Leggett & Platt, Incorporated (LEG) Q1 2010 Earnings Report, Transcript and Summary

Greetings and welcome to the Leggett & Platt’s first quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David DeSonier, Vice President of Strategy and Investor Relations for Leggett & Platt. Thank you. You may begin.

Good morning and thank you for taking part in Leggett & Platt's first quarter conference call. I’m Dave DeSonier and with me today are the following; Dave Haffner, our CEO and President; Karl Glassman, the Chief Operating Officer; and Matt Flanigan, who is our CFO. 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 will provide operating highlights, and Dave will then address our outlook for the full 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 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. Those slides are intended to supplement the information we discuss on this call. 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 of our 10-K entitled forward-looking statements. I’ll now turn the call over to Dave Haffner.

Good morning and thank you all for participating in our call. Notable demand improvement in several of our end markets was reflected in the first quarter results we reported yesterday. First quarter 2010 sales from continuing operations increased 14% over the prior year. Unit volumes grew approximately 18% but were partially offset by steel related price deflation that occurred in the first half of 2009. First quarter 2010 earnings from continuing operations were $0.30 per share. This includes a $0.03 per share net benefit from unusual items which is comprised of a $0.05 per share benefit associated with the sale of a building and several smaller items that net to $0.02 per share expense. In the first quarter of 2009, earnings from continuing operations were $0.02 per share and included a $0.04 per share charge related to a customer bankruptcy. The year-over-year earnings increase primarily reflects higher sales and the associated improvement in capacity utilization, cost reduction initiatives implemented in 2009 and pricing discipline. As anticipated, the incremental unit volume we realized in the first quarter generated contribution margins in line with our approximate 30% expectation. Steel cost increased during the first quarter. These increases included further escalation in scrap cost which compressed metal margins at our steel rod mill. The first quarter earnings impact from LIFO expense and lower metal margins combined was approximately $0.03 per share. Market prices for steel rod have begun increasing and we expect metal margins to improve in the coming quarters. As a result of the cost increases, we have announced and are in the process of implementing price increases in our major steel based businesses. The company’s primary financial objective is to consistently achieve total shareholder return within the top one third of the S&P 500. From January 1st, 2008 through April 20th, 2010, we posted TSR over 49%, which ranks in the top 4% of the S&P 500. Our financial profile remains strong. We ended the quarter with net debt at 25.6% of net capital, which is well below the low end of our long-term targeted range of 30% to 40%. We currently have over $400 million available and two years remaining on our $600 million bank facility and we have no significant fixed term debt maturities until 2013. Our cash balance at the end of the first quarter was $247 million. We generated $51 million of cash from operations during the quarter. Though working capital dollars increased in correlation to sales, as a percent of sales, it remained at a lean 14.2%. We repurchased approximately 2 million shares of our stock during the quarter at an average price of $19.75 per share. We also declared a first quarter dividend of $0.26 per share. At yesterday’s closing price of $23.14, the current dividend yield is 4.5%. The dividend remains a key lever in achieving our TSR goal. And as consistent had been the case for many years, we expect operating cash in 2010 to comfortably exceed the amount required to fund dividends and capital expenditures. For the full year, we expect operating cash to exceed $300 million. Capital expenditures for the year should be less than $90 million and dividends will require about $155 million. With those comments, I will turn the call over to Karl Glassman, who will provide some operating highlights. Karl?

