禮恩派 (LEG) 2012 Q4 法說會逐字稿

Greetings and welcome to the Leggett & Platt fourth-quarter 2012 conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David DeSonier, Senior Vice President of 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 fourth-quarter conference call. 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, who is Staff Vice President 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 will provide operating highlights, Dave will then address our outlook for 2013, 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.

Good morning and thank you for participating in our call. We were very pleased with the operational progress we made in 2012.

As expected, we realized significant earnings leverage as unit volumes grew in several of our businesses. This led to higher earnings and significantly improved margins. We completed the restructuring activity that was initiated in late 2011 and realized the anticipated benefits. Western Pneumatic Tube, which was the first large acquisitions we made since our strategic change, exceeded our performance expectations during its first year in our portfolio.

We have also maintained our focus on optimizing returns. Working capital levels remained lean throughout the year and operating cash grew significantly. Before I elaborate further on those details, I would like to thank all of our employee partners for their hard work that contributed to this 2012 progress.

As we reported yesterday, full year same sales location increased 1% in 2012. Unit volumes increased 3% but were partially offset by lower trade sales from our rod mill and changes in currency rates. Full-year unit volume growth was driven by several key businesses including automotive, US Spring, adjustable bed, Geo Components, carpet underlay, and parts of Residential Furniture components.

2012 earnings were a record $1.70 per share, at the high end of the adjusted guidance we issued on January 10, which incorporated the $0.18 fourth-quarter unusual net tax benefit. 2012 earnings from continuing operations, adjusted to exclude unusual net tax benefits in both the second and fourth quarters, were also a record at $1.46 per share. In 2011, full-year earnings adjusted to exclude fourth-quarter restructuring related costs or $1.20 per share. This 22% increase in adjusted EPS primarily reflected benefits from higher unit volume, cost improvements, and the Western Pneumatic Tube acquisition. EBIT grew and EBIT margins also improved to 9.2% for the full year.

Fourth-quarter same location sales decreased 2% versus the fourth quarter of 2011. Unit volumes increased 1% but were more than offset by lower trade sales from our rod mill. Unit volume growth during the fourth quarter primarily occurred in key residential businesses including US Spring, adjustable bed, carpet underlay and parts of residential furniture components.

Fourth-quarter earnings per share, excluding the unusual net tax benefits, were $0.32. In the fourth quarter of 2011, earnings excluding the restructuring-related expenses were $0.22 per share. The year-over-year increase primarily reflects cost improvements, higher unit volumes, and the Western Pneumatic Tube acquisition. Cash from operations increased 37% to $450 million during 2012 on stronger earnings and improvements in working capital levels largely from reductions in Accounts Receivable.

Optimizing returns on capital employed continues to be a major focus for our operations. We ended the year with working capital at 13.2% of annualized sales, well below our 15% target.

Our financial base remains very strong. We ended 2012 with net debt to net capital at 29%, slightly below the conservative end of our long-term targeted range of 30% to 40%.

In August, we issued $300 million of 10-year notes. With the proceeds we reduced our use of commercial paper and ended the year with our entire $600 million commercial program fully available. 2012 marked the 41st consecutive annual dividend increase for the Company. During the year, we increased the quarterly dividend by $0.01 to $0.29 per share. Even the recent increase in share -- with the recent increase in share price, Leggett & Platt possesses one of the highest dividend yields among all of the S&P 500's dividend aristocrats. At yesterday's closing price of $29.04, the current dividend yield is 4%.

Given the $188 million cash outlay to acquire Western Pneumatic Tube, our share repurchases were at levels well below those of recent years. During 2012, we purchased 2 million shares of our stock and issued 4.7 million shares. Two thirds of the issuances related to employee stock option exercises, which increased notably in 2012 with a significant share price appreciation during the year. Consistent with our stated priorities, for use of excess cash flow, we will prudently buy back our stock sub to the outlook for the economy, our level of cash generation, and other potential opportunities to strategically grow the Company.

We have a standing authorization from the Board to repurchase up to 10 million shares each year, but as -- we have established no specific repurchase commitment or timetable. We assess our overall performance by comparing our Total Shareholder Return to that of peer companies on a rolling three-year basis. Our target is to achieve 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.

