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Leggett & Platt, Inc. (NYSE:LEG)

Q3 2007 Earnings Call

October 18, 2007 9:00 am ET

Executives

Dave DeSonier - VP of Strategyand IR

Dave Haffner - President and CEO

Karl Glassman - COO

Matt Flanigan - VP and CFO

Analysts

David MacGregor - LongbowResearch

Budd Bugatch - Raymond James

John Baugh - Stifel Nicolaus

Carol Kemple - Hilliard Lyons

Laura Champine - Morgan Keegan

Judy Merrick - SunTrust Capital

Steve Bill - Conning AssetManagement

Operator

Good morning, ladies and gentlemen,and thank you for standing by. Welcome to the Leggett & Platt Third Quarter2007 Earnings Conference Call. At this time all participants are in alisten-only mode. Following the presentation, instructions will be given forthe question-and-answer session. (Operator Instructions). As a reminder, thisconference is being recorded today Thursday, October 18, 2007.

At this time I would now like toturn our presentation over to Dave DeSonier. Please go ahead, sir.

Dave DeSonier

Good morning and thank you fortaking part in Leggett & Platt's third quarter conference call. I am DaveDeSonier, the Vice President of Strategy and Investor Relations. With me todayare the following: Dave Haffner, our CEO and President; Karl Glassman, ourChief Operating Officer; Felix Wright, Leggett's Chairman of the Board; MattFlanigan, who is our CFO; and Susan McCoy, our Director of Investor Relations.

The agenda for the call thismorning is as follows. Dave Haffner will start with the summary of the majorstatements we made in yesterday's press release. Karl Glassman will discusstrends in our various markets. Dave will then address our outlook for the remainderof the year. And finally, the group will answer any questions you have.

This conference is being recordedfor Leggett & Platt and is copyrighted material. This call may not betranscribed, recorded or broadcast without our express permission. A replay isavailable from the IR portion of Leggett's website.

In addition, I need to remind youthat remarks today concerning future expectations, events, objectives,strategies, trends or results constitute forward-looking statements. Actualresults or events may differ materially due to a number of risks anduncertainties. And the company undertakes no obligation to update or revise thesestatements. For a summary of these risk factors and additional information,please refer to yesterday's press release and the section in our 10-K entitledforward-looking statements.

I will now turn the call over toDave Haffner.

Dave Haffner

Good morning and thank you forparticipating in our call. Yesterday we reported third quarter sales andearnings inline with the guidance we issued on July 19th. Total sales for thequarter decreased 3% versus third quarter of 2006. Organic sales were down 5% primarilyreflecting lower unit volume. Acquisitions contributed 2% to third quartersales. As anticipated, volume was softer in the quarter in the US home-relatedretail and the aluminium markets that we serve. However, we continue to seestrength in most international markets, including bedding, furniture andautomotive and portions of our domestic, commercial vehicle products group.

We posted third quarter earningsper share of $0.37, there were no significant non-recurring items in thequarter. Our balance sheet and cash flow continue to be very strong. We endedthe quarter with net debt at 28% of net capital.

In the third quarter, wegenerated a record quarterly high $194 million of cash from operations, in partdue to a significant reduction in working capital. Working capital as a percentof annualized sales improved to 19.5% during the quarter.

Share repurchases in the thirdquarter were the highest quarterly level in our history. So far this year, webought back 9.6 million shares of our stock and reduced our outstanding sharesby over 4%. We are finalizing the in-depth strategic review of our businessportfolio.

As mentioned earlier this year,the current review is broader in scope, strategic in nature, and more long-termoriented than any of our previous activates. We are very excited about thiscomprehensive initiative and its strategic value going forward.

We will present our finalrecommendations to the Board of Directors in early November and subsequentlydisclose the strategic implications and financial details to investors.

As we mentioned yesterday, wewill host an Investor Day for institutional investors on November 14th and atthat time we'll discuss results of the review and our strategic plans. Thatmeeting will be webcast.

