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Leggett & Platt Inc. (NYSE:LEG)

Q4 2008 Earnings Call

February 4, 2009 09:00 am ET

Executives

Dave DeSonier - Vice President of Strategy & Investor Relations

Dave Haffner - President and Chief Executive Officer

Karl Glassman - Chief Operating Officer

Matt Flanagan - Chief Financial Officer

Susan McCoy - Director of Investor Relations

Analysts

Joel Havard - Hilliard Lyons

John Baugh - Stifel Nicolaus & Company, Inc.

Budd Bugatch - Raymond James

Keith Hughes - Suntrust Robinson Humphrey

Mark Rupe - Longbow Research

(Fred Fee) - (Spefe Storfs & Capital Group)

Ladies and gentlemen, thank you for standing by. Welcome to the Leggett & Platt fourth quarter earnings conference on fourth February, 2009. (Operator instructions). I will now hand the conference over to David DeSonier.

Dave DeSonier

Good morning and thank you for taking part in Leggett & Platt's fourth quarter conference call. I am Dave DeSonier, the Vice President of Strategy and Investor Relations, and with me today are the following: Dave Haffner, our CEO and President. Karl Glassman, our Chief Operating Officer. Matt Flanigan, our CFO, and Susan McCoy, our Director of Investor Relations.

The agenda for the call this morning is as follows: Dave Haffner will start with a summary of the major statements we made in yesterday's press release. Karl Glassman will provide operating highlights, Dave will then address our outlook for 2009, 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 web site.

In addition, 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.

Dave Haffner

Thank you Dave. Good morning and thank you all for participating in our call. Two thousand eight was a year with two very significant and opposing forces in play. On the positive side, we successfully began implementing and benefiting from our most significant strategic changes in quite some time.

On the negative side, global economies and stock markets suffered from their worst performance in decades. Weakened global economies have resulted in extremely soft market demand. Consumers have significantly curtailed spending in nearly all areas, but particularly for the large-ticket items that contain our products.

Fourth quarter sales from continuing operations declined 15% versus fourth quarter of 2007. Significant unit volume declines of greater than 20% and our decision to exit some specific sales volumes with unacceptable margins were partially offset by inflation related price increases implemented earlier in the year to recover higher steel costs.

Fourth quarter earnings from continuing operations adjusted to exclude restructuring related costs and other items were $.03. In the fourth quarter of 2007 adjusted earnings from continuing operations were $.21 per share. The year-over-year decrease is primarily due to lower unit volumes.

In addition, we further reduce production during the quarter in an effort to bring inventory levels in line with current demand. These production cuts reduced fourth quarter earnings but contributed favorably toward strong generation of operating cash flow.

For the year 2008, sales from continuing operations decreased 4%. Lower unit volume and our decision to exit some specific sales with unacceptable margins were partially offset by inflation. Full year adjusted earnings per share from continuing operations decreased from $1.19 in 2007 to $.88 in 2008, primarily due to extremely weak demand.

We expect these very weak demand conditions to continue for some time. We have significantly reduced head-count, constrained spending and are closing certain facilities. We are not sacrificing long-term opportunities though. We remain focused on new product development and have not reduced our spending in this critical area.

Despite the economic challenges, we made significant progress on our strategic initiatives and our efforts to position the company for the long term. A little more than a year ago we committed to divest some operations, restrain spending, raise the dividend and buy back our stock. We accomplished these objectives and more.

During the year, we divested five business units and received after-tax cash proceeds in excess of $400 million. In the fourth quarter we completed the sale of our poly fibers business. The four other divestitures, including the sale of our aluminum products segment, occurred in the third quarter. Two divestitures remain, those are our Storage Products and Coated Fabrics businesses. We expect the successful disposition of these businesses once credit markets improve.

We also concluded that our store fixtures business unit in its previous form was not capable of meeting our return requirements. As a result we contracted the operation to a smaller, more profitable metals-focused business consistent with Leggett's core competency of producing steel and steel-related products.

