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Leggett & Platt, Inc. (NYSE:LEG)

Q2 2013 Earnings Call

July 26, 2013 9:00 am ET

Executives

David M. DeSonier - Senior Vice President of Strategy & Investor Relations

David S. Haffner - Chairman, Chief Executive Officer and Member of Executive Committee

Matthew C. Flanigan - Chief Financial Officer, Executive Vice President, Director and Chairman of Enterprise Risk Management Committee

Karl G. Glassman - President, Chief Operating Officer and Director

Dennis S. Park - Senior Vice President and President of Commercial Fixturing & Components

Susan R. McCoy - Vice President of Investor Relations

Analysts

Joshua Borstein - Longbow Research LLC

Daniel Moore - CJS Securities, Inc.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Herbert Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Operator

Greetings, and welcome to the Leggett & Platt Second Quarter 2013 conference call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David DeSonier, Senior Vice President, Strategy and Investor Relations for Leggett & Platt, Incorporated. Thank you, Mr. DeSonier. You may begin.

David M. DeSonier

Good morning, and thank you for taking part in Leggett & Platt's second quarter conference call. With me this morning are the following: Dave Haffner, our 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. Dennis Park, who is Senior Vice President of the company and also President of the Commercial Fixturing & Components segment is also joining us this morning to participate in Q&A. As we mentioned last quarter, we plan to periodically include each of the segment presidents in these calls.

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 2013. Karl Glassman will provide segment highlights, 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 expressed 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, 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 in the section in our 10-K entitled forward-looking statements. I'll now turn the call over to Dave Haffner.

David S. Haffner

Good morning, everyone, and thank you for participating in our call. As we reported yesterday, second quarter earnings from continuing operations were $0.44 per share, up 13% versus the $0.39 per share from continuing operations that we earned in the second quarter of 2012. Same location sales grew 2% during the quarter. Unit volumes increased 3%, but were partially offset by lower trade sales from our rod mill. Unit volume growth was largely driven by strength in carpet underlay, Store Fixtures, automotive and Commercial Vehicle Products. EBIT grew and EBIT margins improved by 100 basis points to 10.3% in the second quarter, primarily from higher unit volumes. During the quarter, we exited 3 small operations, and as a result, recorded a $0.05 per share benefit in discontinued operations, primarily driven by taxes. These 3 operations collectively generated only about $15 million of annual sales during 2012, but posted slightly negative EBIT. We are also exploring possible strategic alternatives for our Commercial Vehicle Products business, one of which is the potential divestiture of that business. In late May, we acquired a small aerospace 2 fabrication business, adding to the aerospace products business unit that was formed in early 2012 with the acquisition of Western Pneumatic Tube. We continue to look for opportunities to carefully grow the company through well-screened acquisitions in attractive markets.

Optimizing returns on capital employed continues to be a major focus for our operations. We ended the second quarter with working capital at 12.5% of annualized sales, which is well below our 15% target. In May, we declared a quarterly dividend of $0.29 per share. 2013 marks our 42nd consecutive annual dividend increase at a compound annual growth rate of 13%. At yesterday's closing price of $31.71, the current yield is 3.7%, which is one of the highest among all of the S&P 500's dividend aristocrats. We assess our overall performance by comparing our total shareholder return to that of peer companies on a rolling 3-year basis. Our target is to achieve TSR in the top 1/3 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 3-year period that will end on December 31, 2013, we have so far generated TSR of 19% per year on average, which currently places us in the top third 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 the remainder of the year. Matt?

Matthew C. Flanigan

Thank you, Dave. And good morning, everyone. Operating cash flow grew during the quarter to $99 million, an increase of 22% over the second quarter of 2012. For the full year, we now expect to generate over $350 million of operating cash flow, again, comfortably exceeding the amount required of 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 into December last year in anticipation of higher tax rates. We now expect capital expenditures in 2013 to be approximately $85 million. We repurchased 1.2 million shares of our stock in the second quarter. 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.

