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Executives

Dave DeSonier - VP of Strategy and IR

Dave Haffner - President and CEO

Karl Glassman - COO

Matt Flanigan - VP and CFO

Analysts

David MacGregor - Longbow Research

Budd Bugatch - Raymond James

John Baugh - Stifel Nicolaus

Carol Kemple - Hilliard Lyons

Laura Champine - Morgan Keegan

Judy Merrick - SunTrust Capital

Steve Bill - Conning Asset Management

Leggett & Platt, Inc. (LEG) Q3 2007 Earnings Call October 18, 2007 9:00 AM ET

Operator

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

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

Dave DeSonier

Good morning and thank you for taking part in Leggett & Platt's third quarter conference call. I am Dave DeSonier, the Vice President of Strategy and Investor Relations. With me today are the following: Dave Haffner, our CEO and President; Karl Glassman, our Chief Operating Officer; Felix Wright, Leggett's Chairman of the Board; Matt Flanigan, who is 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 the summary of the major statements we made in yesterday's press release. Karl Glassman will discuss trends in our various markets. Dave will then address our outlook for the remainder of the year. And finally, the group will answer any questions you have.

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

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

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

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

In the third quarter, we generated a record quarterly high $194 million of cash from operations, in part due to a significant reduction in working capital. Working capital as a percent of annualized sales improved to 19.5% during the quarter.

Share repurchases in the third quarter were the highest quarterly level in our history. So far this year, we bought back 9.6 million shares of our stock and reduced our outstanding shares by over 4%. We are finalizing the in-depth strategic review of our business portfolio.

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

We will present our final recommendations to the Board of Directors in early November and subsequently disclose the strategic implications and financial details to investors.

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

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

Karl Glassman

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

EBIT and EBIT margins reflected the soft volume, in our US residential markets including carpet underlay, geo components and fibers. In Commercial Fixturing and Components, organic sales declined in the third quarter, primarily due to lower fixture and display demand, and our decision to walk away from sales with unacceptable margins.

EBIT and EBIT margins were essentially flat. The impact from lower sales during the third quarter was offset by operational improvements. Further consolidation of our fixtures and displays operations will occur in the fourth quarter and is included in the restructuring-related costs that we forecast.

Market conditions remained very challenging in the aluminum product segment and we continue to be disappointed with our performance. Organic sales decreased in the third quarter, due to lower demand in several markets, including small engines, telecom, and appliances. Significant declines in EBIT and EBIT margins primarily reflect lower volume, plant under utilization in operating inefficiencies.

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

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

In Specialized Products, organic sales increased in the third quarter, reflecting worldwide growth in our automotive business, and continued solid performance of a portion of commercial vehicle products.

EBIT and EBIT margins improved significantly versus third quarter '06, reflecting higher organic sales and earnings from an acquired company. These gains were partially offset by unacceptable performance at a couple of operations. And with those comments, I will turn the call back over to Dave.

Dave Haffner

Thank you, Karl. As we announced in yesterdays press release, we expect a full year sales decrease of approximately 3% compare to 2006. Our full year forecast, which is comprised of a 5% organic decline offset by 2% acquisition growth, anticipates ongoing weakness in several of our markets.

We currently estimate full year 2007 earnings between $1.29 and $1.37 per share. This forecast does not incorporate possible non-recurring cost resulting from the finalization of our strategic review, but does include our $0.02 net benefit from non-recurring items and discontinued operations.

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

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

Maintenance capital represents roughly half of this total. Dividends will require about $125 million. Through the end of the third quarter we spend approximately $210 million on share buy-backs and $85 million on acquisitions.

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

Dave DeSonier

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

Andrew, we’re ready to begin the Q&A.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question will come from the line of David MacGregor with Longbow Research. Please go ahead.

David MacGregor - Longbow Research

Yes, good morning. David MacGregor with Longbow Research and hi guys.

Dave Haffner

Hi, David.

David MacGregor - Longbow Research

My question really has to do with the 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 we have seen increases published in the $30 to $40 a ton range, at this point we don’t know to what degree that they will stick, scrap is not inflating to that degree, although, it is inflating gently. So, we’ll see what the market demand is, we do not believe that the market is going to accept an increase of that magnitude, so no, there is nothing in forecast.

David MacGregor - Longbow Research

Okay. And then can you just remind us again about your wire rod business, once upon a time I think you were producing above 450,000 out of 900,000 ton requirement is that still roughly the same or?

Dave Haffner

Our total requirement has come down a bit, Dave, but we are still running sterling flat out and I think we are getting 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 total requirements are little below the 900,000?

Dave Haffner

It is.