Thank you, Dave. Good morning. I would like to quickly discuss a few major topics. You will find segment details in yesterday’s press release and in the slide presentation on our website that Dave DeSonier mentioned earlier. First quarter sales increased 5% in our residential segment with unit volume growth partially offset by the steel related price deflation that occurred in the first half of 2009. In our U.S. betting business, innerspring unit volumes increased approximately 5% in the first quarter reflecting the improved market demand. Box spring units grew significantly during the quarter reflecting improved demand and market share gains. Unit volumes in our furniture components business also increased in the first quarter due to market share gains and relative market strength in motion of upholstery. In both betting and furniture, market demand has been strongest in recent months at lower price points. As Dave mentioned earlier, steel cost increased during the first quarter and as a result, we have announced and are in the process of implementing price increases to recover the higher cost. Increases of approximately 6% to 9% are being implemented in our domestic betting and furniture component businesses. Increases at various rates are being implemented internationally. Demand in the office furniture industry appears to have stabilized albeit at a very low level. First quarter sales in our office components business increased approximately 5%, a notable accomplishment given the current market demand. This volume growth reflects new programs that we have been awarded. Revenues in our store fixtures business grew roughly 35% during the quarter and continued to reflect solid demand by the value oriented retailers with which we are very well placed. First quarter sales in our industrial materials segment increased 7% with unit volume growth partially offset by the steel related price deflation that occurred in early 2009. We closely monitor trends in the steel market and as a producer of steel rod, the increase in scrap cost in recent months compressed first quarter margins in the segment. Rod pricing has begun to increase and as Dave mentioned, metal margins should improve in the coming quarters. First quarter sales in our automotive businesses grew approximately 80% versus an extremely weak first quarter 2009. Automotive industry production rates continue to improve globally. Industry forecast anticipate production growth in all the major markets for the full year of 2010. And with those comments, I’ll turn the call back over to Dave.

Thanks, Karl. In light of an improved demand environment, we raised our full year guidance. Sales for 2010 are now anticipated to be in the range of $3.1 billion to $3.4 billion. The lower end of this range allows for some risk of market contraction from current demand levels and the higher end allows for a relatively strong demand environment to continue. Based on this sales range, we expect full year earnings of $0.95 to $1.30 per share. Much of our sales and earnings growth for the next couple of years will likely come from demand recovery in our end markets. Longer term, we believe a 4% to 5% annual revenue growth is achievable. Consistent with the plan we outlined two years ago, we are now beginning to devote resources to this next phase of our strategy. Achieving this long-term growth objective will require that we continue to prioritize development and commercialization of innovative new products with end markets in which we already enjoy strong competitive positions. We also intend to identify and cultivate new higher growth business platforms, markets that are new to us and in which Leggett would possess a competitive advantage. We are working with external strategy consultants to help us identify these opportunities. Both efforts are receiving significant management attention and priority. Both are vital to our longer term future growth and success. With those comments, I’ll now turn the call back to Dave DeSonier.

That concludes our prepared remarks. We thank you for 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. If you have additional questions, please reenter the queue, and we will try to answer all the questions that you have. Diego, we are ready to begin the Q&A.

(Operator Instructions) Our first question comes from Mark Rupe with Longbow Research. Please state your question.

Hey guys, congratulations on the performance, number one. As it relates to the innerspring units being on 5%, Karl, I believe you had mentioned on the last call, kind of your initial stab on the 2010 thought process for betting would be up, maybe a percent or two. Obviously, the first couple of months of data from the industry has been better than that. Do you have a new kind of view on the rest of the year on the betting front?

Mark, you are right. We may have been a little bit conservative when we released for 4Q talking about this year. That we haven’t put a number out there but internal conversations were probably in the 3% to 4% range now, that (inaudible) just published a new forecast which was a consensus of the manufacturers at 4.5% in units. And we can get comfortable with that that we were seeing kind of an interesting phenomenon and the units were extremely strong in the first quarter, we think that that may have been correlated to an extremely strong tax refund related season, significant volume in the lower end price points. We are cautiously optimistic but it feels a heck of a lot better.

Okay, and just real fast. On the store fixtures, that’s a real 35%, right because you had the impact last year in the first quarter of the walk-away?

That’s correct.

And then 35% is a huge number. I mean is it all really on the value oriented retailers positioning or –

Were on all of them primarily.

Our next question comes from Budd Bugatch with Raymond James. Please state your question.

Good morning everybody, this is actually Chad, pinch hitting for Budd. Let me add my congratulations on the improvement in the quarter as well.

Thanks, Chad.

