karl.

Mark Rupe Longbow Research.

This is actually Andy White in for Mark this morning. My question is just, if you could give us maybe a little bit more commentary or color on the de-contenting or down-specing that you saw from customers. Was that only in the residential segment? And then, also, do you expect that to continue to Q4 into 2012? What sort of outlook do you have for the future?

This is Karl again. It primarily impacts residential. As you know, there is some connectivity into industrial from both a wire and from a tubing perspective. So down-specing truly affects both segments. But what we experienced -- and to make this a little broader, there's a constant question of us as it relates to pricing power, specifically in residential as it relates to still. We did raise prices in the second quarter based on a significant increase in raw material. We successfully passed through that inflation. At the same time, our bedding and furniture customers were dealing with inflation from a number of different sources, primarily petrochemical-based, impacting polyurethane foam in some of the non-fashion fabrics.

And as those customers tried to pass through that inflation that they were receiving from all sectors of the raw material supply, they had a problem passing through to retail. So the response to that was to de-content at the same time that the consumer is bifurcating. They're trading down at the low end and we are dealing with a situation where, both in furniture and bedding, that it's almost as if the product can't get cheap enough.

And at the top and we are seeing real strength in both furniture and bedding. So that bifurcation has -- is a real issue that has become more acute as the consumer has become a more pessimistic as the year has gone on. So it truly is a Residential Furnishings issue.

This is Dave Haffner. The second part of your question was -- will it continue? It could continue, but only to the point where the functionality of the finished product meets the minimum requirements. So, wherever practical, whether there is value engineering or de-specing, de-contenting that, still meets the customers' and ultimately the consumers' minimum requirements, there's some likeliness of that. Of course, as Karl said, a lot of that value has already been driven out.

So maybe just to follow with that, it sounds like, then, that there's not really maybe a whole lot of more wiggle room for that until you get closer to the minimum requirements, as you suggested?

Yes, that's a correct assumption. What happens post-inflationary cycles -- there's a reevaluation of content at our customer level. They have gone through that process. To Dave's point, they can only go so far. And at some point the consumer becomes disgusted, maybe, with the quality that they are getting for the price point, and the consumer starts to step themselves up to get some quality as opposed to just pure unadulterated value.

Okay, thanks, guys, for taking my question.

Keith Hughes, SunTrust.

Two questions -- one, the margin situation you have been discussing -- I assume that's going to continue into the fourth, thus the lower guidance in the fourth. But will that also play a role in the first quarter of next year?

This is Karl again. It will roll to the fourth, and what's happening -- I need to separate what's happening in the steel industry from a long products and a flat products perspective.

In the long products, which are wire and rod, we are not seeing price decreases and are not seeing much price-down pressure. So this is a flat products issue, so therefore, more significantly impacts furniture than bedding. And steel peaked from an input cost perspective in the second quarter. As I said earlier, we raise prices based on that. That cost inflation ran through our cost sheets in the third quarter. We are now replacing that steel with lower steel cost, again, from a flat perspective. And steel continues to deflate.

Part of the margin squeeze issue that we got ourselves into is our customers were pressuring us for price reductions earlier than we ran that lower cost through our cost of goods sold. So it will continue into the fourth. We believe that it will be through the system by the end of the fourth quarter.

And then, Keith, as you know, some of these actions that we are taking had some one-time costs associated with them. But the long-term benefits of these actions would positively affect next year.

And the actions, the plant closures, headcount reductions -- will those all be done by the end of the calendar year?

For the most part. And, Keith, the way to think of that is, from a 2011 impact, it was roughly $0.05. About $0.01 of that is in the fourth quarter, and then the net benefit -- our best estimate is $0.06 to $0.07 into 2012. But we are, as Dave said in his comments as the press release pointed out, we are stepping back with the view that the economy is not going to recover at any point in our lifetimes and are taking a real critical look at all of the capacity we are underutilized in our facilities.

And so I don't want to infer by these comments that there won't be additional cost in the future, but there will be resulting benefit from that also. And it gives us the opportunity to better utilize existing assets.

We will stop this not in our lifetime talk, Karl, I don't need that (Laughs).

Hey, I'm feeling older every day.

Well, you are older than I am. So anyway, see you later.

John Baugh, Stifel Nicolaus.

I wanted some color on the bedding industry in Europe, say, versus the US. Any divergent trends there?

Just recently, John, that we are seeing a softness in unit demand. But I will say, from a sales perspective that on a dollar basis, units are -- I'm sorry -- dollar sales are higher in Europe because there was much more severe steel-based inflation in Europe. But the units actually, in the third quarter is the first time we saw European demand soften. We are seeing real strength, continued strength in Mexico, Brazil and Uruguay. The Asian markets are basically flat. So there are differences around the world. But to sum it all up, Latin America, good, and Europe getting softer.