During the year we also significantly reduced our combined spending on capital expenditures and acquisitions. We increased our annual dividend by 39% and bought back 9% of our outstanding shares. Further, we implemented an annual rigorous strategic planning process at the business unit level. Operationally during the year we gained significant market share in our US bedding components business. We also successfully implemented price increases to recover inflation in steel costs.

We fell short of one of our goals in one key area last year, and that was EBIT margin improvement. Excluding unusual items from both years' results, our continuing operations posted an EBIT margin decline versus 2007. To a significant extent, this was due to reduced demand in our markets, however, it is imperative that we aggressively pursue an deliver higher margins as part of our effort to improve returns.

As a part of our strategic change, we adopted Total Shareholder Return, or TSR, as our primary objective. For 2008 we posted TSR of negative 7%, which was well below our 12 – 15% goal. However, our TSR performance ranked in the top 10% of the S&P 500, and did significantly better than the negative 37% TSR for the S&P 500 collectively.

We strongly believe that our TSR would have been much lower had we not implemented and made substantial progress on our strategic initiatives.

In this very turbulent financial environment, our strong financial profile is especially notable. Our balance sheet remains in excellent condition. We ended the year with net debt at approximately 28% of net capital, which his below the low-end of our long-term targeted range of 30-40%.

We have over $500 million of availability and more than three years remaining on our $600 million bank facility. And we have no significant maturities of long-term debt until 2012.

We generated $436 million of cash from operations during the year, $233 million of which was in the fourth quarter as we made substantial progress in reducing working capital. We are aggressively managing our operations and expect to further reduce working capital levels in 2009.

We repurchased $1.6 million shares of our stock during the quarter, bringing our full-year total to 15.8 million shares.

We also declared a fourth quarter dividend of $.25 per share. The current dividend yield is approximately 7.9% based on a $12.71 stock price. Two thousand and eight marked the 37 consecutive annual dividend increase for Leggett at an average compound annual growth rate of over 14%.

Even with 2008's challenging market conditions, operating cash exceeded the amount required to fund dividends and capital expenditures by $153 million. Going forward we expect to comfortably meet these priorities with operating cash flow. As we have consistently stated, we plan to use the majority of the divestiture proceeds to repurchase shares, but we are completing those purchases at a slower pace than originally anticipated as we carefully monitor economic conditions.

Returning cash to our shareholders is a key priority, and we expect share repurchases to consistently be one of the means by which we attain our TSR goal. And with those comments I'll turn the call over to Karl Glassman who will provide some operating highlights. Karl?

Karl Glassman

Thank you Dave. Good morning. In my comments this morning, I am not going to repeat the segment details from yesterday's press release. We are operating in very tough markets with limited visibility in most cases. We are not forecasting demand improvement in 2009, but we are intently focused on the factors we can influence and control.

Dave has already mentioned some of the actions we are taking, but they bear repeating.

Across the company we significantly reduced production in the fourth quarter in order to reduce inventory levels, this at a significant negative impact on the quarter's earnings, but most of the inventory reduction is now behind us. We have also significantly reduced head count. By the end of the quarter we had eliminated about 9% of our work force. We are tightly constraining our overhead spending. We are closing certain facilities and are near completion with most of those activities.

In late 2007, we filed an anti-dumping suit related to inter spring imports from China, South Africa and Viet Nam. As we have discussed with you previously, we saw a distinct decline in unfair imports in 2008 after the anti-dumping investigations began, and as a result, we regained market share.

Last week the International Trade Commission made a unanimous final determination that the domestic inter spring industry has been materially injured by imports from China. This follows their unanimous ruling in November on inter springs imported from South Africa and Vietnam.

As a result of these determinations, we should see improved performance in our bedding group as imported innersprings from these countries will now have to be sold at fair prices. The current anti-dumping rates on innersprings from these countries are significant, ranging from 116% to 234%. The anti-dumping duty orders will remain in effect for at least five years.