Sitting in our shoes as we think about modeling the year, I mean obviously, I think the most challenging segment for us is industrial line, and I would imagine, it’s probably the most challenging forecasting for you guys as well. If you could help us out a little bit there, I mean what does your full year guidance assume for sales and margin in that industrial segment. I guess just how do we think about units versus pricing and then that scrap rod spread. David in his comments mentioned that you expect that margin to improve. Is that incorporated in the guidance, does it assume kind of flattish or is there sort of a range? Just whatever color help understanding that segment you could give us would be very appreciated.

Chad, we currently expect that the – you are right, industrial is the most difficult to predict, by the way. The steel volatility over the last few years has been extreme, that we expect that metal margin issue to begin to rectify in the second quarter. We have, as Dave said in his commentary, have announced price increases. We are starting to see scrap moderate. Longer term we would expect industrial for the year to be in that 8% to 9% EBIT range, coming off of a pretty tough first quarter.

Okay, great. That’s – and that’s very helpful. And if I could sneak one other quick one; and office furniture components up 5%, could you give us a sense for how much of that was organic versus the new programs? And I don’t know if you have talked about it before, but are the new programs related to new customer wins, expanded business with the existing customers or are a little bit of both?

Chad, as you know that office furniture universe is relatively small. So they are primarily wins in the existing customer base. And as you know, the BIFMA statistic show that that office furniture sales, the expectation is, is they would be off in that 4.5% to 5% range. So we are – we are probably experiencing the similar thing, so that delta of new programs are probably in that 5% to 10%. It’s been helpful. Our folks have done just a wonderful job of managing both the cost side and the product development innovation part of that business.

Terrific. Well, I appreciate you taking my questions and good luck on the rest of the year.

Thank you.

Thank you, Chad.

Our next question comes from Keith Hughes with SunTrust. Please state your question.

Thank you. Two questions on raw materials. The price increases you referenced earlier, is that in response to the inflation in scrap and other products that you are seeing kind of year-to-date or is this – you are trying to get ahead of the curve of potential future increases that are coming down the pike?

Yes, Keith, thanks for the question. We actually – step back a little bit. What we have seen on the scrap side of things is inflation since December of about a $100 a ton. When we announced rod, wire, and then – steel wire based component increases, we did so with an expectation that scrap would moderate in May as it normally does and actually fall back a little bit. So we are not really ahead of things that if scrap was to continue to run, we would have to announce another wire-based increase. If it moderates somewhat, we are probably okay. It’s a challenge. Forecasting steel, as you know, it’s a worldwide commodity, it’s become even more difficult now than it has historically been and that ore contracts used to be annual contracts, they are now quarterly contracts. We have seen extreme inflation and volatility in the Chinese and the European markets, to a greater extent even in the domestic markets. So we just flat out don’t know.

Keith, this is Dave. I think you know that seasonally there tends to be an increased volume in scrap collection and the spring after the winter months. And as a result of that, there generally tends to be an abatement in the cost of the scrap in the spring time, we have built that into our forecast. But as Karl says, if we don’t see that, then we will back at the drawing board. But right we have built that into the forecast.

Okay. And there are stores that with the change in iron ore pricing that steel could go up significantly. So just to hear you right, if that would be the case, you would probably have to raise component prices again, correct?

That’s correct.

That’s correct, absolutely.

And the second part of that, if we go more to just the rod spread pricing, is there any reason that that scenario would apply that you wouldn’t see the normal spread, it might contort for a month or two, but would it not reverb back to normal as it’s doing right now with further inflation?

Keith, we are not real sure what normal spreads are, that they are certainly wider today than they were in the 2001, 2002 timeframe and not as wide as they were in 2008. So we would expect that over a longer timeframe that they – the spreads would be greater than they were at the turn of the century and not as wide as they were in 2008. But to try to pin it to a new normal, we don’t know. But we do know that the steel industry is consolidated, that there is less manufacturing capacity around the world, it truly is a world market, and we have an expectation that those spreads will be acceptable to us.