For the three years ending December 31, 2012, we generated TSR of 16% per year on average, which places us in the top 37% of the S&P 500 companies, just shy of our goal to be in the top one third. Our shareholders continue to benefit from our effort to achieve consistently strong TSR by profitably growing revenue, improving our margins, paying meaningful dividends, and buying back our stock.

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 this morning, I will discuss a few segment highlights. You will find additional details in yesterday's press release and in the slide presentation on our website.

In the Residential Furnishings segment, same locations, the sales increased 4% in the fourth quarter entirely from higher unit volumes. In our US Spring business, innerspring unit volumes grew 6% in the quarter and boxspring units increased 4%. Growth of Comfort Core, which is our pocketed coil product offering, continues to significantly outpace the other innerspring categories and was up 35% in the quarter. This is being driven in part by strong market reception of hybrid mattresses.

For the full year, innerspring units grew 4% and boxspring units were up 1%.

Volume in the furniture -- in furniture components increased 2% in the fourth quarter and 3% for the year. Continued growth throughout the year in our seating and sofa sleeper businesses was partially offset by a 4% fourth-quarter and full-year decrease in motion hardware unit volumes. Again this quarter, we had significant growth in adjustable beds with unit shipments up 21%. For the year, units grew 27%.

We also had meaningful sales growth in carpet underlay in both the fourth quarter and full year. Fourth-quarter EBIT and EBIT margins increased versus the fourth quarter of 2011, primarily due to the absence of last year's restructuring-related costs and higher unit volumes.

In the Commercial Fixturing and Component segment, same location sales decreased 4% in the fourth quarter. Fixture and display sales decreased 9% on lower retailer spending. Sales in Office Furniture Components increased 2% during the quarter which, we believe, is roughly in line with the overall market for office seating.

EBIT and EBIT margins improved during the quarter, primarily benefiting from prior cost improvement initiatives, the absence of last year's restructuring-related costs and increased production related to programs that will ship in the first quarter of 2013. We anticipate a strong start to 2013 in the segment. We have been awarded several major programs by the various retailers that should have a positive impact in the first quarter on not only our wood operations, but metal and import operations as well.

In the third quarter of 2013, we will face a very strong 2012 comparison from large programs that shipped last fall. And typically fourth-quarter volumes declined significantly versus third quarter. We expect that normal sequential decline again this year.

In the Industrial Materials segment, fourth-quarter same location sales decreased 15%, primarily from lower trade sales at our rod mill. Across the remainder of the segment, unit volumes were essentially flat. The decrease in trade sales of steel rod during the quarter was largely offset by an increase in intercompany rod sales. So total rod production in the quarter was roughly flat with the prior year.

The rod mill continues to run at 100% capacity utilization. Despite the negative sales headlines they create, lower trade sales abroad are generally neutral to earnings if production levels are stable and we are consuming the rod in our own mills, which was the case in the fourth quarter. EBIT and EBIT margins for the segment increased primarily due to the absence of last year's restructuring-related costs, cost improvements and earnings from the Western Pneumatic Tube acquisition.

As Dave mentioned earlier, we are very pleased with the performance of the Western acquisition. The business exceeded our initial first year forecast and, as expected, generated full year 2012 margins greater than the Company average.

In the Specialized Products segment, fourth-quarter same location sales increased slightly. Automotive continued to experience strong growth in North America, but this was offset by lower demand in Europe with sales in Asia essentially flat. Sales grew during the quarter in Commercial Vehicle Products, but this increase was offset by lower machinery volume. EBIT and EBIT margins increased during the quarter, primarily from the absence of last year's restructuring-related costs.

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

Thank you, Karl. You guys did a great job this past quarter.

As we stated yesterday in our press release, we anticipate further improvement in sales and earnings in 2013. For the full year, we expect sales growth between 1% and 6%, resulting in sales of $3.75 billion to $3.95 billion. Given this sales growth and the contribution margin we expect from incremental unit volumes, we anticipate 2013 earnings from continuing operations of $1.50 to $1.75 per share. This compares to the $1.46 of adjusted EPS from continuing operations that we reported in 2012.

As Karl mentioned in his comments, our store fixtures business will likely experience some quarterly earnings volatility again this year. We have a relatively strong first quarter of 2013 currently anticipated. For 2013, we expect to generate over $350 million of operating cash, again comfortably exceeding the amount required to fund capital expenditures and dividends. During calendar 2013, dividends should require about $125 million of cash which is lower than a typical year since the dividend normally paid in January 2013 was accelerated in December 2012 in anticipation of tax rate changes.