Our financial base certainly remains very strong. We ended the quarter with net debt to net capital at 29.3%, slightly below the conservative end of our long-term targeted range of 30% to 40%. As we stated in yesterday's press release, sluggish demand in certain of our end markets led to a reduction in our full year guidance. We now expect sales growth between 1% and 4%, resulting in full year sales of $3.75 billion to $3.85 billion. That's versus previous guidance of $3.8 billion to $3.95 billion. Given this expected lower level of sales growth, we now anticipate 2013 earnings of $1.55 to $1.70 per share. This includes $0.05 per share from discontinued operations, which we just reported in the second quarter. Earnings from continuing operations are now expected to be between $1.50 and $1.65 per share. Our prior guidance anticipated that continuing operations would earn between $1.55 and $1.75 per share for the full year. As a reminder and for comparison purposes, we earned $1.47 of adjusted EPS from continuing operations in 2012. While we do not issue quarterly guidance, we want to remind everyone again that our store fixtures business faces a very challenging year-over-year comparison in the upcoming third quarter. Now I'll turn the call over to Karl, who will provide some additional segment comments.

Karl G. Glassman

Thank you, Matt. In the Residential Furnishings segment, same location sales increased 3% in the second quarter from higher unit volumes in certain product categories and raw material related price increases in carpet underlay. In our U.S. Spring business, sales increased 2% in the quarter. Innerspring unit volumes decreased 1%, however, the growth in the Comfort Core innerspring category continued, with those higher margin units up 13% during the quarter. Our box spring volume growth outpaced the market, with units up 12%. In furniture components, sales decreased 2% in the second quarter. Volume in our seating and sofa sleeper businesses grew 6%, but was more than offset by an 8% decrease in motion hardware unit volume. Adjustable Bed units were down 14% in the quarter. Product introductions planned for next week's bedding market in Las Vegas should benefit volumes in the back half of the year. In carpet underlay, sales increased significantly in the quarter from higher unit volume and price increases implemented to recover higher raw material cost. In this segment, second quarter EBIT and EBIT margins increased slightly versus the second quarter of 2012. The benefit of higher unit volumes, favorable product mix in U.S. Spring and gains from building sales were partially offset by margin compression in our fabric converting business.

In the Commercial Fixturing & Components segment, same location sales increased 11% in the second quarter. As expected, strong program shipments in store fixtures drove 17% sales growth in that business. In Office Furniture components, volume was down slightly during the quarter. We are optimistic about the longer-term view for the office furniture industry, but we expect 2013 volume in this business to be somewhat soft. EBIT and EBIT margins increased versus the second quarter of 2012, reflecting higher sales in the absence of last year's restructuring related expense. As Matt mentioned in his comments earlier, we will face very strong third quarter comparison in this segment from large store fixture programs that were shipped last fall. In the Industrial Materials segment, second quarter same location sales decreased 9% due in roughly equal parts to lower trade sales in our rod mill and steel related price deflation. The decrease in trade sales of steel rod during the quarter was more than offset by an increase in intercompany rod sales, and the rod mill continues to run at 100% capacity utilization. As we've stated in past quarters, a change in the mix of rod sales from trading intercompany is generally positive to earnings since that change tends to also shift the production mix to higher value, high carbon rods. EBIT and EBIT margins for this segment increased during the quarter, primarily due to the absence of last year's acquisition-related cost, gains from equipment sales and earnings from small acquisitions.

In the Specialized Products segment, same location sales increased 7% in the second quarter. Automotive sales increased 6% with strong growth in Asia and North America, partially offset by lower demand in Europe. We also experienced strong sales growth and improving performance in Commercial Vehicle Products. Machinery volume increased slightly. EBIT and EBIT margins increased during the quarter, primarily from higher sales. Automotive industry forecast project low to mid single-digit growth in both North America and Asia this year and low single-digit declines in Europe. These forecast aggregate a global growth of 2% for the year. With content gains, we expect to outperform this industry growth rate. With those comments, I'll turn the call back over to Dave.