Okay, thank you.

You’re welcome.

Our next question comes from John Baugh with Stifel Nicolaus. Please state your question.

Hi, good morning, and my congratulations as well, terrific results. Quickly, in the residential furnishing, you mentioned share gain. Can you mention or tell us when that occurred, when it anniversaries, and then if you back that out what you were seeing in the residentials? And I have a follow-up.

The – John, that the share gain in residential that we spoke to is inter-springs. I think we are holding our own that there hasn’t been a loss or gain. Box springs that we have a share gain because of picking up that Sealy business, it will anniversary to the most part in the second quarter. On the furniture hardware side, that is relatively new business that’s come back to us. There is some dynamics, kind of multifaceted dynamics happening in the – on the motion upholstery side in that. We picked up some business at the expense of some low priced, low-quality mechanism manufacturers in China, who put some product into the market into some of our furniture customers’ product that didn’t perform very well. So we have gained that business back. Most of those wins took place in the latter part of the fourth quarter. We won’t anniversary that really until 1Q 2011. We should continue to benefit through the rest of this year. We are also experiencing as the market does, the continued growth of motion at the expense of stationary, so that is also driving the category in total.

And Karl, and following up two things, one, what was the – your best guess with residential furniture in the market excluding the share gain was? And then I am curious, it looked like year-over-year the contribution margin was right at 30% and yet you had steel inflating and it sounds like still a negative mix shift. And I am right about that in thinking that it could have been slightly better had those not – events not occurred and how do we think about that contribution margin going forward? Thank you.

On the contribution part of the question, you are dead-on. It – it was around 30%. We have an expectation it will be greater than that once we get past the steel issue. As it relates to furniture, we think the industry in 1Q was probably on the upholstered side that we participate into a much greater degree than stationary, than on the motion side. We would expect it was probably up in the 10% range.

Great, thank you very much.

You’re welcome. Thanks John.

Our next question comes from Joel Harvard of Hilliard Lyons. Please state your question.

Thank you. Good morning, everybody.

Hi Joel.

Karl, you made a few comments today about sort of the inflation pressures coming your way, the price hikes you are passing through. Is the environment changing us, specifically with regard to sort of the length of the timing curve that it takes to – to see these coming your way and your ability to pass them through. What I am getting at is, is there – is there sort of a – is there more of a fundamental shift or change in the sort of historical trend there. I know it’s traditionally taking you all sometime to absorb it and sometime to pass it back through. Is that – is that curve getting tighter?

Actually Joel, it’s an interesting question. That it’s not taking us longer to pass it through. There are – is a higher percentage of that pricing is geared to is indexed, especially on the store fixtures side of things where you will remember when we went through the inflation in 2008, we were exposed to a greater degree on store fixtures and our teams have done a really a good job of allowing for raw material inflation metrics and their pricing. So it’s recovered more quickly and more effectively. On the more core residential side of the business and the industrial, that – we are passing through it about the same rate. If there is a difference today, it’s the magnitude and the variety of inflation from our finished, bedding and furniture customers standpoint, not only are they getting it from steel, but they are seeing at everything, petrochemical based. So they are getting foam increases, fiber increases, the leather guys are seeing huge inflation in hides, cardboard, all the MDFs. So it’s a challenge that historically the retailers have said to the manufacturing customers, we won’t let you pass through. Our manufacturer customers are in a squeeze, they have to pass it through in retail. The magnitude and the velocity of this, retail has to move this time.

You guys have been around the industry long enough to have some perspective on that. Is this a harbinger or a reminder of events going back two, three decades? I know you guys aren’t all that old, but –?

I will let Dave answer that question.

Every – everything is relative Joel. Actually I don’t know how to answer that question, I do not think so. But I really don’t know and I apologize for being sounding like a sidestepping.

No, that’s fair. I guess, maybe, I will put it this way. Is there – is there – are you describing a way of structuring your – your bid that is more flexible or are contracts themselves allowing for a more updated pricing as needed?