David MacGregor - Longbow Research

Okay. And then, I guess just on the aluminum side it seemed you have too much capacity in you and rest you still don’t have anything really going in Asia, I don’t want to steal the thunder on whatever plans you plan announcing over the next few weeks, but is it possible [way to 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 repurchase plans you bought for 9.6 and for that you are authorized by 10.0 does that imply 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 question will 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 guidance going forward you talked weakness in same location. When we drill down in the segment, should we think of it in the same order that you had weakness in third quarter, in other words residential being the poorest performer in the quarter and aluminum being second poorest?

Karl Glassman

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

Budd Bugatch - Raymond James

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

Karl Glassman

Yes

Budd Bugatch - Raymond James

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

Karl Glassman

Yes, Budd but not to the same magnitude. What happened in carpet is that sales dump carpet underlay. The sales 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 unit selling prices of the end product were significantly higher, and we will not fully anniversary that issue in the fourth quarter.

Budd Bugatch - Raymond James

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

Karl Glassman

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

Budd Bugatch - Raymond James

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

Karl Glassman

Thanks Budd.

Dave Haffner

All right, Budd.

Operator

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

John Baugh - Stifel Nicolaus

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

Karl Glassman

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

John Baugh-Stifel Nicolaus

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

Karl Glassman

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

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

John Baugh - Stifel Nicolaus

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

Karl Glassman

Yeah, John, thank you for giving me an opportunity to clarify. What I should have said more clearly is what we’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 of some of those pieces because it is our ability to increase the height of the product. But I absolutely agree with your pieces but the top end of the bedding industry is soft, but the middle is softer yet. It's the low end or the lower end 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 comes from Joel Havard with Hilliard Lyons. Please go ahead.

Carol Kemple - Hilliard Lyons

Hi, this is Carol Kemple for Joel Havard.

Dave Haffner

Hi, Carol

Carol Kemple - Hilliard Lyons

I was wondering, do you anticipate another share repurchase program either in the fourth quarter, if you 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 have authorization for this year up 10 million shares and we've consumed the bulk of that already.

Carol Kemple - Hilliard Lyons

Okay. Thank you.

Dave Haffner

You are welcome.

Operator

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

Laura Champine - Morgan Keegan

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

Dave Haffner

Laura, we have consistently said in the fall or towards the end of the year. So, I am not sure exactly how you came to that conclusion. But I will comment that the quality of the analysis is absolutely crucial to myself and to the rest of management team, and to our Board of Directors, and rather than speed, we are dedicated to the proposition of completeness and quality, and we feel comfortable with the analysis that we’ve done now.

Laura Champine - Morgan Keegan

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

Karl Glassman

Primarily deteriorating mix shift.

Laura Champine - Morgan Keegan

Thank you.

Karl Glassman

Welcome.

Operator

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

Judy Merrick - SunTrust Capital

Hi, this is Judy for Keith Hughes and I think you just answered my question on the raw materials. You said that you 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 that right?

Karl Glassman

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

Judy Merrick - SunTrust Capital

Karl, you might comment on aluminum and resins.

Karl Glassman

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

Judy Merrick - SunTrust Capital

Okay. Great, Thank you.

Karl Glassman

You are welcome.

Operator

Thank you. Our next question will come from the line of [Steve Bill] with Conning Asset Management. Please go ahead.

Steve Bill - Conning Asset Management

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

Matt Flanigan

Steve, this is Matt Flanigan and we consider those very important, certainly we have a $600 million commercial paper 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. (Operator Instructions). 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 for some in residential and may be in fixture and display can you characterize the office demands versus the POS in the fixture side?

Karl Glassman

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

Budd Bugatch - Raymond James

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

Karl Glassman

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

Budd Bugatch - Raymond James

It surprised me a little bit in office because different numbers have been slightly better. Can you characterize what you see going on or are you loosing any share there, or while the numbers would suggest, you are but, I know that could be misleading in some way?

Karl Glassman

Yeah Budd.

Dave Haffner

This is Dave. They are bit misleading in that and I know you this and I apologize for repeating myself to you. But we are predominantly engaged in seating components. When they classify or sub-classify their data seating components gets all kinds of, anything you set on, 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 you know, the office furniture industry isn't always directly in phase with rest of the economy. And I read your commentary this morning but we haven't lost any market share.

The problem with co-relating to BIFMA and even the sub-category of seating in BIFMA is that we don't make wooden chairs, 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 we have no additional questions in the queue. Now, I'll turn the conference back to you for any closing remark.

Dave Haffner

This is Dave Haffner, I just want to thank everybody for their patience and really, really look forward to seeing you and talking to you in New York next month.

Dave DeSonier

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

Operator

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

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Source: Leggett & Platt Q3 2007 Earnings Call Transcript
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