Capital expenditures in 2013 should not exceed $100 million. And with those comments, I will now turn the call back over to Dave DeSonier.

That concludes our prepared remarks. We thank you for your attention and we will be glad to try to answer your questions. In order to allow everyone an opportunity to participate, we request that you ask your single best question and then voluntarily yield to the next participant. If you have additional questions, please reenter the queue and we will be happy to answer all the questions you have.

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

(Operator Instructions). Keith Hughes, SunTrust Robinson Humphrey.

Question on the Industrial segment. The intersegment sales in industrial materials were up only modestly in the fourth compared to the fourth quarter of last year. With all the [inter] usage of the materials, wouldn't that number have been higher if most of the stuff was going internal?

The sales out of the rod mill when we sell those to ourselves, those actually go to our own wire mills, which are all within that one segment. So those never get reported in any form in terms of a sale.

So the issue here was a sale from your rod mill to your wire mill versus your rod mill going external to the Company, is that correct?

That's correct.

Is that something that is going to continue in the future?

It was a big issue starting in the third quarter of 2012 and, as I said in my prepared comments, it has a significant negative impact on reported trade sales. In the fourth quarter, as an example, our trade sales would have increased 3% versus being flat if those rod sales would have gone to trade. We expected to continue because we expect that our sales will continue to grow. We -- selling rods to the external market at the degree that we did in 2011 was the default. If our internal consumption within the Company consumption of wire and rod, therefore rod is at the levels that it was in the back half of 2012 and at the levels that we expect in 2013, you should continue to see that depress reported trade sales strictly from the Industrial Materials segment.

I will pile on here that, as the comment said, that is relatively neutral to earnings. It is actually slightly positive, I will complicate this a little bit more, in that when we consume wire and rod internally it tends to be higher value. It tends to be a higher percentage of high carbon and low. When we sell rod externally it tends to be heavy weighted to low.

So this switch is really good from every perspective other than the headlines of the reported trade sales.

So is that the reason you had such a strong contribution margin that the EBIT was up substantially in the Industrial segment year over year, is that the --?

It is just one of the reasons. Matter of fact, it is a relatively small contribute to all of that that we didn't repeat the restructuring costs that we had in the fourth quarter of last year. Western certainly is a contributor, but that piece was a small contributory positive [element].

And then final question, you've made money in Commercial for the first time in about six years. Was there something unusual that will prevent you from making money again next year or is this [past our earlier]?

I appreciate you calling that out. Dennis Park and the store fixtures people would appreciate it also that -- you will remember in that segment that it is made up of office which really always performs well. It is always profitable in the fourth quarter, offset by reduced spending in the store fixtures side of the business.

What happened in the fourth quarter was we were very busy from a production standpoint building for programs that will ship in the first quarter of this year. So the answer to your question will it repeat is pretty much dependent on the order book that we have received in the fourth quarter of any year predicting consumption or sales in the first quarter of the following year.

At the same time, we are working feverishly to always make that segment profitable from the store fixtures perspective. It really is a demand issue, but we are not having a repeat of restructuring costs. That business is very much in control today at a much greater rate than it had been in the past.

I will just summarize by saying it is our expectation that it will continue its profitability.

Thank you.

John Baugh, Stifel Nicolaus.

Good morning and great quarter on the margin side. So following up just so we are modeling correctly as we think about this internal rod mill versus external. What might that influence the revenue line when we look at all of 2013 versus 2012? And it sounds like it is more first-half of the year loaded.

Yes, that's true. It was about a $45 million impact for all of 2012. It was about a $28 million impact in just the fourth quarter of 2012. I expect, I'm guessing that it will be about an $18 million impact in 1Q of 2013 and it would probably diminish to maybe in the $12 million to $13 million range in the second quarter. But again it all is dependent on internal demand of wire.

We are going to continue -- that rod mill is very, very price cost competitive. So we are going to run it at 100% at all times.

And related to that, I assume, is the drop in Accounts Receivable. I assume there is some connection there although it looks like that was even greater than that figure. If you could give some color on AR.