We have an ongoing focus on product innovation and recognize that this important function is critical to our future success. Our new patented Verticoil Innerspring continues to be in high demand, and in 2009 we are expecting to sell more of these new proprietary products than the generic Banal (ph) Innersprings that they replace.

Verticoil is a better value product for our customers with a higher earnings contribution for Leggett. Market share gains combined with this new product launch enabled our US bedding operations to outperform the industry during 2008 and we expect it to continue to do so in 2009.

As a part of our effort to contract store fixtures to a smaller metals-focused business, we are consolidating four wood fixtures facilities into two ongoing operations. The specific closures were announced in the fourth quarter, significant consolidation steps have been taken and remaining activity should be substantially complete within the next two months.

We have also eliminated virtually all of the customer programs that were deemed to have unacceptable margins with very little of these sales should occur in 2009. We believe these activities will position the store fixtures business to generate returns at or above cost-of-capital levels.

As a final comment, all of our segments use the FIFO method of valuing inventory. An adjustment is made at the corporate level to convert about 60% of our inventories to the LIFO method. These are primarily our domestic steel-related inventories. Significant steel-cost increases during 2008 along with moderately higher levels of inventories resulted in LIFO expense and continuing operations of approximately $62 million for the full year.

Segment level earnings in 2008 generally benefited under the FIFO method from the effective rising commodity cost. With those comments, I'll turn the call back over to Dave.

Dave Haffner

Thank you Karl. As we announced in yesterday's press release, 2009 earnings per share from continuing operations are expected to be in the range of $.60 to $1.00. This guidance anticipates the continuation of weak market demand. Versus our fourth quarter results, we expect 2009 earnings improvement as a result of better overhead absorption, as necessary inventory reductions and facility consolidations have been and are nearing completion.

Two thousand and nine earnings should also benefit from closure of poorly performing operations, head count reductions, reduced overhead spending and lower commodity costs.

Sales from continuing operations for the full year are projected to be approximately 12% to 22% lower than in 2008. This decrease reflects continuation of weak market demand, expected steel-related price decreases, and the elimination of sales with unacceptable margins, partially offset by the continued benefit from market share gains that occurred throughout 2008.

Our quarterly sales and earnings normally reflect moderate seasonality. In 2009, our quarterly earnings are expected to be more variable than normal due to steel impacts. In the first half of 2009 is expected to be negatively impacted by steel deflation, as we adjust inventory valuation and selling prices to reflect lower steel cost.

This impact should be offset for the year by LIFO income. We are forecasting about $50 million of LIFO income for the full year, and anticipate recognizing approximately $12.5 million in each quarter. As a result of the expected mismatch and timing of these two offsetting items, first half of 2009 earnings, and especially in the first quarter, should be lower than second half earnings.

We expect to generate more than $300 million of operating cash in 2009. Capital expenditures for the year should approximate $100 million, and dividends require about $155 million.

We still intend to use excess cash primarily to repurchase shares. Our 2009 guidance assumes we repurchase 4,000,000 shares for the year, and realize a 2,000,000 share net reduction including shares issued for employee benefit plans.

And in conclusion I'll just say, as all of you well know, these are very unusual financial times, possibly the most difficult any of us have ever seen. Leggett is well situated to weather this environment, even it it lasts for an extended period. We are very comfortable with our strategic direction and are absolutely committed to the continued execution of our plan. We believe our actions are reestablishing this company as a stronger and a more profitable venture.

With those comments, I'll turn the call back over to Dave DeSonier.

Dave DeSonier

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

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

Question-and-Answer Session

One moment for the first question, please. The first question comes from Mark Rupe. Please state your company name followed by your question.

Mark Rupe - Longbow Research

Karl, question for you. You’ve been in this business for a long time on the bedding side. Have you ever experienced anything like this on a brief or extended period of time? Just trying to get your take on where the industry is and if you’re seeing any kind of stabilization on the bedding side.

