禮恩派 (LEG) 2013 Q4 法說會逐字稿

Greetings, and welcome to Leggett & Platt's fourth quarter 2013 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, David DeSonier, Senior Vice President, Strategy and Investor Relations, for Leggett & Platt Incorporated. Thank you, sir. You may now begin.

Good morning, and thank you for taking part in Leggett & Platt's fourth-quarter conference call. I am Dave DeSonier, and with me today are the following: Dave Haffner, our Board Chair and CEO; Karl Glassman, who is President and Chief Operating Officer; Matt Flanigan, our Executive VP and CFO; and Susan McCoy, our Staff VP of Investor Relations. Jack Crusa, who is Senior Vice President of the Company, and also President of the Specialized Products Segment, is also joining us this morning to participate in Q&A.

The agenda for our call this morning is as follows. Dave Haffner will start with a summary of the major statements we made in yesterday's press release. Matt Flanigan will discuss financial details, and address our outlook for 2014. Karl Glassman will provide segment highlights, and finally, the group will answer any questions that 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 have posted to the IR portion of the website a set of PowerPoint slides that contain summary financial information, along with segment details. 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'll now turn the call over to Dave Haffner.

Good morning, and thank you for participating in our call. We are pleased with our underlying operating performance in the fourth quarter, and encouraged by the sales momentum in certain of our markets. But a few factors impacted us from a reported GAAP earnings perspective. Consistent with our announcement on December 17, we recognized a $67-million or $0.31 per share non-cash charge, related to the goodwill and intangible assets of our commercial vehicle products business.

In addition, increases in steel costs late in 2013 resulted in a larger-than-expected LIFO expense of $12 million in the quarter. The timing of the steel cost increases concentrated the LIFO impact into the fourth quarter, and ahead of the benefit we expect from selling price increases. We've begun implementing price increases to recover the higher cost, and should realize a benefit in the first half of 2014 that offsets this LIFO impact. And the earnings-per-share impact from higher LIFO expense was essentially offset by a lower-than-normal effective tax rate in the quarter.

Fourth-quarter earnings, adjusted to exclude the CVP impairment charge, were $0.35 per share, in line with the guidance we issued in late October. In the fourth quarter of 2012, earnings per share, adjusted to exclude an $0.18 unusual tax benefit, were $0.32. Same-location sales increased 3% during the fourth quarter, with growth in automotive, residential furniture, bedding, carpet underlay, and machinery, partially offset by lower demand in store fixtures and CVP.

EBIT and EBIT margins, adjusted to exclude the CVP impairment charge, decreased in the fourth quarter. The earnings benefit from sales growth was more than offset by higher steel costs, and the concentration of the yet-to-be-recovered LIFO expense that I mentioned earlier.

For the full year, earnings from continuing operations, adjusted to exclude the fourth-quarter CVP charge, and a $0.06 per share unusual acquisition-related benefit from the third quarter, were $1.54 per share. Full-year 2012 earnings from continuing operations, adjusted to exclude an $0.18 per share unusual tax benefit, were $1.47 per share.

Same-location sales were essentially flat, with modest unit gains offset by lower trade sales from our rod mill. Sales grew primarily in automotive and carpet underlay, but these gains were partially offset by declines in store fixtures, CVP, and adjustable bed. Adjusted EBIT and EBIT margins for the year were roughly flat with 2012.

We expanded our aerospace tubing business unit in 2013 with the acquisition of two companies. The first was a small UK-based business acquired in May that extended our capability in aerospace tube fabrication. The second was a larger French-based company acquired in July that added small-diameter, high-pressure seamless tubing to our product portfolio.

With these acquisitions, our aerospace products business unit now has an annual revenue run rate of approximately $120 million. The development of this business platform aligns very well with our strategic emphasis on improving the overall margin mix of our businesses by investing in attractive markets where we can build or extend a strong, sustainable, competitive advantage.

As discussed earlier in the year, we've been considering strategic alternatives for our commercial vehicle products group, including possible divestiture of the business. As we progress through the quarter, it became apparent that current market values for certain CVP assets had fallen below recorded book values, and impairment charges related to the goodwill and other intangible assets of the business were recognized.