You are right that there was some impact because there were obviously fewer reported trade sales, but that was not the majority of it. It was a really good job by our Corporate Finance, and Credit Collection group augmented by some help out in the field of reducing our DSO.

Great. And then lastly, quickly, Western Pneumatic, I recall there was some earnings drag in the initial year. Could you review again what that was? When that precisely goes away and what that impact roughly would be to earnings from 2013? Thank you.

There was about $5.5 million that we attributed to an inventory fair market value adjustment that most of that came through 2012. There's a little bit of that that carried over, but it is less than $1 million. In fact it is probably less than $0.5 million. It carries over into 2013.

There's also about a $3.5 million intangible offset that we assigned some value to, that had a one-year life. So that basically rolls off by January as well. So in that $8.5 million to $9 million range is what 2012 was burdened with but 2013 should not be.

Thank you.

Budd Bugatch, Raymond James.

Good morning. Congratulations on the margin performance and the operating performance of the quarter. Karl, maybe I missed it, I might have gotten -- but can you go over where we are in bedding and how you saw the quarter develop and what the outlook is for early 2013? I think that January of last year you had a very strong performance in spring and that would be hard to compete against.

Thank you for that and I'll be long winded with this answer too and I apologize for it. But there has been so much question as regards the ISPA statistics and the timing of the months, that I want to do what I did in the third quarter and give you a walk.

Innerspring sales within [inaudible] versus if they are reported and before I do that I want to preface my comments by saying that ISPA is a wonderful aggregator of data and reporter of data. This discrepancy is no indication on ISPA or ISPA's ability. It is a timing of purchases. They are somewhat victimized by the data that comes to them and remember that all they receive is data of two thirds of the industry.

So ISPA reported that innerspring sales were up 12.8% in October. Our innerspring unit sales were up 3%. ISPA reported that November innerspring sales as a supposed industry was up 8 -- I'm sorry, 11.8%. Our sales were up 3%. ISPA reported that December innerspring sales were down 5.4%, our innerspring unit sales were up 10%.

So anybody that invests on the ISPA data based on a monthly sample is probably doing themselves and probably others a disservice.

If you aggregate it from a quarter perspective, ISPA reported that innerspring sales were up 5.9%. Leggett's sales were up 6%. So perhaps it makes more sense to look at the quarterly numbers than the monthly numbers.

I will continue in that it is notable that in the fourth-quarter ISPA statistics the innerspring outgrew non-innerspring and the AUSP of innerspring sales was positive versus non-innersprings being negative. But it is the first time that has happened in quite some time. It is a testimony to the hybrid offering in the product line supported by the Comfort Core comments that I made.

And to give you a little more color there. Comfort Core or pocketed coils is a percentage of Leggett's total US innerspring sales. In 2011 were 7.1%. In 2012, they were 9.2% and in January of 2013 they were 10.8%. A Comfort Core has greater than a two-times average unit selling price compared to the open coil product that it replaces. So all those dynamics are good.

Now to January, January has certainly been off to a slow start. Our January US-based innerspring shipments were down 8.4%. We did have one fewer shipping days so on a same-day basis it was down about 3%. And we really do attribute that to your comment in that January of 2012 was extremely strong and in addition that our customers who you interacted with and a number of the other listeners and participants on this call interactive with in Las Vegas, are very, very bullish about the quarter but they all collectively say that the year started a little bit slow.

Some of that cause is probably attributed to the delay in the IRS issuance of refund, tax refund checks. The first quarter is the most promotional quarter from the standpoint of lower end bedding. A tremendous amount of units. The quarter is really important to us. We think that season is going to get started somewhere between two and four weeks later in 2013, because of the tax noise caused by our friends in Washington.

Okay. That's very, very helpful. And just so I don't get run too far afoul of David's prescription for one question, I am going to sneak one other in. As I look at the share repurchase and dividend prescription for this year, it looks to me like you -- one of your share repurchase criteria, it had been no dilution and yet you had a little bit of dilution last year because of not purchasing for the 4.7 million share issuance. This year do we look like we are going to have less dilution or no dilution? Are we going back to that?

And on the dividends we are only going to see three quarters of cash flow this year because you have accelerated the dividend into the fourth quarter of last year? Correct?