Now, I'll turn the call over toKarl Glassman, who will discuss the segments in more detail.

Karl Glassman

Thank you, Dave. Good morning. Inthe Residential Furnishing segment, organic sales decreased in the third quarterprimarily due to ongoing soft demand in the US residential markets, and verystrong prior year comps in our Carpet Underlay business. International demandof both bedding and upholstery furniture components remained strong.

EBIT and EBIT margins reflectedthe soft volume, in our USresidential markets including carpet underlay, geo components and fibers. In CommercialFixturing and Components, organic sales declined in the third quarter,primarily due to lower fixture and display demand, and our decision to walkaway from sales with unacceptable margins.

EBIT and EBIT margins wereessentially flat. The impact from lower sales during the third quarter wasoffset by operational improvements. Further consolidation of our fixtures anddisplays operations will occur in the fourth quarter and is included in therestructuring-related costs that we forecast.

Market conditions remained verychallenging in the aluminum product segment and we continue to be disappointedwith our performance. Organic sales decreased in the third quarter, due tolower demand in several markets, including small engines, telecom, andappliances. Significant declines in EBIT and EBIT margins primarily reflectlower volume, plant under utilization in operating inefficiencies.

Our Auburn, Alabamafacility, as well as a few other locations are underperforming our expectations,in part, due to lower market demand. Some of the restructuring related cost inour fourth quarter forecast relates to a consolidation in this segment.

In Industrial Materials, organicsales were down slightly in the third quarter, continued softness in the US residentialand other markets, led to lower unit volume but this decline was partiallyoffset by inflation in steel prices. EBIT and EBIT margins improved versusthird quarter 2006, primarily from operational improvements and the earnings ofan acquired business partially offset by the impact from lower organic sales.

In Specialized Products, organicsales increased in the third quarter, reflecting worldwide growth in ourautomotive business, and continued solid performance of a portion of commercialvehicle products.

EBIT and EBIT margins improvedsignificantly versus third quarter '06, reflecting higher organic sales andearnings from an acquired company. These gains were partially offset byunacceptable performance at a couple of operations. And with those comments, Iwill turn the call back over to Dave.

Dave Haffner

Thank you, Karl. As we announcedin yesterdays press release, we expect a full year sales decrease of approximately3% compare to 2006. Our full year forecast, which is comprised of a 5% organicdecline offset by 2% acquisition growth, anticipates ongoing weakness inseveral of our markets.

We currently estimate full year2007 earnings between $1.29 and $1.37 per share. This forecast does notincorporate possible non-recurring cost resulting from the finalization of ourstrategic review, but does include our $0.02 net benefit from non-recurringitems and discontinued operations.

For the fourth quarter we expectan approximate 3% sales decrease versus the fourth quarter of 2006. Fourthquarter earning should be between $0.18 and $0.26 per share including $0.07 ofrestructuring-related costs.

During 2007, we expect togenerate about $650 million of cash, largely from operations but supplementedwith proceeds from the prime foam divestiture that was completed in March. Wehave reduced our capital spending expectations for the year to $160 million.

Maintenance capital representsroughly half of this total. Dividends will require about $125 million. Throughthe end of the third quarter we spend approximately $210 million on share buy-backsand $85 million on acquisitions.

With those comments, I’ll turnthe call back to Dave DeSonier.

Dave DeSonier

That concludes our preparedremarks. We thank you for your attention and we will be glad to answer yourquestions. In order to allow everyone an opportunity to participate, we requestthat you ask your single best question and then voluntarily yield to the nextparticipant. If you have additional questions, please reenter the queue and wewill answer all the questions you have.

Andrew, we’re ready to begin theQ&A.

Question-and-Answer Session

Operator

Thank you, sir. (OperatorInstructions). Our first question will come from the line of David MacGregorwith Longbow Research. Please go ahead.

David MacGregor - Longbow Research

Yes, good morning. DavidMacGregor with Longbow Research and hi guys.