This decline in current market values of the assets resulted from lower expectations of future revenue and profitability, reflecting reduced market demand for the racks, shelving, and cabinets used in telecom, cable, and delivery vans. We now intend to increase focus on improving the operating performance and cost structure of the CVP business.

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-year period that ended December 31, 2013, we generated TSR of $0.16 per year on average, which placed us at the midpoint of the S&P 500 companies.

I'll now turn the call over to Matt Flanigan, who will discuss some additional financial details, along with our outlook for 2014. Matt?

Thanks, Dave. Good morning, everyone. Once again we generated strong cash flow in the fourth quarter, with operating cash of $178 million. For the full year, operating cash flow totaled $417 million. Working capital contributed $26 million of that amount, a notable accomplishment, since we ended 2012 with particularly low levels of accounts receivable.

Optimizing returns on capital employed continues to be a major focus for our operations. We ended the year with working capital at 10.1% of annualized sales, well below our 15% target.

In August, we increased the quarterly dividend by 3.4% to $0.30 per share, and 2013 marked our 42nd consecutive annual dividend increase at a compound annual growth rate of 13%. At yesterdays closing price of $30.69, the current yield is 3.9%, which is the fourth highest among all of the S&P 500's dividend aristocrats.

In 2014, we expect to again generate over $350 million of operating cash. Dividends should require about $170 million in 2014, and capital expenditures should approximate $100 million.

Our depreciation and amortization expense should again total about $120 million. With current capacity utilization rates still relatively low, our need to invest in additional productive capacity is limited. We continue to make investments for maintenance, deficiency improvement, and growth in businesses and product lines where sales are strong. As volumes improve, we expect capital expenditure levels to increase, but longer term, they will likely remain at or below total depreciation and amortization.

Our incentive plans emphasize returns on capital, which include net fixed assets and working capital. This emphasis, we believe, helps ensure that we are efficiently utilizing our asset base, and investing capital dollars where the highest return potential exists. Going forward, returns should continue to improve as we expand EBIT margins while controlling invested capital.

In other uses of cash, we repurchased 2 million shares of our stock in the fourth quarter, bringing our full-year repurchases to 6 million. We also issued 3.2 million shares during the year.

Consistent with our stated priorities for the use of excess cash flow, we will prudently buy back our stock, bearing in mind our level of cash generation, other potential opportunities to strategically grow the Company, and the overall outlook for the general economy. We have a standing authorization from the Board to repurchase up to 10 million shares each year, but have established no specific repurchase commitment or timetable.

We recognize that our financial base remains very strong, and this gives us considerable flexibility when making capital and investment decisions. We ended the year with net debt to net capital of 27.3%, well below the conservative end of our long-standing targeted range of 30% to 40%.

The economic outlook for 2014 is a bit brighter than it has been for some time. Most forecasters are calling for a modestly better US economy in 2014, though they note that headwinds will still exist.

For planning purposes, we expect 2014 sales growth to accelerate, and EBIT margins to expand. We anticipate full-year sales of $3.85 billion to $4.05 billion, or 3% to 8% growth versus 2013. Based on this level of sales, we expect 2014 earnings in the range of $1.65 to $1.85 per share, which would represent another year of record earnings from continuing operations. This compares to adjusted continuing operations EPS of $1.54 in 2013.

Now I will turn the call over to Karl, who will provide some additional segment comments.

Thank you, Matt, and good morning. In the residential furnishings segment, same-location sales increased 6% in the fourth quarter from higher unit volumes in several product categories, and raw-material-related price increases in carpet underlay.

In our US spring business, sales increased 1% in the quarter. Innerspring unit volumes were essentially flat, however, growth in the Comfort Core innerspring category continued, with those higher-priced and higher-margin units up 35% during the quarter. Our box spring volume was also strong, with units up 8%. Sales grew 8% in international spring, primarily from market share gains, and increased Comfort Core sales in Europe.

In furniture components, sales increased 9% in the fourth quarter. Volume in our seating and sofa sleeper businesses grew 13%, and motion hardware unit volume was up 7%. Adjustable bed units were down 11% in the quarter. In carpet underlay, sales grew primarily from price increases implemented to recover higher raw-material costs.