Yes, that's correct. It is our intent to go ahead and buy the shares back and remain neutral and the only caveat I would provide is that if there is something that we feel strategically would be much more compelling to the value of the Corporation, maybe it's a very attractive acquisition, then we would consider that. But normally it is our intention to at least maintain neutrality on that dilution factor.

And likelihood of that strategic acquisition?

We are always looking for opportunities. I will say that there are some interesting things out there. We are not close to consummating any deals of any significant size at this point.

And the money you've made in -- the money you invested last quarter in something. I take it that that did not happen and that is back in the Company coffers?

No. It is still standing, hanging fire if you will. We are still investigating that as a -- as an attractive long-term potential.

I thought that was supposed to be ended by the end of the year. That is not correct?

No. We -- what happened is we extended our indemnity with another entity so that we -- it gave us a longer period of time to analyze the aspects of the acquisition.

Got you. Thank you very much. Congratulations and best of luck for 2013.

Thanks.

(Operator Instructions). David MacGregor, Longbow Research.

Good morning, everyone. Nice quarter.

Thanks, David.

Can you just talk about the Specialized Products group for a moment? And it seems like things are mixed. It's nice to see CVP sales up.

But as you put together your guidance for 2013, what are the trends that you are assuming with respect to margins in this segment? Should we be expecting better margins, flat, down?

David, you -- from an auto perspective that there was about 6% industry production growth in autos in 2012. We are expecting about 2% worldwide auto production. So we -- auto is the biggest part of that segment. So we expect continued growth there. That fourth-quarter mix of CVP being positive and machinery being negative is actually dilutive to margins, while we appreciate the CVP business and the margin that it brings, that that is not a trade that is good for us.

So it is somewhat dependent from a long-term basis as to the demands in those two industries. And we, at this point, would expect that 2013 would look similar to the fourth quarter of 2012.

Boil that all together, segment margins should not be significantly changed one way or the other.

Good. And then on the spec -- you highlighted the machinery business being down. Is there something going on there with respect to share or evolving technology that we should be concerned about?

No. As you will remember, that that machinery business is primarily sewing and quilting related to the (technical difficulty) industry. I think that there was a -- certainly a US pause in capital spending with the uncertainty around the fiscal cliff in the fourth quarter. Worldwide, a lot of that machinery goes into Europe; South America was a little depressed.

So it is really macroeconomic. It has nothing to do with shares.

And then with respect to the contribution margins, I guess we have to discuss it on a consolidated basis, but I know historically you have been at that 25% to 30% range. I sort of took from the verbiage in the press release that you were expecting better contribution margins for next year.

I just want to make sure I am reading that correctly and if so can you highlight maybe what the best, sort of the most powerful drivers of that might be. Is it mix, is it pricing?

Well, let me start and then, Susan, you might want to comment. We continue to think that our contribution margins are going to be in that 25% to 30% range and that assumes the approximate mix that we have. I know we have mentioned before and it is true that certain of the business units have higher incremental contribution margins than others. Right now for planning purposes, we have just used the 25% to 30% on average.

Susan, do you want to comment?

That's what I was going to actually point you to, David, on slide 11 there is a forward walk sort of that shows from our continuing ops earnings this year to the midpoint of our guidance, it implies on that 3% midpoint sales growth somewhere around the 30% contribution margin however we look at this, whether it is EPS or whether it is from an EBIT standpoint, that is basically what we have built in. It is mix sensitive and that is the reason for the range that we have put out there. Somewhere around 30% would be a reasonable place to start.

Great. Thanks very much and good luck.

Robert Kelly, Sidoti & Company.

Good morning. Just a question on the outlook for -- at the segment level for 2013. If the midpoint Companywide growth is 3%, what is growing above the average by your budget? And it sounds like your specialized division is coined to growing below the midpoint budget.

At the midpoint of our guidance, we would actually have specialized growing at a nice pace somewhere in the mid-single digit range with Residential and Industrial approximately at the midpoint of our guidance which is in that 3% or so range. And currently Commercial about flat.

So almost uniform growth across the businesses except for Commercial.

Right, with Commercial a little lower and Specialized a little stronger.

Great. Thanks. And as far as the LIFO reserve changes, do you have any expectations there for 2013?