David S. Haffner

Thanks, Karl. As fellow shareholders, we are pleased with the company's performance since making this strategic change a few years ago. We continue to focus on the levers that influence total shareholder return, including profitable growth and margin enhancement. The very attractive Western Pneumatic Tube acquisition in 2012 and the more recent addition of other small companies to that business or another small company to that business platform are examples of our high priority on disciplined growth. In addition, the meaningful margin increase in recent years with further improvement anticipated in our current year guidance is further indication of our high priority on value creation. Despite the progress we've made, we're not content with the current level of performance, and we have implemented additional initiatives to further enhance profitable growth and EBITDA margins. And with those comments, I'll turn the call back over to Dave DeSonier.

David M. DeSonier

That concludes our prepared remarks. We thank you for your attention, and we will be glad to answer your questions. [Operator Instructions] Claudia, we're ready to begin the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from the line of Josh Borstein with Longbow Research.

Joshua Borstein - Longbow Research LLC

On the raw material front, could you discuss what you're seeing currently? I know some steel prices have been rising, so I was hoping to get some color on that and what the potential impact it might have.

Karl G. Glassman

Josh, this is Karl. Actually, since the third quarter of last year, steel has been flat to slightly softer biased. There has been some announced increases that are expected to go into effect sometime August, September based on about a $25 a ton scrap increase. We'll see if those increases hold. But right now, our forecast is for the third and fourth quarter show flat to slightly upward trend.

Joshua Borstein - Longbow Research LLC

Okay, great. And then just one more related question on steel. You mentioned in the press release some raw material price increases in the Residential segment, but some price decreases in your Industrial segment. Can you discuss the dynamics there?

Karl G. Glassman

Yes, the price increases in Residential were singularly placed in carpet underlay, where there had been a significant shortage of the scrap material that ultimately becomes rebonded carpet underlay. In the first half of this year, there were a number of price increases implemented. We now believe as we start the third quarter that we're fully recovered, the first time we've been in that position since the tail end of the fourth quarter of last year. In Industrial, there was a slight downward pressure at the rod and then wire level in the second quarter of this year. As I said earlier, we expect that there will be some reinflation in both wire and rod in the latter part of the third quarter based on currently announced increases.

Joshua Borstein - Longbow Research LLC

Okay, great. And then just one more for me, on the adjustable foundations, could you discuss what you're seeing in that business currently? And I think you had mentioned in April that was back on track. So just hoping to get some color on that and maybe a peek into July, what you're seeing.

Dennis S. Park

This is Dennis Park. Basically, what has occurred there, in the second quarter, there was a major promotional effort nationwide on a program that we did not participate in, and quite frankly, it was successful. We had not lost any 4 position, and next week, we will be making an introduction of 2 new programs at the Las Vegas Furniture Market, and the early reports are very positive about how that will be received in the marketplace. So we feel very good about the back half of the year.

Joshua Borstein - Longbow Research LLC

Okay. And in July, has things -- have they picked up at all?

Dennis S. Park

They're basically flat. July is in line with what we experienced over the last -- really, over the last 6 or 8 weeks.

Operator

Our next question is coming from the line of Daniel Moore with CJS Securities.

Daniel Moore - CJS Securities, Inc.

Last quarter, you brought up the bottom end of the guidance range, and obviously, this quarter's shifting back down slightly. Maybe just rank order the biggest change or changes in the demand environment over the last 90 days.

Karl G. Glassman

Dan, this is Karl. It's all sales related. It's across all of our businesses that I can't point to any one single business unit or certainly at a segment level. It's our expectation in April that there would be a stronger back half of the year. We did not experience that obviously in the second quarter. While we think we had a really strong second quarter from an operating performance standpoint, the one area of disappointment was lack of top line, and we're forecasting the continuation of that through the back half. Generally, we were more optimistic just a quarter ago as it relates to sales than we are today.