Karl Glassman

Mark, the answer is unequivocally, no. I’ve never seen it. As a matter of fact, I’m kind of the by product of four generations in the bedding industry, and in talking to my father that he’s never experienced anything like this.

So the depth and the duration of this, we haven’t seen in the past. As to where are we from a trend standpoint and where are we in the cycle, we have not seen much of a change. We believe that the bedding industry in the fourth quarter from a macro standpoint, certainly not like from a macro standpoint was off in the 25 to 30% range. We believe that those statistics continue as we speak.

Mark Rupe - Longbow Research

Okay, because I know that it seems like you took a step down, stabilized, and took another step down. But now that we’re going against some easier comparisons, it doesn’t sound like what you’re saying is things are changing at all?

Karl Glassman

That’s correct. And we really from what we see today, our guidance is showing that we see a demand environment that is really unchanged through all of this year. We’re not forecasting the proverbial strong back calf, from a bedding specific perspective; we don’t really start to bump up against those easier comps until into the mid-third quarter.

Mark Rupe - Longbow Research

And you cited improved performance related (inaudible) that happened last week. I was under the assumption that you had been benefiting from most of the countries that this relates to. Is that not the case?

Karl Glassman

No, you are correct. We have been benefiting, but we continue to benefit. Really the way to look at that, Mark, is that we didn’t really see any benefit through the first quarter of last year. We started to incrementally benefit in second and third quarter, and probably started to feel the full extent of that late third and early fourth quarter.

We just haven’t anniversaried that benefit yet.

And the fact that that final determination was made last week gives any hope of those that had illegally dumped an opportunity to continue to do so. That just closes that door.

Mark Rupe - Longbow Research

Okay, good luck. Thank You.

Karl Glassman

Thank you.

Operator

The next question comes from Keith Hughes. Please state your company name followed by your question.

Keith Hughes - Suntrust Robinson Humphrey

I wanted to follow up on your comments regarding the negative impact of price you expect in the first half of the year. It sounds as though you must be lowering price in certain industries I guess based on weak demand and the falling steel. Can you just give me more color of where is that, how much it is, and when it’s actually going to be implemented?

Karl Glassman

Okay, Keith, this is Karl again. What we’ve experienced is there’s, as you know it’s pretty complicated a place. I’m going to take you from almost a segment perspective.

Keith Hughes - Suntrust Robinson Humphrey

That’s fine.

Karl Glassman

In industrial materials the more commodity like raw material, the wire side of the business, we have started to reduce some selling prices, effective January 1st. We have also done the same in the furniture and bedding industries. And some of the other markets, specifically specialized products, we did not get the full benefit of the inflation in 2008.

So we are not reducing prices. We effectively didn’t fully increase them in 2008, so we’ll actually get benefit in 2009 from the late or really fourth quarter impact of that inflation.

David Haffner

Some of those, Keith, were due to long term committed contract pricing.

Karl Glassman

They would be automotive and then some of the specialized areas of industrial also would have that same criteria. What happens to us in commercial - that also is a mixed bag in that store fixtures business, a significant percentage of those customer supply agreements now has a commodity inflation index in them?

So as we receive this deflation, we’ll pass that through. Some of those as we call, and we’ve made reference to it in my comments, some of the unacceptable business we actually have less of it, but we’ve increased prices there.

On the office side of things, we got some benefit of inflation last year. Don’t expect a lot of deflation there. We didn’t get the full magnitude of our cost increases.

So it’s all over the board, but I will end this by saying Leggett historically has proven really a somewhat unique ability to raise prices in the face of rising raw material cost and appropriately defreeze prices when we start to deal with deflation in those same indices.

We perceive this as an opportunity to enhance our margins, which need enhancement.