Our guidance does not include nor does it ever include at the beginning of the year LIFO, FIFO forecast that two measures matched during the year so it's not part of our thinking at this point, totally dependent on what happens with inflation, deflation during the year. We expect that this point a relatively calm steel year, that the outlook for steel pricing and what we have read from an industry perspective is that steel should be really pretty flat during the year. But it can change very quickly but at this point there you should not see a lot of LIFO FIFO noise.

All right. Thanks very much.

Allen Zwickler, First Manhattan.

First and foremost, I want to congratulate you guys for being good long-term investors with a couple of rough spots along the way.

Anyway, my question is more of a macro that I ask maybe maybe once every couple of years if you kind of look at your mix, I know you bought two businesses, but whether it be Residential, the mattress business or the fixture business, could you describe to us where you feel you are in those businesses? I.e., capacity, i.e., competition. I mean, I know that is a long-winded question, but maybe to your end maybe it is a good time to just refresh us on how you are feeling about those businesses.

No, it is a good question. I will give a high level comment and then ask Karl to give you some more specifics. We still are well below our capacity utilization targets and I look at that from a glass half-full perspective. That is a wonderful opportunity for us. And so as the demand for our products continues to or we hope continues to go up, we will see those incremental margins that we've commented. The only one that is that full capacity, Karl mentioned this, is our sterling rod (multiple speakers).

But the rest of them have lots of room to grow. They vary anywhere from the mid-high 40% utilizations to excluding sterling in the 60%, 70% utilization. And as you know, we have said we like to be in 80% the way we calculate it. We will continue to put a very high priority on all of our business segments, Residential Furnishings of course is -- has always been the genesis of the Company and continues to get a large amount of our product development effort. But there's business development going on in each one of the segments.

I think that Commercial Furnishings, as I mentioned before, our expectation is that it will continue its upward profitability march. We are very pleased to see what those men and women have been able to do there. So we have got plenty of capacity in that particular business unit and demand is what we need. Luckily we are winning those significantly important and large opportunities from various of the retailers.

Well, could I just ask it a slightly different way? You have -- you say you have capacity and so just in the last few years, the -- particularly the mattress business, there's been some changes in terms of different kinds of mattresses. Even though I am sleeping on the same one, and you probably hate me for it, but my question is do you have -- is the capacity matching with today's demands? Am I making myself clear? On whether, yes, you might be running at 50% of capacity, but the other 50% is machinery that, for example, is making products that people aren't buying anymore. I'm just trying to match that up.

Yes, okay. Thanks for the clarification. And of course our utilization is significantly higher than that 50%.

Well I'm just -- you understand now where I am coming from.

Yes, I do. I do. And suffice it to say that the equipment that we are commissioning most recently and today and in the near future, a large percentage of that equipment is pocketed coil equipment which goes to Karl's previous commentary about how that Comfort Core product has grown. And so our capacity is aligned with what we believe will be the demand going forward for the types of innersprings that are going to be expected and demanded by our customers.

Karl, do you want to offer anything?

Well, I think that we -- our job is to match capacity utilization with a mix of our business on a daily basis and we are doing our job.

So just to wrap up, so the fact that you are not running those plants full out, whatever the number may be in terms of capacity, is not function of not having the right machinery, right? If I am using the right word. So if for example you got the orders, but they were stuff that you couldn't produce, you would have to pass on them to somebody who had that business.

Yes. That is not the situation. It is a very good question, but we are not missing business for lack of our ability to produce the particular specification that is required.

Okay, that's fine. And in the fixture business do you feel now that you have the right mix, forget about the customers who are going to be fickle. But do you feel that you have the right mix there? And capacity if you look at your capacity versus your mix of customers, et cetera, do you think that is in balance at the moment?

Yes. We are better positioned there than we have been since we started aggregating acquisitions and store fixtures many years ago. The balance is correct for our customer demand, evidenced by the performance over the last few quarters and the expectation that you should have of our performance into the future.

Thank you and, again, we appreciate your doing a good job.

Thanks.

(Operator Instructions). Budd Bugatch, Raymond James.

Reentering the queue to ask a few more questions, if I could. Karl, I want to make sure I understand for modeling purposes the situation with Commercial Fixtures. You had said that in the 2012 third quarter you still had some business that you were delivering, I think, for some of the major retail projects you won. You don't expect that to really participate in this year's third quarter and yet you still expect to drop off in the fourth-quarter revenue. So do I understand that right?