Daniel Moore - CJS Securities, Inc.

Okay, maybe a quick follow-up. The strides you've made in bringing down working capital are pretty remarkable. Can you maintain the 12%, 13% range of revenue? Or should we expect that trend to trend back up toward your stated 15% objective over time?

David S. Haffner

Dan, this is Dave. I'm glad you asked that question because I ask it often. Karl?

Karl G. Glassman

Dan and Dave, the answer is yes. Short of a real severe increase in raw material inflation, call it steel, there may be periods of time before we cycle through that bump up, which we did not forecast that. We have no visibility. I don't see that in the future. That's the only caveat that I continue to give to Dave and Matt, who want to continue to push our target down below 15%. Absent that, that 12.5%, 12% to 13% range is where we live. And Dan, I appreciate what you said. Our operating folks have done a really good job in that area. It's a constant area of focus, and they're incentivized to keep the working capital in line.

Matthew C. Flanigan

And I'd just add to that, that as time goes on, one of the things that we look at when we look at acquisitions, of course, is the overall use of capital and some of the businesses may have longer receivable terms and things like that. So it could be biased slightly upward or for that matter, downward, with businesses that Karl, really, and the team, the segment guys, have done just an incredible job of keeping that working capital in place.

Operator

Our next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

I just want to dig back into the adjustables a little more. What is your sense of the growth rate in the industry there? Have we found a top at all in adjustable, or is it still just straight up?

Dennis S. Park

Keith, this is Dennis Park. Actually, in the second quarter, industry-wide, it seems our sales check indicate that the industry growth rate did slow, still continues to be a pretty positive category. It -- and looking at where it's going from here, we certainly feel that if you look at the attachment rate, it is still relatively low, and we think it continues to have significant upside. And our investment in new product introductions and innovation that we will be bringing out here shortly, we think we'll tap into that opportunity quite well.

Karl G. Glassman

Keith, this is Karl. I'll pile on a little bit. Very much agree with what Dennis said with an attachment rate of sub-5% and demographics of the U.S. population going forward and what we've seen in International markets, we absolutely believe that the category has a lot of upward capability in it and the second quarter was just a soft quarter.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

And switching over to furniture, what kind of sense for the second half of the year are you getting from your furniture customers at this point?

Karl G. Glassman

Actually, Keith, the second quarter started pretty slow. April and May were slow. We started to see some pickup in June and I would say, collectively, the furniture manufacturers feel a little bit more bullish than the bedding side. Our domestic hardware units were up 8.5% in June. It feels like there's more strength in U.S. manufacturing, certainly, some Chinese domestic consumption softness and some softness in Europe that had a negative impact on our mechanism sales in the second quarter. But, yes, I would say that overall, we'll know more next week in the Las Vegas Market. The furniture manufacturers are pretty bullish right now.

Operator

Our next question comes from the line of John Baugh with Stifel.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

My one questions is/are, what are the issues, you mentioned Chinese local demand and Europe, I guess, impacting that motion upholstery figure? And then I'd love some color on the compression on fabric margins and what to expect there going forward.

Karl G. Glassman

John, all of the mechanisms that we sell in Europe are manufactured in Asia, and Asian -- as a matter of fact, let me separate from a furniture hardware standpoint. We gave you an aggregate at 8% number down. Domestic was up 3%. International was down 12%, and some of that is impacted by soft consumption in Europe, some of it, again, soft consumption. Domestic China is relatively a small part of the market, and we had some market share loss that is minimal, and we expect that we've anniversary-ed now in the second quarter to a maker/user, a Chinese based maker/user, who is using a larger percentage of their own mechanisms. And as far as fabric converting goes, there was a little bit of inflation in the first quarter, polypropylene based, and then some deflation in the second quarter. And from a competitive perspective, it looks like the market got a little ahead of itself in some price deflation activities, both Asian produced and U.S. distributed. That will normalize here in the third and fourth quarters from a year-on-year perspective. But really, what that is, is a comp issue in that the margins in the second quarter of 2012 were pretty darn healthy, and they narrowed in the beginning of the second quarter of 2013.