Fourth-quarter EBIT and EBIT margins increased in the segment, primarily from higher sales. For the full year, same-location sales in the residential segment increased 3%, largely from growth in carpet underlay, partially offset by declines in adjustable bed. EBIT and EBIT margins improved primarily from higher sales in certain product categories, cost improvements, and favorable product mix in US spring.

In the commercial fixturing and component segment, same-location sales decreased 8% in the fourth quarter. Store fixture sales decreased 10%, and volume in office furniture components was down 4% during the quarter. Segment EBIT and EBIT margins decreased versus the fourth quarter of 2012, primarily due to the lower sales. For the full year, commercial segment same-location sales were down 6%, and EBIT decreased on the lower volumes.

In the industrial materials segment, fourth-quarter same-location sales decreased 4%, with slightly higher unit volumes more than offset by steel-related price decreases early in the quarter. EBIT and EBIT margins for this segment decreased during the quarter, with acquisition earnings more than offset by lower metal margins, and late-quarter inflation in steel cost. For the full year, same-location sales in the segment were down 8%, with about half of the decline from lower trade sales at our rod mill, and the balance from steel-related price deflation.

The decrease in trade sales of steel rod during the year was offset by an increase in intercompany rod sales, and the rod mill continued to run at 100% capacity utilization. As we stated throughout the year, the change in the mix of rod sales from trade to intercompany is generally positive to earnings, since that change tends to also shift the production mix to higher-value, high-carbon rods.

Full-year EBIT and EBIT margins in the segment improved, primarily due to the absence of acquisition-related costs at Western Pneumatic Tube, and earnings from other acquisitions. These gains were partially offset by lower metal margins in the second half of 2013.

Our aerospace business continues to perform well, and earnings should further benefit in 2014 as we fully integrate recent acquisitions. In the specialized product segment, same-location sales grew 8% in the fourth quarter. Automotive sales increased 20%, from a combination of expanded content, participation in new vehicle platforms, and demand strength in each of the major markets. Same-location sales grew 17% in machinery during the quarter.

In commercial vehicle products, sales declined 32% in the fourth quarter. Large fleet customers pulled volume forward into the second quarter, and curtailed capital spending in the back half of the year.

The segment's EBIT and EBIT margins, excluding the CVP impairment, increased during the quarter primarily from higher sales. For the full year, same-location sales grew 4%, with strength in automotive partially offset by declines in CVP. Full-year EBIT and EBIT margins, adjusted to exclude the CVP impairment, increased primarily from higher sales.

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

Thanks, Karl. As we look forward into 2014 and beyond, we are encouraged by the positive direction several of our businesses are headed.

We continue to be very optimistic about the growth potential in our automotive business for the next several years. Industry forecasts project 3% global production growth in 2014. With content gains, we expect to outperform this industry growth rate as we did in 2013. We are also encouraged by the longer-term view for the office furniture industry, and expect improving growth rates in our related business in 2014.

Customer backlogs in aerospace support industry demand strength in that business for several years. Our adjustable bed business has recently gained significant market share that we will start to see the benefit from in 2014. And with consumer confidence in housing generally on an upward track, our residential furniture components and bedding businesses are poised to benefit as demand in those end markets improves.

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

That concludes our prepared remarks. We appreciate your attention, and we will be glad to answer your questions. In order to allow everyone an opportunity to participate, as we typically do, we request that you ask your single best question, and then voluntary yield to the next participant. If you have additional questions, please re-enter the queue.

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

(Operator Instructions)

Daniel Moore, CJS Securities.

Dave, you sound increasingly optimistic obviously around 2014 and you touched on some of these topics at the end of your prepared remarks. But in automotive obviously seeing a nice pickup there. And the core businesses mattresses and furniture, what gives you the confidence that consumers are likely to get off their hands and get out there and increase unit purchases?

And then a quick follow-up is simply what is tax rate embedded in your adjusted $0.35 EPS for fiscal Q4? Thank you very much.

Okay. You are welcome, Dan. In fact, we were talking before the conference call just amongst ourselves about the fact that we indeed do feel better about 2014. Things seem and indices would indicate that business is likely to be better in a broad array of our business units. Those things that I did mention, of course, there's some publicly available information that would support that.