And if I heard your comments, Karl, correctly on Residential Furniture, it doesn't sound like in-market pull-through in motion furniture, let's say, was down 9%. Do you think there was some level of inventory destocking going on?

At this point, we think that that's the case. We also know that there was some trading down, though, in quality and specification. But from a macro demand standpoint, we do think the third quarter was just a one-time inventory optimization opportunity.

Robert Kelly, Sidoti & Company.

Just a question on -- for the majority of the segments, it looked like you saw some margin compression due to raw materials and, exacerbating that, the slow demand story. But you called out raw materials for all the segments as being a negative. But you're successful getting price. Is this EBIT margin compression a timing issue from an inventory perspective, or did you not fully recover the raw material increases?

Really, the explanation on raw material inflation is a year-on-year issue as opposed to a sequential issue, so that's why the call out in the segment detail. And we believe that we are -- I'm not going to say that we are fully recovered, but we are recovered to a high degree. The challenge is this mix shift or this de-contenting or spec change down the backside.

And also, Karl, as we pointed out, when we made the decision, Bob, to cut back production in order to contract our inventories, the overhead associated with that production is meaningful. And so that had a pretty meaningful effect on margin. And then I know it's repetitive and I apologize, but that shift from an intercompany sale of rod to our wire mills to trade -- even though the EBIT was the same, the reported trade sales went up. And that also had that negative impact on our margins.

If production goes back up, of course, we will absorb all that overhead in a much better fashion, and then any shift back towards internal sales of our products out of the steel mill will also have a positive effect.

Okay, thanks. And just one follow-up -- in the office furniture market, you seem to have seen some deceleration there. But we're still growing. In past quarters, you talked about pretty significant underutilization, or below optimal utilization -- maybe that's the right way to characterize it. Where are we today in the office furniture business as far as utilization?

Really, what we are seeing in office is just more difficult comps. That business started really significant recovery in the second quarter of 2010, so we are anniversarying that significant growth. The utilization rate in the office sector is just a little bit north of 50%. So as we continue to get additional volume and pass through and more profitably utilize those facilities, it's very good thing for us.

All right, good to know, thanks guys.

(Operator instructions) Allen Zwickler, First Manhattan.

Could you just -- on a macro basis, your comments about competition in the bedding industry and your comment quoting that there just doesn't seem to be a price -- how does that jibe just generally with your dominant market position in certain components? Is it that there is somebody out there who has somehow figured out a way to make something similar to you at a cheaper price, if you follow where I am going with this? Because it just -- it was a little striking to me that we know that demand is down in general. But it didn't quite come through to me that that was the only issue.

Allen, what it is, to answer your bedding question first, is that the competitive environment in bedding really is unchanged. The big difference is, we will admit, as I said, that specialty sleep products are taking some share from innerspring. We think that specialty, from a unit perspective, has about a 10% market share. So that is some competition. But as you will note, we've said that are units were flat.

As it relates to the de-specing situation, that's more consumer-driven than anything. It's the consumer trading down to a price point, the retailer becoming more promotional to drive the consumer into that retail environment. So it's not a significant competitive issue as it is a consumption issue.

Okay, so it isn't as if someone came along and -- I'm going to say this the wrong way -- made a different Leggett-type component that is able to be sold -- you know where I'm going with this -- (multiple speakers). I just want to be clear on that.

Yes, yes, it's a very good question, and I think we can give you great comfort that there isn't anybody in the world that we know of that can take steel rod and turn it into, I'll just bedding components, any more efficiently than Leggett. There aren't any new innerspring geometries or box spring geometries that have eroded a portion of our offering to our customers. It doesn't mean that there aren't people working on those things. We work on them all the time, of course.

But I think it's good that you asked the question because we are comfortable that we can -- we don't like to use the word dominate. But we are comfortable that there isn't anybody else in the world that can produce those components that I just mentioned more efficiently than Leggett.

Okay, and just two quick follow-ups -- one is, how are you doing in China in terms of production, etc.? And then, unrelated, in terms of the commercial business -- store fixtures, etc. -- how would you characterize that business versus the capacity that you've taken out in the last two years?

As it relates to Chinese production, not a lot has changed. We operate the 11 facilities there very successfully and profitably. They continue to be very, very productive. So we haven't seen a change there, really positive or negative. It's just demand related.

As it relates to store fixtures, we were very optimistic moving into 2011 because we have reduced our capacity. We experienced a strong 2010. You remember, in the first half of 2010 we had picked up some market share gains in early 2011. And what we experienced in the second and now third quarters and will continue on into the fourth is just a lack of demand in that the retailers continue, to some degree, with their openings, as they normally do. But they have very much slowed on the remodeling part of their business. And remodeling is an important element to us.

Thank you.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

We will just say, we appreciate your attention and we will talk to you again -- next release will be early February, and then we will again have a conference call the next morning. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.