Dave Haffner

Hi, David.

David MacGregor - Longbow Research

My question really has to do withthe Materials business. So, I guess, first of all, on the industrial materials,it looks like wire rod prices are going up about $40 to $50 a ton in November (inaudible).Is this in your guidance?

Karl Glassman

David, the answer is, no. That wehave seen increases published in the $30 to $40 a ton range, at this point wedon’t know to what degree that they will stick, scrap is not inflating to thatdegree, although, it is inflating gently. So, we’ll see what the market demandis, we do not believe that the market is going to accept an increase of thatmagnitude, so no, there is nothing in forecast.

David MacGregor - Longbow Research

Okay. And then can you justremind us again about your wire rod business, once upon a time I think you wereproducing above 450,000 out of 900,000 ton requirement is that still roughlythe same or?

Dave Haffner

Our total requirement has comedown a bit, Dave, but we are still running sterling flat out and I think we aregetting about 450,000.

David MacGregor - Longbow Research

Closer to 500,000

Dave Haffner

500,000 tons, roughly.

David MacGregor - Longbow Research

Okay. And then the totalrequirements are little below the 900,000?

Dave Haffner

It is.

David MacGregor - Longbow Research

Okay. And then, I guess just onthe aluminum side it seemed you have too much capacity in you and rest you stilldon’t have anything really going in Asia, I don’t want to steal the thunder onwhatever plans you plan announcing over the next few weeks, but is it possible [wayto see] with an expanding presence in aluminum in Asia at any point soon?

Dave Haffner

We will talk to you in New York about that.

David MacGregor - Longbow Research

Okay. Just finally the share repurchaseplans you bought for 9.6 and for that you are authorized by 10.0 does thatimply that fourth quarter activity is going to be laid on share repurchases?

Karl Glassman

Yeah Dave. That's what it implies.

David MacGregor - Longbow Research

Okay. Thanks guys.

Karl Glassman

Yeah.

Operator

Thank you. Your next questionwill come from the line of Budd Bugatch with Raymond James. Please go ahead.

Budd Bugatch - Raymond James

Good morning, Dave and Karl.

Dave Haffner

Hey, double BB

Budd Bugatch - Raymond James

Question for you on the guidancegoing forward you talked weakness in same location. When we drill down in thesegment, should we think of it in the same order that you had weakness in thirdquarter, in other words residential being the poorest performer in the quarterand aluminum being second poorest?

Karl Glassman

Yes Budd. I think that wouldexpect those macroeconomic trends to continue, there is nothing inherent in thecompany that would indicate anything different than that.

Budd Bugatch - Raymond James

And still positive andspecialized and be the only one of the five to be positive?

Karl Glassman

Yes

Budd Bugatch - Raymond James

Okay. And just lastly onresidential, would you drill down a little further in that, you said strength inbedding and in upholstery and weakness in carpet? Do we still have a fourthquarter carpet underlay challenge for the quarter?

Karl Glassman

Yes, Budd but not to the samemagnitude. What happened in carpet is that sales dump carpet underlay. Thesales dollars in our third quarter were down 27%, our units were only down 3%.Though a year ago, the scrap prices were significantly higher average unitselling prices of the end product were significantly higher, and we will notfully anniversary that issue in the fourth quarter.

Budd Bugatch - Raymond James

So then, do I take it that yourexpectations for the same location in that has lessened that down by 8.5% thatyou had in the--?

Karl Glassman

You would be in that and that's insimilar range.

Budd Bugatch - Raymond James

Similar range. All right, thanksguys, look forward to seeing you in November.

Karl Glassman

Thanks Budd.

Dave Haffner

All right, Budd.

Operator

Thank you. Our next questioncomes from John Baugh with Stifel Nicolaus. Please go ahead.

John Baugh - Stifel Nicolaus

Good morning. Following up on theresidential, first of all were there inflation/deflation in carpet underlay? Wasthere much impact on EBIT or was that a pass through?