And then relative to your question about some of our core products, it's a broad-based combination of facts that lead us to believe that we're going to see improvement in those, Dan. Obviously interacting with our customers, taking a look at what they are planning to provide at markets, what sort of new products they're asking us to pursue, timing of those. But the general uplift of the housing market and consumer confidence going forward is likely to lift a lot of ships, not just Leggett's core businesses. So I don't want to come across as overly optimistic, we're a fairly conservative Company, you know. But I can tell you the group that sits here with me today feel like 2014 is likely to be a meaningfully better year, and obviously Karl and his operating people have generated a forecast that would suggest that.

Now I'm going to hand over the tax rate. I know the answer but I'm going to give it to Matt and let him comment on the tax rate that was embedded in that 2014 forecast.

Well, the forecast is basically implying for 2014 a tax rate of approximately 30% in the fourth quarter alone, Dan, it was certainly a bit of a cluttered quarter, but it was about 11%. And again, that was a function of a lot of unique occurred in that quarter, not in our decision-making but because of the taxing jurisdictions that we are involved with literally all around the world. Specifically Mexico and China, Canada and Austria are all four examples of activities that occurred in the fourth quarter with decisions or ruling that proved to be beneficial in this case and drove our tax rate down uniquely which of course we mentioned in that fourth quarter EPS result.

Got it. So that $0.35 is on the $0.11 -- 11% tax rate.

Yes.

Perfect. Thank you. I will jump back in the queue.

Joshua Borstein, Longbow Research.

With respect to the revenue guidance I was just wondering if you could tell me at the midpoint what it implies for each segment?

Yes, Josh. Just in kind of rough terms. Residential would be at somewhere around 4%. Commercial up 1% or 2%. Industrial up around 6%, with about half of that actually coming from the acquisitions that we completed earlier in 2013. You'll remember those were roughly midyear so we still have some of that benefit carrying into 2014. And we expect strong growth in specialized, obviously automotive did real well in the fourth quarter, that growth would be up somewhere around 10% or 11% next year. All of that aggregates to kind of a midpoint growth in the ballpark of about 5%, 5.5%.

Great. Thank you for that. And then just on the other expense line, the $59.3 million in the quarter, could you talk a little bit about what that was exactly?

That is the impairment showing up in there.

Yes Josh. There was, of that total $60 million, call it $67 million of impairment, there was about $63 million of that, in fact I think it was exactly $63 million that hit the other line. That was specifically the goodwill impairment. We also impaired another customer related intangible, but we did that by accelerating the amortization on that particular asset, and so that hit I think it's the line above on the table that you are looking at, the amortization expense.

Okay. So nothing there that should be recurring in the following quarters?

There is always a little bit of other income or expense but no not relative to those two items.

Okay. Great. Thank you. I will jump back in the queue.

Budd Bugatch, Raymond James.

I guess my first -- my question really is in industrial. I'm trying to get some more color and understanding of the bridge between last year and this year. We've got good performing aerospace this year. And last year, while you still had it, I think there were some charges that were still -- accounting charges that still were compressing or at least toward the first half of last year, maybe not in the fourth quarter.

But I'm trying to understand, how do we get to that $3.2 million bridge when we keep saying that the Western Pneumatic and the other two new acquisitions are performing well? So can you maybe put some color and some numbers to that if you would? And is aerospace around 20% or 25% of revenue in that segment now?

The run rate that it's at, Budd, is about $120 million, but of course we did not have all of that revenue in 2013.

I'll get there pretty quick. About 16%, 17%.

Okay. So 16% or 17% of the segments revenues.

Okay. And how do we get to the bridge in EBIT between the two parts of that?

Yes. Budd, let's talk about steel pricing for just a second while Susan is trying to dig through a little of that. The quarter was, as you wrote in your note this morning, a little ugly from a lot of perspectives but it certainly was in industrial as it relates to steel pricing. And this commentary primarily relates to the long around products.

But what we experienced in late September, early October was some selling price deflation in both rod and wire with sale -- with pricing pressured by an abnormally large amount of import rods. So rods that were flooding into the country from primarily China and Turkey, that were taking down that sale price while scrap was relatively flat. And then -- so there was an oddity in that we were experiencing actually in the business units, some FIFO expense. And with reevaluating inventories because of selling price.