Keith Hughes - Suntrust Robinson Humphrey

Okay, it sounds as though the wire business, as I understand the price coming down, but you are bringing some price down in furniture and bedding. Is that correct?

Karl Glassman

Selectively, but I will admit that our inventory valuations are higher than they should be. We’ve clearly communicated that to our customers. That we have not yet received relief on the costing side, even though admittedly the replacement cost is lower than the current cost. So we have been judicious with those decreases.

Keith Hughes - Suntrust Robinson Humphrey

Okay, final question. Offsetting that you refer to the 50 million LIFO benefit, so we have two negatives offsetting that 50 million - what we’ve just been discussing and the inventory valuation down. What’s the break between those two?

Karl Glassman

Theoretically they should marry each other, from the way LIFO/FIFO adjustments work, the problem is the timing disconnect. And Leggett has had a long standing policy that the way that we look at LIFO forecast, either negative or positive, expense or income, depending on increasing or decreasing commodity cost, is we look at a forecast at December 31st.

We forecast those expected replacement costs; multiply it by the expected inventory level. As we run through that calculation today we have an expectation of $50 million of income.

Keith that number will change as we get closer to year end. Commodity costs will change. Our assumptions are wrong. We don’t know how much. And the inventory value is strictly a forecast.

So we’ll continue to update that. But as we update it, we allocate that either cost or income on a quarterly basis of the quarters that remain.

Keith Hughes - Suntrust Robinson Humphrey

But you’re not taking some big first quarter write down because of the fall on inventory prices, is that correct?

Karl Glassman

We are. Our inventories will turn over in that replacement cost is significantly below the existing cost of those inventories. So those inventories will turn over in the first quarter. That’s why we’ve gone to kind of an extreme of saying, look expect that the first quarter is not going to follow the normal trend. Expect strength in the seasonal trend of earnings; expect strength in the back half, because of the smoothing of the LIFO impact offset by the revaluing of inventories in the first quarter.

It’s important that you don’t hear us say that we expect a strong second half because of any change in demand assumption.

Keith Hughes - Suntrust Robinson Humphrey

The 12 to 22% whatever number we pick in that range, that would be pretty consistent throughout four quarters, is that kind of what you –

Karl Glassman

Correct.

Keith Hughes - Suntrust Robinson Humphrey

All right. Thanks a lot.

Karl Glassman

Thank you.

Operator

The next question comes from Budd Bugatch. Please state your company name followed by your question.

Budd Bugatch - Raymond James

Good morning. I wanted to walk through the last year number to the guidance. I’m not sure you quantified the pricing act for us and the pricing concession. Is it going to match the 50 million, Karl, of LIFO. Or is there another way to look at that? And I have a couple other parts of that to get through to the sales guidance.

Karl Glassman

But it will not get a part of that 50 million of, call it LIFO income, which isn’t a pure accounting term, LIFO adjustment, is the devaluation of the inventories, the biggest part of it.

So pricing is not the driver of that resultant 50 million add back. Okay? Now in answer to I think you were asking about the miss in guidance in the fourth quarter. That was really a by product of this LIFO calculation which is very, very difficult.

We’re making some assumptions on what the value of inventory is as we deal with each one of those LIFO layers. And then assumption on what ending inventory is going to be. Admittedly, our inventories while the operations guys did a fantastic job of reducing inventories in the fourth quarter, exhibited by the cash flow, that the year just ended too quickly for us.

David Haffner

Well, our best guess at the commodity price in the inventory unit levels were wrong. And that is what caused that variance.

Budd Bugatch - Raymond James

Well, that really wasn’t the question. I was trying to go forward – but I thank you for that because that was also a question. But I was trying to go forward to the $3.2 to $3.6 billion from $4.1. We know you’ve got a 12 to 22% reduction. We’ve got some amount of volume that’s going to be lost, 125 or more for the exit of the pieces for fixtures.

I was trying to get some of the major pieces of that. What’s that reduction in volume for exited businesses, how much is a pricing concession, how much is the unit change to the extent that you’re willing to quantify that?