Basically that's right. You should always expect the fourth quarter is going to be extremely soft. It doesn't matter which retailer, which mix. It's just they have to have their stores, all retailers across all categories, they have to have them position roughly October 1. So that is what causes the weakness in the fourth quarter for us and all others' fixture manufacturers.

As it relates to the difficult third-quarter 2012 comp, that all we are doing is saying, heck, it was a heck of a third quarter last year. It is really early this year. We don't have orders in hand to match that. We are not saying that we won't, that retailers usually don't release that kind of p.o. that early in the year.

So we are continuing to win business everyday. All it is is a notification or a reminder to you that, heck, it was a good quarter. I am not for one willing to sit here today and tell you that we can't match that. I am willing to tell you that we don't have orders in hand to do that nor did we a year ago today to run to that real strong 3Q 2012 demand.

Well, the sequential growth from last year's second quarter to third quarter was nearly $50 million, year over year in the whole total segment. It doesn't seem that that's in the cards this year. We are projecting a little bit more flattish from second quarter to third quarter of 2013, even though the second quarter of 2013 we are projecting it above last year. Is that a right kind of starting place? And then fourth quarter this year we are projecting down to almost flattish with last year.

I think that is prudent for your modeling purposes. And I hope that we are all surprised that it's less than what we actually post, but I do think that is prudent.

Couple of other quick questions. I think the sterling rod mill capacity was usually about 550,000 tons. Is that still right? Is that still a right prescription?

Yes. that is roughly accurate. We have not added or reduced capacity.

Yes, but I was just wondering whether you had gained any capacity from some efficiencies that you had been able to do. (multiple speakers). No, no real difference in capacity.

No. Slight, but not significant.

And finally even though you had a great performance this year, it seems to me that the operating margin on a normalized basis still has, I think, several hundred basis points to go to get to a target that I think I remember from the time when we first heard about the strategic plan. Is that still accurate?

Yes.

Okay. And timeframe to get there?

We need volume. You tell us what the macroeconomic situation is going to look like and sort all that out and I will give you an answer. It all goes back to capacity. Capacity utilization and then the contribution margin associated with the additional volume. So you give us volume and we will bring it home at a higher level than we have in the last couple of years, albeit there has been significant improvement and we expect that to continue.

Somewhere north of 4 billion maybe it is 4.2 billion, 4.3 billion with current product mix or the metrics. And will that be in 2014? Hope so.

You know how much regard I have for the Company, but I have heard this issue a long time about needing the extra volume to get to that kind of margin potential. The cynic might say are we really having a pipe dream there. I know you have a high regard for your customers and you want to be able to supply them when they give you -- when they favor you with an order, but are we just being a little bit too open to that kind of prescription and wanting that volume to come back?

Mattress units haven't recovered to the demand prerecession. [Bolster] furniture demand hasn't recovered to near that demand, auto hasn't recovered fully, home construction has not recovered. The population of the United States is larger, so I guess we would have to -- the default to know that we can't is the consumers' long-term inability to consume. We are selling primarily replacement products.

I would just add that one of the nice aspects of 2012 was the illustration particularly in the back half of the year of the incremental margin, contribution margin, that does show up if we have incremental volume appear. None of us and all are particularly overwhelmed by a 9.2% EBIT margin in 2012. We need to be to double digits and beyond. But the nice thing is what happened in 2012 and we certainly anticipate going forward as additional volume appears, that we will harvest in that 30% contribution margin range. And that simple math takes you to 10% and beyond on EBIT margins and we are certainly looking forward to that taking place and believe it will and are dedicated to that proposition.

No, I have no issue with the contribution margin. It is just -- it is the level of sales that gets you to that I think that $2.00 roadmap we have all wanted to see you get to for a while.

One last question quickly is the EBIT margin on carpet underlay. Have you increased sales? I don't remember hearing you talk about has the EBIT margins yet (technical difficulty) satisfactory?

It is improving, but not yet acceptable. But it is getting there.

All right. Thank you.

You're welcome.

There are no further questions at this time. I will now turn the floor back over to David DeSonier for closing comments.

Well, we don't have a lot of closing comments. We thank you for your participation and we will talk to you again next quarter. Thanks.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.