Karl Glassman

The margins were slightlynarrowed, yes. So, there was an absolute--

John Baugh-Stifel Nicolaus

Okay. And you mentioned carpetunderlay, geo and fibers. So, there was no comment about bedding, and you madethe comment about international bedding being strong, was domestic beddingstrong, flat, slightly down but were it down less than segment? And then acomment on the furniture side as well?

Karl Glassman

Domestic bedding was down. Thenegative was much less than the segment. It was down 3.2%, pieces were downgreater than that, we are starting to see the real benefit of our sale, ourability to place in the market, the premium and proprietary products that wespoke about earlier in terms of product development initiatives.

So, that’s a good thing but thedemand continues to be extremely soft, offset by an 8% growth in internationalspring. In Furniture, the units worldwide were up significantly up in thedouble-digit range. But the dollars were down. Let's call it 2% that is anindication of deflation. The demand is there, the motion category continues togrow.

John Baugh - Stifel Nicolaus

Just the follow up on theinteresting comment about premium because I see generally the domestic marketobviously embedding, shifting down right now, and mix formal side and you’regoing the other way. So, your new product placements and some of the innovationsare clearly taking all that what’s going on?

Karl Glassman

Yeah, John, thank you for givingme an opportunity to clarify. What I should have said more clearly is whatwe’re seeing in the vast majority of our pieces, it can to be the lower end that,but lower end is still where the pieces reside.

We’re getting more value out ofsome of those pieces because it is our ability to increase the height of theproduct. But I absolutely agree with your pieces but the top end of the beddingindustry is soft, but the middle is softer yet. It's the low end or the lowerend price points so opening price points where the velocity is at this point.

John Baugh - Stifel Nicolaus

Thank you.

Karl Glassman

Thank you.

Operator

Thank you our next question comesfrom Joel Havard with Hilliard Lyons. Please go ahead.

Carol Kemple - Hilliard Lyons

Hi, this is Carol Kemple for JoelHavard.

Dave Haffner

Hi, Carol

Carol Kemple - Hilliard Lyons

I was wondering, do youanticipate another share repurchase program either in the fourth quarter, ifyou complete this one, early in 2008?

Dave Haffner

We can’t comment on that, Carol.

Carol Kemple - Hilliard Lyons

Okay.

Dave Haffner

As you know, we do haveauthorization for this year up 10 million shares and we've consumed the bulk ofthat already.

Carol Kemple - Hilliard Lyons

Okay. Thank you.

Dave Haffner

You are welcome.

Operator

Next question comes from the lineof Laura Champine with Morgan Keegan. Please go ahead.

Laura Champine - Morgan Keegan

Good morning. On the strategicreview, I thought originally we were supposed to hear back in late summer. So, ifI may be calling correctly, we’ve pushed back the timeframe on that a littlebit. Could you comment on why that review is taking a little bit longer thanpreviously expected?

Dave Haffner

Laura, we have consistently saidin the fall or towards the end of the year. So, I am not sure exactly how youcame to that conclusion. But I will comment that the quality of the analysis isabsolutely crucial to myself and to the rest of management team, and to ourBoard of Directors, and rather than speed, we are dedicated to the propositionof completeness and quality, and we feel comfortable with the analysis thatwe’ve done now.

Laura Champine - Morgan Keegan

And just as a follow-up on thecommentary on the residential same location sales trend down and some of the putsand takes there. It looks like you mentioned deflation in furniture components.Is that Leggett lowering prices or is that once again as deteriorating mixshift to the down side.

Karl Glassman

Primarily deteriorating mix shift.

Laura Champine - Morgan Keegan

Thank you.

Karl Glassman

Welcome.

Operator

Thank you. Our next questioncomes from the line of Keith Hughes with SunTrust Capital. Please go ahead.

Judy Merrick - SunTrust Capital

Hi, this is Judy for Keith Hughesand I think you just answered my question on the raw materials. You said thatyou saw that there was inflation in steel prices in Industrial segment. So,could you give on the residential you saw increases in the foam prices was thatright?