And then what happened in November and then accelerated in December was a significant inflation in scrap, in domestic scrap costs, driving selling prices up. We did not incur the benefit of those selling price inflation. They were announced in the month of December. But they became effective first week of January and first week of February as it relates to wire and rod. So that drove that big LIFO issue. I can't remember having FIFO expense and LIFO expense in the same quarter. So it was that dramatic swing that caused some of the pressure, all manifested itself in a metal margin spread that was tighter than anything we've experienced in quite some time.

Now, in the first quarter, we should have the benefit of the wire and rod selling price increases. Simultaneously, between Christmas and New Year's we announced selling price increases into the bedding industry that become effective in the first quarter. So that's the cause of the chop so to speak in industrial. It will also have somewhat of an impact going forward, so the first quarter of this year is going to be somewhat pressured by the increased cost, and then the delay that is our typical delay in getting those price increases implemented in both industrial and in residential.

This is Dave, Budd. Just one other thing. We had a little bit of a hiccup if you will -- it wasn't nearly as large as the things that Karl was talking about -- in our steel tubing products. Not aerospace tubing but steel products tubing, where our margins were lower than we had originally had hoped they would be in the fourth quarter. That's another element of that.

So if I heard you right, let me see if this math works. Then it looks like that the metal margins were somewhere between 3% to 4% in the quarter and the balance of that $160 million or so of sales, and the balance would be the aerospace margins on those sales. Is that about right?

I don't know. I don't know the answer to that but my sense is that may -- to go through that calculus, that may give you aerospace margins that are higher. I know what you are trying to calculate but I don't know. We'll just have to go back and check that.

Okay. I'll get back to the queue. Thank you very much.

But I do want to reaffirm that our aerospace business is performing very, very well. So you should not look at industrial in the fourth quarter and say hey these guys are being a little disingenuous with aerospace. Aerospace is doing well.

You want to put any quantification on that, Karl?

This is all you are getting. It's performing at above our expectations at the time we made each of those individual acquisition, so very well.

Thank you.

John Baugh, Stifel.

I wanted to ask and you don't have to go into minutia of the products, but I was wondering, as you enter 2014, and you look at key product areas, you referenced a couple where you were going to have market share gains. I think, or had market share gains, I think international springs was one. And then there was a reference to pending share gain in adjustables. Could you go through the whole Company key product areas and cite where you think you are gaining share or losing share that would influence the numbers when we look at 2014 versus 2013? Thank you.

We'll start with residential, John. This is Karl. US Spring is an area that we are gaining the benefit, continued benefit of Comfort Core which gives us optimism as we go forward. To see that growth rate of 35% in units, and growth of hybrids is a very good thing for us. Admittedly the US bedding market has been pretty soft. I think when ISPA sorts through and trues up, we will probably ultimately report that units were down in 2013. The ISPA forecast for 2014 is 2% real unit growth so that would help us.

As furniture performed -- home furniture performed extremely well in the fourth quarter as it did all year. We expect that it will continue to perform well there. As more upholstery is manufactured in North America, that's a very good thing for us, especially in seating and distribution. Rest of segment, carpet continues to just be a macro benefit from correlated to housing.

As we said, as Dave said in his comments, we expect some strength in office. Office has been under pressure the last couple of years. We expect that supported by the BIFMA forecast of 2% to 3% growth this year. We feel good about that business and have also experienced some market share gains there as well.

Moving into industrial, I spoke to aerospace, certainly feel good about that and the aircraft manufacturer build plans going forward. Automotive is a great story that we -- the fourth quarter of last year, we saw productive growth in Europe for the first time in a number of quarters. So Europe bottoming out and becoming a contributor is a good thing, and we continue to gain content in each vehicle produced. So that gives us that general optimism, augmented by the macro statistics.

Relative to specific where do we get these market gains? In adjustable beds, we know specifically who those customers are that have made that change. And they're customers that are significant bedding manufacturers. It's business that has already been consummated. We are taking that business from another adjustable bed manufacturer.