Operator

Our next question comes from the line of Herb Hardt with Monness, Crespi & Hardt.

Herbert Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division

First of all, good to see you back in buying stock back. You expected that, I know. My question is the discontinued operations, are they just going to be shut down? Are you selling them off? And the follow-on is does this free up any cash of significance?

Karl G. Glassman

Herb, this is Karl. The one facility, which is a geo mold facility based in Texas, is in the process of being closed. The little CVP action was a divestiture that closed during the second quarter, and the other, which was in industrial, was a dishwasher rack business that has been closed. In terms of freeing up some cash, the answer is yes because there'll be some working capital pickup, and we will certainly gain on the sale of some of those assets.

Susan R. McCoy

Herb, I'd add, the little CVP businesses, just to be clear, is not our entire CVP unit. We've talked about that being under review. This is a small operation that was a subset of that particular business unit that was actually built during the quarter.

Operator

Our next question comes from the line of Budd Bugatch with Raymond James.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Apologize if we get some speaker noise behind me. I guess, my question, David, one is to kind of a larger issue of reinvigorating growth of the company, and we've been at the operating model now for a number of years, which you've done a great job on. You've delivered a lot of TSR. That way -- can you hear me?

David S. Haffner

Yes, we can hear you, Budd.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Okay. But I'm just curious now, how do we start to see growth? I know we've got the -- we had the Western Pneumatic Tube acquisition, and I just want to hear from you where you want to drive the company in terms of growing top line and the bottom line over an extended period of time for the next, maybe, 3 to 5 years.

David S. Haffner

Sure. Be happy to respond to that, Budd, and we've said fairly often recently that we want to grow our top line somewhat conservatively at 4% to 5% per year, and maybe half of that comes from GDP-type activity. The other half of it comes from other initiatives. Those initiatives, of course, include acquisitions, and just a side comment, our acquisition radar screen, if you will, is significantly more attractive at this point than it has been in the past, that, of course, coupled with the fact that we're more critical in the screening protocol that we use when we look at those acquisitions. But I feel comfortable that acquisitions and then some new product developments, which we don't talk about every new product that is developed, but generally speaking, even if a new product cannibalizes an existing product, there tends to be an incremental improvement in revenue and a simultaneous improvement in margin. So I do believe that you're going to see more on the acquisition front. I hope that you'll be comforted with the fact that we're more critical than we've ever been on what we pay for acquisitions and what their long-term strategic fit will be for the corporation and new product development. And then day in, day out, the operating people, the sales and marketing people are out there looking for ways to gain market share in the markets that we already participate in with the products that we have. And the last comment I'll make, sorry to ramble, is that we've also modified our compensation program just this year so that we will be compensated -- we're no longer issuing options. And what we're doing is we're issuing performance grants that may or may not be paid out, and they will only be paid out if we see meaningful growth in revenue above a defined target and/or increases in EBITDA margin. And that's really what I was referring to in that brief comment in my opening comments. All those things combined, we think, will give us what we need, not just for the next 3 to 5 years, Budd, but hopefully, for a much longer period of time than that.

Karl G. Glassman

And, Budd, if I could add, on an organic opportunity standpoint, and I'll speak just to 2014, the auto statistics show 6% growth rate next year with our increased content. Our auto should grow at greater than that if that 6% industry growth holds together. The forecast for office is stronger for next year than this. Aerospace is expected to grow from a production perspective greater this -- next year than this. As long as consumer confidence holds together with the housing statistics that we're dealing with now, we're confident that we'll see continued growth in carpet underlay, and we continue to be very bullish on furniture and bedding, but it takes a confident consumer. We'll see what happens to the consumer in the back half with inefficiency of our government over the whole debt ceiling situation, which makes us a little bit nervous, but we'll see how all that plays out. Another positive trend is we are now just eclipsed 3 quarters in a row, where innersprings are growing at a faster rate than non-innerspring bedding. So the belief that innersprings are dead is proving to be not factual. So we're very, very bullish, but we're just concerned about the back half of this year.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Yes, to me, I think you pay more for the -- you get more value for organic growth than you do for the acquisition growth. Western Pneumatic was a fine acquisition, but it was expensive. I just would love to hear at some point in time, talk a little bit -- give us a product vitality metric or something that lets us know how we're doing in really generating new product sales for the company to deliver some organic growth that is visible to the investment community.