Karl Glassman

Yeah. We probably remember we areout of that Prime Foam business but yes the inflation has been announced to ourcustomers both furniture and bedding in prime polyurethane foam was about 10%, itwas announced effective October 1st, which gives us and it's not fully implementedyet, gives us a little bit of a heartburn because here again, our bedding andfurniture customers have to deal with raw material inflation. And in bedding areain particular, they still haven't dealt with the inflation that came from aflammability perspective. Our bedding customers desperately need to raise theirprices as well as the furniture customers and we are concerned of the impactthat that will have to us as components suppliers.

Judy Merrick - SunTrust Capital

Karl, you might comment on aluminumand resins.

Karl Glassman

Resins and aluminum both arereally generally flat, we are seeing a slight uptick in resins and aluminumitself is flat.

Judy Merrick - SunTrust Capital

Okay. Great, Thank you.

Karl Glassman

You are welcome.

Operator

Thank you. Our next question willcome from the line of [Steve Bill] with Conning Asset Management. Please goahead.

Steve Bill - Conning Asset Management

Yes, good morning. Just onequestion with respect to the strategic review. Can you give us a sense on howimportant maintaining your tier 1 commercial paper writings are as you look atthe various aspects of that?

Matt Flanigan

Steve, this is Matt Flanigan and weconsider those very important, certainly we have a $600 million commercialpaper program that we use in general about half of that most of the time. So,that’s very important and as this our long-term net writing--.

Steve Bill - Conning Asset Management

Okay. Thank you.

Operator

Thank you sir. (OperatorInstructions). Our next question is a follow up questions from Budd Bugatch.Please go ahead with your question.

Budd Bugatch - Raymond James

Yeah. You have drill down forsome in residential and may be in fixture and display can you characterize theoffice demands versus the POS in the fixture side?

Karl Glassman

Yeah, but the offer side was downabout 3% in F&D. So, there is just general softness.

Budd Bugatch - Raymond James

Okay. And you expect that tocontinue in the fourth quarter too, Karl?

Karl Glassman

We don't see any real indicatorthat would suggest that it will change significantly either way. We basicallyhave forecasted same this.

Budd Bugatch - Raymond James

It surprised me a little bit inoffice because different numbers have been slightly better. Can youcharacterize what you see going on or are you loosing any share there, or whilethe numbers would suggest, you are but, I know that could be misleading in someway?

Karl Glassman

Yeah Budd.

Dave Haffner

This is Dave. They are bitmisleading in that and I know you this and I apologize for repeating myself toyou. But we are predominantly engaged in seating components. When they classifyor sub-classify their data seating components gets all kinds of, anything you seton, tends to get in there. And so we truly have not lost any market share,contrarily we've gained a bit of market share with some new programs. As youknow, the office furniture industry isn't always directly in phase with rest ofthe economy. And I read your commentary this morning but we haven't lost anymarket share.

The problem with co-relating to BIFMAand even the sub-category of seating in BIFMA is that we don't make woodenchairs, we don't make certain other type of Seating Systems.

Budd Bugatch - Raymond James

Okay. All right, thanks Dave,thanks Karl.

Dave Haffner

Thanks, Budd.

Operator

Thank you, sir. At this time wehave no additional questions in the queue. Now, I'll turn the conference backto you for any closing remark.

Dave Haffner

This is Dave Haffner, I just wantto thank everybody for their patience and really, really look forward to seeingyou and talking to you in New Yorknext month.

Dave DeSonier

That concludes all we got. Wewill talk to you in a month. Thanks.

Operator

Thank you, management. Ladies andgentlemen at this time we will conclude today’s teleconference. We do thank youfor your participation on today’s program. You may now disconnect and pleasehave a pleasant rest of your day.

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Source: Leggett & Platt Q3 2007 Earnings Call Transcript

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