Karl Glassman

Pricing just about neutralizes in all of that, Bud. Because there was from a year-on-year basis, there’s inflation that you’ll see in the first and second quarter as an example.

Our selling prices first and second quarter of ’09 are significantly higher than they were in first and second quarter of ’08. Even though on a trend analysis, because of some limited give backs, will be lower than they were in the fourth quarter.

So pricing kind of neutralizes through all of that.

Budd Bugatch - Raymond James

You’re saying there will be no net pricing impact on revenues this year?

Karl Glassman

It will be minimal. It is a unit story. It’s that midpoint of 17% units off. That’s the story.

Budd Bugatch - Raymond James

And how much volume is lost because of the exit of store fixtures and whatever other product lines you might be exiting for the year from the 4.1 billion?

Karl Glassman

Store fixtures themselves are about 130. And then other business – but there were the vestitures in continuing operations that took place through the year that eliminated about 100 million, the best that we can quantify of sales, that just don’t exist.

Budd Bugatch - Raymond James

So a total of $230 million lost versus the $4.1 billion? Is that the right number?

David Haffner

Bud I’d edge it up a little more in round numbers, say $250 million.

Budd Bugatch - Raymond James

Okay, and finally let me just quickly ask you to quantify if you would the head count savings or the impact on the fourth quarter of the under utilization?

Karl Glassman

That head count incidentally included hourly and salaried people across the board. A large percentage of the individuals were variable with our volume, hourly folks. But in round numbers it’s in the SG&A portion of our statement. It’s probably about $15 million, Bud.

Budd Bugatch - Raymond James

And that’s the fixed side of that? That’s the side that’s more structural than the variable side?

David Haffner

Yes.

Budd Bugatch - Raymond James

And David what was the impact of under utilization on the fourth quarter?

David Haffner

I don’t know right off the top of my head. Karl do you by chance?

Karl Glassman

No.

David Haffner

It’s a big number. I’m sorry I don’t have it. We’ll have to try and work on that and get back to you, Bud.

Budd Bugatch - Raymond James

All right. Thank you very much.

Operator

The next question comes from John Baugh. Please tell your company name followed by your question.

John Baugh - Stifel Nicolaus & Company, Inc.

My question was on the - now that you’ve guided earnings to be less than your dividend, how do you think about that with TSR and what should be our expectation for – you gave us the $2 million share reduction in share count. Is that your best guess or how might it change depending on how business conditions change.

And then do you have a goal in mind, a figure for working capital reductions for ’09?

Thank you.

Karl Glassman

Okay, John. Good morning. Relative to the dividend, it’s still our intent to increase earnings per share to the point where that dollar, circa dollar, represents about 50 to 60% of our earnings. So differently we continue to believe that we will be able to drive our EPS up every appreciably over the next two to three years.

David Haffner

The board is very proud of its dividend history. I can’t speak for all of the board, but I can speak for Karl and I here. And we continue to be very comfortable with our cash generation and what our operations are able to generate, the strength of the balance sheet, and so we are very comfortable with our dividend policy.

Relative to share count, you are correct it would suggest that the forecast is pretty conservative. We’ve chosen to be conservative in that regard. We don’t know what’s going to happen in this economy and just want to maintain our flexibility.

There’s a reasonable chance that the net number of shares purchased would be greater than that $2 million that we’ve put into the forecast.

Karl Glassman

Working capital.

David Haffner

Oh, the effect on working capital. This one’s a little more challenging to predict. But the three primary elements of working capital that are at play, namely inventory and receivables and payables, all have significant initiatives going with them.

And if we were building a model it would seem reasonable to put at least another $50 million worth of cash flow out of working capital.

John Baugh - Stifel Nicolaus & Company, Inc.

Great, thank you very much.

Operator

The next question comes from Joel Havard. Please state your company name followed by your question.