So we try not to just assume that we are going to gain market share John, you know that about us. Only when we know that we've realized that market share will we build it into a budget. Now that doesn't mean that we can't lose market share too. And obviously competition is what it is.

But there's also some major -- I'll just say development work that happens; that's built into this forecast with some customers. Most of those are existing customers; some of them are new customers. So we build that into a budget based upon a risk profile or a probability profile that we think is prudent.

So Dave, just to kind of sum it up, your share gains in office. Content share gains I guess in automotive particularly in Europe. Share gains in adjustables, maybe lingering share gain in innersprings internationally. All gains. Any areas where you see any losses going into 2014?

John, nothing of any magnitude. There's always puts and takes but I can't think of anything of any magnitude that would be considered a loss.

Great. Thank you.

Good question though.

Keith Hughes, SunTrust.

One, back to the other expense line, you have highlighted the $63 million of the charge that was in there. You still leave kind of a positive 3 on that number. What were the other elements that made it a positive 3?

Nothing that comes to mind immediately, Keith. I can look at that and get back to you but there weren't any other large things in the quarter.

Yes Keith, we had a small real estate building gain as part of that 3 and certainly not all of it, I mean knick knacks. Truly it's a cluster of a number of things.

Okay. And then to your comments on commercial furniture, besides some share gains on those components that you had discussed, do you see that business growing faster than the BIFMA numbers? Is there a chance that could be up mid-single digits in the industry?

This is strictly -- should the seating category grow faster than the macro BIFMA numbers?

Yes.

It could. Frankly I don't know why it would. I think that we'll outperform that data point because of the gains that I spoke of but, yes, I don't know that there's any real reason, Keith, that seating would grow faster. At NeoCon -- the last NeoCon, the launches tended to be across all product categories, not heavy weighted to seating. So I don't know that seating would get an inordinate share of that growth.

Some of our customers -- as you know, Keith, we do some private label type business right now where we produce the entire component or chair for our customer. And that appears to continue to be gaining some interest by some of our customers to bring that activity to Leggett. And indeed, the 2014 forecast does have some more of that type of revenue growth or content, if you will, in it. But I'm like Karl. It's hard for us to dispute BIFMA numbers and I think they do a good job as anybody in trying to forecast that.

Okay. Thank you.

Herb Hardt, Monness, Crespi, and Hardt.

My question is that things seem to be coming together reasonably well for you across most sectors. What areas are the most concern to you?

I'll let Karl and/or Matt comment too. I have some concern -- continuing concern, Herb, with commercial vehicle products. Mind you, we've righted the balance sheet. The value that we carry to what we think is the right number now, but I continue to have some concern with that part of our business. Of course, Jack is here with us and he can comment on that if he wants. We're highly focused on improving that business since we chose not to give it away. We could've sold it. We chose not to at the prices that were offered.

I also have some continuing anxiety about some of our primary steel tubing. It's more of a commodity type product. Certainly the antithesis of the aerospace tubing. But I do have some concern about that commodity type product, Karl how about you?

I would throw in store fixtures in that it is such a difficult business to forecast. Our people do everything that they can to forecast that business but Herb, as you know, it's a seasonal and cyclical business that just is -- it's a tough business. And we are optimistic from the standpoint that we've had greater access to bids and feel relatively good but it's a business, because of the nature of the business, that sometimes surprises us. So that's a concern.

The other is, as we pass through this raw material bulge, we always get it through but it's a challenge. There's the lag that's kind of innate. But at the same time there's some tough conversations with customers at a time that they are pretty bullish about their demand. So it's always a challenge. But our people are great at executing.

Okay. Thank you.

(Operator Instructions)

Daniel Moore, CJS Securities.

Maybe talk a little bit about capacity. You reiterated in the press release that you have -- you can see $400 million in additional sales with little needed CapEx. Maybe talk about where that capacity is proportionately? Where I guess -- what areas of the business if you saw more material pickup you might need to start adding capacity over the next 12 months plus? And one quick follow-up.

Yes Dan. This is Karl. Where we are tight on capacity is certainly at the steel mill. As I said, it runs at 100%. But automotive, with automotive's growth, if we go back and look at 2013 CapEx of $81 million of spend, about 30% of that has been in automotive. That's a great thing because they are devoted to new programs, awarded programs, that will impact us today and well into the future. But that's an area, because of the growth in that business, that we are a little tight.