David S. Haffner

Yes, Budd, that's a very good point. It's Dave again. Well, I didn't bring the vitality index information in here. We do monitor that, and I apologize because I don't have it in front of me. The vitality index is up, and the way we define that is revenue generated from products that did not exist 36 months ago, and we're not talking about just changing an SKU from white to blue. It has to be a bona fide new product. So we do monitor that, and we will provide some additional information. You should make a note, and we'll talk about it next time we all get together. And we agree with you, incidentally, that generic growth is worth more than the acquisition growth. We clearly agree with that.

Operator

[Operator Instructions] Our next question comes from the line of Daniel Moore with CJS Securities.

Daniel Moore - CJS Securities, Inc.

Any update on the potential time line of divestment or sale of CVP? And then beyond that, are there other business or product lines that the board is looking at as potential divestment candidates?

David S. Haffner

Yes, Dan, we're still gathering information through the M&A department and an investment banking firm that we've engaged. We have a meeting, I guess, it's next -- I can't remember which day. Two weeks, yes, on Tuesday, week after next, to assess that situation, and that'll give us very contemporary data. And at that particular point in time, we believe we'll be able to at least cross the -- or make the decision on whether we pursue divestiture or keep it in our portfolio, and if we do, then what are the attributes of changes that we'll do. So we're not there. We're not ready to say we're definitely going to sell this business, but strategically, we think it would make sense for our shareholders to trade that business for some dollars that we could reinvest in something that would provide better returns and/or some shares that we would buy back.

Daniel Moore - CJS Securities, Inc.

Helpful. And Susan, I'm going to take a crack at one, just being really lazy, can you perhaps quantify the EPS impact of the spike in the store fixtures demand that took place during last year's Q3?

Susan R. McCoy

Dan, we have not quantified that data externally.

Daniel Moore - CJS Securities, Inc.

Understood. Thought I'd give it a shot. Appreciate it.

David S. Haffner

Dan, I will tell you from a modeling standpoint, we expect that sales will be off about $35 million in the third quarter from a top line standpoint. I, like Susan, won't give you the EPS impact, but expect that, that's the magnitude of the top line effect.

Karl G. Glassman

Offset significantly by the other segments.

David S. Haffner

Correct. Yes, just in store fixtures.

Operator

Our next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Just a follow-up question. If you do sell CVP, will those proceeds just go into the normal [indiscernible] use of cash flow, or will there be a special use for those? Or what's kind of the view now?

Matthew C. Flanigan

Keith, they become generic dollars, if you will. We've got some opportunities to invest in the not-too-distant future, either in acquisitions or obviously in our shares. So we don't have them earmarked. It's not something that's driving us to generate x number of dollars that we're immediately going to redeploy. It just goes into Matt's pocket over there, and then we'll go back down when we need the cash and ask him for it for an acquisition or the share repurchase.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

One other follow-up. You had mentioned your July mattress business was more or less flat, what you've seen for the last couple months. Was there any sort of -- let me ask it this way, did you see kind of a spike on 4th of July and then kind of a tail-off after that? That's kind of been the history of the industry for the last couple years. Did that occur here again in July?

David S. Haffner

Yes, Keith, it did. It absolutely occurred over Memorial Day, and then again over the 4th of July, there's a -- some softness that builds to really pretty good holidays. But then, there's a vacuum that's created, really, before and after each one of them. So the bedding industry, both at the manufacturing and the retail level, has conditioned the consumer to only buy mattresses when they're heavily discounted and heavily promoted. So it's a little bit of a feast or famine.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

When you add it all up, you get kind of a flattish industry, is your opinion, is that right?