Joel Havard - Hilliard Lyons

Hilliard Lyons. Good morning everybody. Question for Matt. And this is going to be pretty vague because I need an education on it.

Given the credit market environment recalling that your revolver/commercial paper backed facility is used as a trade tool, what difficulty did you run into in the worst of the storm? How has the environment changed and to give you a bit of a softball, what advantages can the company craft out of this environment in your ability to extend the trade credit with customers who may be running out of other options?

Matthew Flanigan

Joel, good question. First of all through the excitement in the third quarter and the fourth quarter, we are very blessed to have very ready access to the commercial paper market. We never heaved up to have that be a problem for us at all.

As you know near the end of the year we did become an A2/P2 commercial rated paper borrower. But once again our name is very well known out in that market. And we’ve had absolutely no disruption at all.

And also as you know with the strong cash flow generation and frankly the determination from Dave and the board to go ahead and throttle back on our share repurchase activity, we’ve been significantly paying down our commercial paper balance.

And as we sit here today, it’s all of about $50 million. So we’re not really actively needing to call upon that market very much by design.

Relative to using that strong financial flexibility to help support our customers, I’ll tell you pretty quickly that we’re working very hard to make sure our customers are staying on point with their terms to pay us back or actively managing the accounts receivable base.

Everyone is passionately trying to protect their own cash flow positions. And certainly Leggett is doing the very same thing. And we certainly listen to our customers as they have issues that we need to deal with to the extent there’s new business or new opportunities that we can weave into that conversation, we’ll do so as part of their terms.

But the shorter answer is we’re being very diligent in following all of our working capital management aspects here and receivables and collection is right in that sweet spot for us as well.

Joel Havard - Hilliard Lyons

Okay. One related follow up, if I may. The facility I understand is in (inaudible) through 2012. Is there any risk or potential need for any of that structured change?

Matthew Flanigan

No. In fact we’re fortunate that we did a renewal of that facility a year-and-a-half ago. And as you look at that that was pretty good timing relative to the credit markets at that point.

And it is a very benign or of no significant financial – there is no significant financial aspect to it - and a very strong group of banks providing that for us. And it is very much anchored in place for more than three years from today.

Joel Havard - Hilliard Lyons

Okay, thanks guys. Good luck.

Operator

The next question comes from Fred Fee(ph). Please state your company name followed by your question.

Fred Fee - Spefe Storfs & Capital Group

Related to your customers, can you talk about your allowance for doubtful accounts? And also as weak as they are do you see pending de-verticalizations?

Unidentified Company Representative

For a businessman, I’ll start out on the allowance for doubtful accounts. At the end of the year that was about $28 million for Leggett, relative to our gross receivable base which is about $578 million.

In the press release you’ll see that our AR is shown at 550, but that’s after our reserve was reflected. And we did bolster that quite a bit in 2008 as you might expect.

And also relative to our guidance for 2009, we’re assuming it’s going to be a uniquely challenging year for some of our customers in our planning for our allowance for doubtful accounts accordingly.

And then your other question, Fred?

Fred Fee - Spefe Storfs & Capital Group

De-verticalization—you’ve had some success in the bedding industry of taking in house production. Any other pending things like that?

Karl Glassman

Fred, this is Karl. We continue to have conversations with our customers that were backwardly integrated. We appreciate you making mention of the bedding side.

We also had a de-verticalization activity in the furniture hardware mechanism business last year. We have those conversations and in times like this historically there have been opportunities. There’s nothing imminent but we’re in conversations with some folks.

David Haffner

Fred, this is Dave. Good morning. I’ll mention that – or reiterate what Karl said. Challenging times is one of the criteria that helps the concept of de-verticalization or a change in make versus buy. Especially if it fits into a sweet spot for us and we can meet or exceed the customer’s expectation and simultaneously take some assets off of their balance sheet and help with their return on assets.