In Residential Furnishings, we're continue to be a little tight on Comfort Core as that has grown around the world. So there's not much available capacity but we certainly have the ability to add capacity and continue to do so. And certainly at more efficiency in each one of -- the addition of each one of those machines.

I don't know of any other area that we are really tight. There are capital investments will continue to heavyweight to automotive, residential, and to the steel mill. And that's not a capacity situation. It is steel mills are just expensive to maintain, but we improve utilization with most dollars spent there. It's not just maintenance. But Dave I don't know of another place that we're really --.

It's interesting. As you were talking I wrote down mine and I put Sterling, automotive, and pocket springs, which is Comfort Core. Those were the three areas where -- and as you know, Dan, we can't wait to spend some more money in those areas. But that generic volume of course is very attractive to us and so we did bump up -- I was probably conservative, but we did bump up forecast for CapEx in 2014. Whether or not we'll spend all that, we will see. But those are the areas where the capacity dollars are likely to go.

Okay. And then maybe just a couple comments on the CVP business, given the lack of demand in the marketplace and now you are going to try to right the ship. What do you think -- what margins are achievable or sustainable in that business as we look out over the next couple of years?

This is Jack, Daniel. The target in a long-term perspective for CVP would be to get it up closer to the 9% to 10% margin range. In 2014, that's going to be a challenge because we have a lot of -- we have moving parts, the Ford business, they're going to cease the production of the E series van and begin to produce a transit in Kansas City, and we'll be establishing our presence in Kansas City to do that; to support that.

So it will be a steady progression towards those improvements. Historically, we've seen that business in good years approach that 9% to 10% EBIT margin. And in soft years, it'll be in the low single digits. So to be fair, I would probably use something in a longer-term perspective in the 6% to 8% range.

Very helpful. Thank you.

Budd Bugatch, Raymond James.

One, Karl is there any update on the tariff situation, I think that's going through review again?

Yes. We are in early stages of that review now. It's in a combination of review, Budd, at the ITC and the DOC. That at this point we expect the DOC decision sometime in March. The ITC would trail that a little bit. But we are very confident there because of circumstances have not changed.

You may have seen the recent publication of a Malaysian manufacturer that was speeding, cheating, lying and all those other dirty nasty things that they were doing and transshipping products into the United States. And they were caught doing so. That duty rate was of 234% was reaffirmed. We see that as a good sign.

We continue to work with a number of other manufacturers of other products, both steel and non-steel related, to deal with continued enforcement of the existing anti-dumping and countervailing duty orders as they relate to transshipment. And we've done a pretty good job I think of engaging Congress and the DOC and Customs. So they are certainly well aware of the situation, and I think that bodes well for them adding another five years to the time frame.

And do you still think about 1 million units are finding their way in? I think it peaked at about 4?

I think that there is about 1.5 million units coming into the United States. About half of those coming in legally and about half of those coming in illegally.

Okay. And I know Comfort Core has done real well but how do we think about pocketed coil versus open coil these days? It seems like open coil must be losing share and that's been a traditional Leggett strength or a legacy Leggett strength for as long as I've been around.

Yes. That certainly is a good point that we have some open coil capacity that is available right now. Some of its being relocated into the other geographies. But certainly, if you deal with 35% growth in Comfort Core, which today in the US is about 12% of our total business, growing obviously quickly, that it is obsoleting so to speak some open coil. And I would suspect, as you make your way around the showrooms in Las Vegas at market next week you will see more hybrid, more Comfort Core introductions. A number of us were in Cologne last week at the IMM fair. And boy there's pocket coil in places there that used to be open coil as well.

So it actually bodes well for us because of, as you heard in my commentary, the higher average unit selling price is at higher margins, so it's been a good trend for us. With us having access to the best machinery company in the world, being Spuhl, to manufacture those machines has been a very good thing for us. It allows us to innovate and we'll continue to innovate on each one of the triggers that trigger the consumers' purchase of a hybrid product.