David S. Haffner

Yes.

Operator

Our next question comes from the line of Herb Hardt with Monness, Crespi & Hardt.

Herbert Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division

Could you give us a breakdown of the carpet underlay business as to how much would go into residential versus commercial?

David S. Haffner

Boy, it's primarily -- Herb, it's primarily residential based, but there is a healthy mix in that we supply all types of carpet underlay. So it's residential, industrial and commercial, actually, because of the foam rubber and fiber attributes of each one of those. But off the top of my head, I don't know what that mix is.

David S. Haffner

I don't either, Herb, but I may have mentioned this previously. But on industrial applications, that is significantly biased towards the fiber and the rubber based product, whereas residential is virtually all a foam based component.

Operator

Our next question is a follow-up from John Baugh with Stifel.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

I hit the lottery this morning. Let's see, I just wanted to clarify, I guess, Dave, that your reference, I think, it was additional initiatives, does that relate to this compensation issue for growth and/or margin? And then, secondly, a Comfort Core question, I recall those percentage gains year-over-year being up in the 20%, 30%, 40% range in, I think, it was '13. Is that just anniversary-ing really tough numbers? Or is there something else going on there as it relates to Hybrid?

David S. Haffner

Okay. Yes, John, on the first one, the initiatives was curled because while that modified compensation program, which we feel comfortable will assist us in generating incremental sales of higher margins, is important. There are a lot of other, I mean, almost countless initiatives. A pretty good -- across the company. A pretty good example is in Dennis' group, where they've redefined the sales protocol to incentivize our salespeople to go out and gain incremental volume, which is a different compensation program than they've had in the past. Many of those types of things are happening across the board.

David S. Haffner

John, and on the Comfort Core question, first quarter sales were up 32% in units. And as we said, the second quarter was up 13%. The second quarter was a little soft. We have certainly anniversary-ed, but we would expect in the back half of the year to run at that 13% rate or greater as more lines of Hybrid or Comfort Core -- Comfort Core is used in lines other than just Hybrid. But as more products are launched, there certainly has been widespread industry acceptance to that product offering. So the rate of growth might -- probably less than long term, less than that 32%, but it still should be very healthy.

Operator

Our next question is coming from the line of Josh Borstein with Longbow Research.

Joshua Borstein - Longbow Research LLC

In Office Furniture, could you say what your customers are seeing right now, their expectations for the back half of the year?

Karl G. Glassman

Yes, Josh, the BIFMA statistics show about 2% gain forecasted for 2013 across all of the categories. Seating is probably a little softer than that, maybe flat. They're starting to anniversary some stronger numbers in the first half of last year. So I would say they and we believe that the second half year-on-year comparison will be positive.

Joshua Borstein - Longbow Research LLC

Okay. And any insight yet into what 2014 may hold?

David S. Haffner

Yes, they're forecasting about 4%, but it's early. It's mitigated somewhat by the loss of government-related spending.

Joshua Borstein - Longbow Research LLC

Okay. And then in Europe, you saw some nice gains in the Spring business. Again, this happened in the first quarter as well. What's causing that business to perform so well while most other things in Europe are either flat to down?

David S. Haffner

Actually, you are right. European units were up 18% in the second quarter after a strong first quarter. I will say the mix isn't as good as it was a year or so ago. So we're selling more units, but of lower average unit selling price and lower specification. The reason for our relative success in Europe is we tend to be U.K. and Northern Europe based, Scandinavian countries, where higher quality, higher average unit selling price is consumed. We don't have much of a position in the southern part of Europe. We continue to gain some share because of some currency exchange rate negatives to others that are trying to ship into the U.K., where we're really the only large producer of any size on the island.

Operator

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

David S. Haffner

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

Operator

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

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