So as Karl said there are some opportunities lying out there, nothing imminent, but I think you know us well enough that we always look for ways that will allow that such that our customers benefit and Leggett shareholders benefit.

Fred Fee - Spefe Storfs & Capital Group

Thank you.

Operator

Ladies and gentlemen if you would like to ask a question please press the star followed by the one on your telephone at any time. If you would like to cancel your request, please press the star followed by the two. The next question comes from Budd Bugatch. Please state your company name followed by your question.

Budd Bugatch - Raymond James

I just have a few more follow-up questions, Karl and Dave. One can you talk a little bit about January versus December in the fourth quarter in terms of unit changes? Has there been a step down in January or any change from what was going on in the end of the year?

Karl Glassman

Budd, no not really. It’s unchanged if we’re looking at the January top line it’s holding with what we’ve guided. There hasn’t really been a change.

In each one of the markets they’re depressed. It’s hard to find any bit of optimism. But it doesn’t feel like things continue to deteriorate. It feels like bedding is still running that 20 to 25 to 30% off furniture. Probably worse than that, North American Automotive obviously challenged. The (inaudible) statistics that you reported capably on yesterday, we’re experiencing that same type of demand environment.

So things don’t feel to be getting worse, but they certainly aren’t getting any better.

Budd Bugatch - Raymond James

Okay. And you talked about your cash flow from operations to exceed $300 million. I would presume that’s at the mid-point of your sales guidance. Could you tell us what it might be—what you project it to be at the end-points of your sales guidance?

Matthew Flanigan

Budd this is Matt. We would expect it to be north at $300 million even at the low end of guidance. And at the upper end of guidance again you would take it north of probably 350, maybe a little bit better than that. Of course we’re coming off the heels of a year that we found pretty tough when it was all said and done. And we did well over $400 million.

Frankly come good or bad within our guidance we should do comfortably north of $300 million cash flow.

Budd Bugatch - Raymond James

Okay, just two other questions. One – will the first quarter, do you think that will be profitable? I know you’re giving back pricing in the quarter and it is challenging, but do you think it’s going to be profitable?

Matthew Flanigan

Yes.

Budd Bugatch - Raymond James

Lastly, can you kind of walk through the impact of foreign exchange? There have been a lot of changes in that arena as well.

Matthew Flanigan

Yeah, Budd, this is Matt. Relatively insignificant sales because the dollar weakening actually pulled back about $16 million in the fourth quarter because of the weaker dollar. Where you see the biggest impact on currency for Leggett, and you’ll see this in much bigger dosages for companies far more international than we are, was in our stockholder’s equity.

The other comprehensive income because the dollar got stronger therefore the assets off shore translating into fewer dollars was about $140 million impact to our stockholder’s equity in the fourth quarter.

But as we sit here today it’s relatively mute given where currencies currently sit, as an impact that we are expecting this year should not be very significant.

And frankly if there is some good news, some ray of sunshine, it is in our automotive business where we produce a lot of that product in Canadian dollars and sell in US dollars. And that’s been a good trade with what’s happened in the exchange rate in the last 90 days.

Matthew Flanigan

And we’ll see a little bit of that in our office and contract business as well.

Budd Bugatch - Raymond James

Okay. Thanks a lot.

Operator

The next question comes from Micha Magid (ph). Please state your company name followed by your question.

Micha Magid

Sorry. My question was already asked.

Operator

Ladies and gentlemen if you would like to ask a question please press the star followed by the one on your telephone at any time. If you would like to cancel your request please press the star followed by the two.

Sir, there appear to be no other questions at this time. Please continue with any other points to wish to raise.

Unidentified Company Representative

We’ll just say thank you. We appreciate your attention and we’ll talk to you again next quarter.

Operator

Ladies and gentlemen this concludes the Leggett & Platt fourth quarter earnings conference call. Thank you for participating. You may disconnect.

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Source: Leggett & Platt, Inc. Q4 2008 Earnings Call Transcript
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