Okay. And last thing for me if I could -- thank you for that answer -- I guess to Matt maybe or Susan. On the working capital, on the cash from operations expectation of $350 million or more. If I do the midpoint of it and with depreciation and amortization and maybe some stock compensation expense, I get to like about a $410 million before working capital uses.

How should we think about that if you do that midpoint I think it's $20 million more -- $200 million more of revenue. What do we think about the use of working capital to get to your working capital -- to your cash from operations forecast?

Great question Budd. This is Matt. If you look at the end of the year at I know you have done and the working capital rate is 10.1%, you've heard us say for many several years now that our goal is 15%, or that's our target. We've been inside of that routinely. We expect to stay inside of that. Our current modeling, which again we think is conservative, would estimate say around 12%, 12.5% as a working capital investment on that sales growth that we anticipate taking place in 2014. If you plow that into your model, you would get something between $360 million and $400 million of operating cash flow to come out of 2014.

Again we would look forward to doing better than that. Also as you well know seasonally the fourth quarter of the year is always the big operating cash flow time of those 12 months for us. So a lot of that comes home to roost in the fourth quarter as it did once again this year. So we say more than $350 million, we certainly feel very strongly about that. Might it begin with a 4 by the time we close this coming year's books? Could be the case, just like it was this past year and the year before that.

And that usually how does that split between receivables and inventory?

Yes. We obviously look at all the pieces but if you take receivables, inventory, and payables, where there's a lot of work going on the payable side, you can basically take that 10% all in metric, go to 12.5% and basically use all three of those pieces to find your way there.

All right. Thank you very much.

Josh Borstein, Longbow Research.

Just to another question on the Comfort Core, if you could talk about the cadence in the quarter I'm just curious if you saw falloff in December as some other companies have reported and just how January started off for you?

That's an interesting question, Josh, in that we didn't see a falloff. We did full disclosure see a falloff in December in spring sales. So I don't want to do anything to disconnect when we aggregate -- I'll stop dancing with you. Our total innersprings in December were down 6% in units. So it was a tough month for people, probably weather driven. But if we look at the cadence of Comfort Core, up 38% in October, up 28% in November, and up 34% in December. And I would expect us to continue to run at a pretty impressive rate as we have some insight into what our customers' introductions are next week in Las Vegas.

Are all of those bedding, Comfort Core or any of that furniture Comfort Core --?

Yes. That's a good question, Dave. That excludes Comfort Core. We are seeing significant growth in Comfort Core applications and furniture upholstery and to a very small extent in pet beds, and all of that is excluded. So the growth in Comfort Core though back to home furniture is a good story as well.

Great. Thanks for that color and then just on the adjustable foundations, if I think back to last quarter, it seems -- the business seemingly was improving as the quarter progressed much like the Comfort Core business back in 3Q. Could you just talk about what the falloff in 4Q was that you saw?

Josh. It was pretty constant in the quarter. It was -- it aggregates to that 11%; we ran at about that rate. Actually the fourth quarter was -- the December month was exactly 11%. You've opened a door for me on adjustables. Let's talk about that category for a little bit. Dave made reference to it as well, but our path of distribution on adjustables had been primarily direct to retail and we, through what was admittedly a difficult year in 2013, we did not lose any retail for placement.

What had happened to us is so some of the OEM manufacturers did a really good job of packaging their mattress with a specific base and in some cases those bases weren't ours. As Dave said some of that has been rectified and we are starting to ship those programs now. So I think that we are behind the loss of adjustable bed business.

Okay. Great. Thanks, and then just one more from me. On the slide deck I noticed for the 2014 guidance the contribution margin was 25%. Normally you use a more normalized 30%. What accounts for the change?

Josh, that acknowledges that in our sales guidance range we expect to have some inflation. We haven't split out how much of that 3% to 8% is pricing and how much is units. But admittedly some of it's going to be pricing. And we don't get 30% contribution margin obviously as we have talked with you in the past about when it's price driven sales growth. So that really is just a bit of a hedge if you will. At this point of the year it is difficult to identify exactly what's going to make up the sales growth. But considering that some of that's going to come from pricing, that just simply was hedging that contribution a bit.

Thank you and good luck.

Thanks, Josh.

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

Thank you we appreciate your time and we'll talk to you again in April.

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