We have asked all of our operating people to contemplate the value of indexed pricing wherever it makes sense for their respective segment and their customer. And, of course, there is safety on both sides of that going up and going down respectively. And so, we have seen more of that. And some of our customers want to now lock in less volatility for periods of time. I would say though and this – and this probably the extent of my salesmanship, if you look at the significant inflationary impacts of petrochemical products, and as Karl said, our customers are catching it from every direction. And one of the advantages, even though we experience inflation in steel, one of the advantages that a combination of spring wire and air has over petrochemicals is it’s net less expensive. And so we continue to innovate ideas and products not just for bedding, but for various of our customers, which include wire and wire systems to help our customers reduce the amount of foam and/or fiber type products that they have to use. That will continue to be one of the high priorities for us.

Okay. Guys thanks and congratulations as well, and best of luck.

Our next question comes from Mike Smith with Kansas City Capital. Please state your question.

Well, good morning.

Good morning, Mike.

And good job. I noticed that your SG&A continues to decline. Is there much more there you can do or have you done it all?

Mike, this is Matt. I will just add that it’s been running about $90 million a quarter as you have seen. And certainly as sales potentially increase from this point, you should see us have a chance to migrate as a percent of sales to around 10.5%. For example, here in this past quarter, it was just a tad over 11%. So we will see some more gearing there. And as Dave and Karl are both quick to remind all of us, as we see business come back, we sure need to work hard on all of our cost pieces to ensure that that we don’t have creep take place there inappropriately. And SG&A will be one area we watch very closely in that regard.

Thank you. I have one other question. I don’t know if I am last in the line, I general am, but –

Go ahead.

Excellent, because star one is kind of hard to find. The question was – yes and I think you went through it in your prepared remarks. But what type of financing do you have available on your commercial and your various lines of credit?

Mike, we have a $600 million bank facility that matures in April of 2012, so it has two more years to go and it’s fully available in that regard. Right now, today, as we sit here, we are using about a $100 million of it for actual commercial paper borrowings, and about a $100 million or little less than that for some typical letter of credit needs. So we have a little over $400 million at the ready for any liquidity needs we might have and it’s a very strong group of banks led by JPMorgan, and we feel great about it.

And just out of curiosity, I know you have got your planning put in place in November of 2007, as you have executed on that five stars. Are there – concerning the current economic environment, are there any acquisitions out there that are coming to you with the tin cup?

Well, Mike, this is Dave. The M&A market certainly isn’t – is not frothy. However it’s getting more interesting, I will put it that way. I think there are no significant acquisitions in the near term that we are planning. On the other hand, we are seeing more and having more interaction with some companies. I think that’s a direct result of companies that want to sell their business are seeing improved performances and therefore easier to ask for higher prices. And on the other hand, on the buying side, I think companies are getting more comfortable that indeed the improved results are realizable. So we don’t – we don’t have anybody with the tin cup suggesting that we should buy them out of fire, but we are starting to talk to a few more companies than we have in the past.

Thank you very much.

Thank you. Our next question comes from Fred Speece with Speece Thorson Capital Group. Please state your question.

Yes, thank you. This new platform, are you thinking of a new segment or acquisitions within the current segments you have?

Fred, this is Dave. It – we are not limiting our thought process to having something being absolutely brand new and a new segment. In fact, a couple of the products that we are looking at right now are significant extensions of existing product lines that would be serviced to a broader range of prospective customers namely older less ambulatory customers. On the other hand, we are looking at absolutely brand new businesses. And if one of those is large enough, whether it be an acquisition or a combination of an acquisition and some internal product development, we would in fact initiate that as a – an independent business unit probably ultimately growing into a business segment.

Thank you.

Our next question comes from Jon Evans with Edmunds White. Please state your question.

Can you just talk a little bit about the tone of business and how you saw it kind of progressed through the quarter, because when we talked or when we see some of your customers, they have all talked about their business in extremely strong and actually getting better as they went through the quarter and as they have gone into April. So could you help us out and maybe talk about kind of how order trends were for you as you went through the quarter and if you can give us any in-look into April?

John, this is Karl. It varies by business, but overall that January certainly was a little slow out of the gate. We saw pretty significant momentum build in February and March at least on the residential side. And I made reference to this earlier that that the more promotional products sold extremely well and we think that there might be a correlation there from what our customers were telling us to unusually high tax refunds, it does to the lower end more promotional business. Business since the Easter Holiday has slowed a little bit and which is in residential is the normal cycle that we usually slow a little bit, furniture and bedding going into Memorial Day. There is not a lot to trigger to promote off until the Memorial Day weekend. Automotive on the other side has came out of the gates extremely strong. Obviously they are dealing against some pretty darn easy comps, but that business continues to stay strong in the SM – I am sorry, CSM – my goodness – forecast continue to ratchet it up for domestic production. They have just upgraded last week again, so it seems like that customer is out there. Some of the other businesses, industrial is so correlated to furniture and bedding that demand continues to hold inventories relatively low. There might be some advanced buying taking place in the next few weeks as price increases are implemented. But overall, I would say things are a little softer as they normally are.

Okay, thank you for the insights.

You’re welcome.

Thank you. (Operator Instructions). Our next question comes from Keith Hughes with SunTrust. Please state your question.

Yes, just a follow-up, your comments on the commercial furniture business stable or component business stabilizing, are you starting to see some signs from customers of order activity heading into particularly the non-office type space? Is there any sign of that or is it just sort of flatlining at this point?

Keith, I would say it’s flatlining. People are more optimistic because their rate of decline is leveled and we do think that we bottomed. But there is not a significant enthusiasm for growth at this point. There is a lot of second hand high-quality product out in t marketplace. But there are a lot of those office customers are doing a really good job from a new product innovation standpoint. NeoCon in the next month or two will be interesting. We expect a lot of launch activity there to try to reinvigorate volume. But until occupancy, rent rates increase, we see white collar employment grow significantly that we think we have flatlined.

Okay, thank you.

You’re welcome.

Our next question comes from John Baugh with Stifel Nicolaus. Please state your question. Mr. Baugh, your line is open.

Can you hear me?

Yes, John.

Yes, quickly, steel deflation going forward for the rest of the year, how does that sort of map out quarter-by-quarter?

No deflation. We have anniversaried the deflation. The first quarter year-on-year was the last of the deflation. You will see inflation really starting this week.

Okay. And as you mentioned, 6 to 9, how do we map that during the quarter, it’s obviously being implemented during the quarter. If we get half of it roughly in this quarter and then should we thinking 6 to 9 inflation in those key product areas in Qs 3 and 4?

Yes, I would say that it would be safe to model half of it in 2Q.

Great, thank you.

You’re welcome.

Our next question comes from Fred Speece with Speece Thorson Capital Group. Please state your question.

Yes, are you seeing any easing or any change at all in the availability of credit of your suppliers or customers, what you’re concerned or will you have to help out?

Fred, this is Matt. No, we are not seeing that be a problem at all. I would guess that they are probably seeing credit a bit easier to obtain now than they did three to six months ago as most businesses are seeing a bit more buoyancy in their business. But, no, that has not been a trend that we are troubled by at all.

And you have not changed your allowance for doubtful accounts at all?

We have not.

Thank you.

Thank you. Our next question comes from John Baugh with Stifel Nicolaus. Please state your question.

Just having a field day here. You had one business unit still for sale, could you just update us on that please? Thank you.

Yes, John, that’s correct. That’s our storage products business unit. We are nearing finalization of that transaction. It has not been closed. We are in some final negotiation. I would like to think that it would be done by circa at the end of May, no later than the end of June.

Great, thank you.

Yes.

Ladies and gentlemen, there are no further questions at this time. I will turn the conference back over to Mr. DeSonier for closing remarks. Thank you.

We appreciate your attention and we will be talking to you next quarter. Thank you.

Thank you. This concludes today’s conference. All parties may disconnect now.