Leggett & Platt, Incorporated
Q2 2011 Earnings Call Transcript

Published: 29 Jul 2011

[Operator:]

Greetings, and welcome to the Leggett & Platt Second Quarter 2011 Earnings 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 DeSonier:]

Good morning, and thank you for taking part in Leggett & Platt's Second Quarter Conference Call. With me this morning are the following

[David Haffner:]

Thank you, Dave. Good morning, and thank you for participating in our call. As we reported yesterday, second quarter sales grew 8% versus the prior year, from a combination of inflation, currency exchange rates and higher trade sales from our steel mill. Excluding these factors, sales during the quarter were roughly flat with the prior year. Unit volumes declined, both year-over-year and sequentially, in most of our major residential businesses, reflecting continued uncertainty on the parts of consumers and choppiness in the broader global economies. Store Fixtures volume also decrease versus the prior year, as this business continued to face difficult comparisons related to high levels of remodeling activity by large customers last year in 2010. The markets where we saw year-over-year growth during the quarter, were Automotive, Office Furniture components, Power Foundations, Machinery and Commercial Vehicle Products. Earnings for the second quarter, were $0.37 per share and included a $0.02 per share benefit from an unusual tax item. In the second quarter of last year, earnings were $0.34 per share. Operationally, we performed well during the quarter, given the macro and market demand headwinds. Gross profit dollars increased slightly versus second quarter of 2010, which was our strongest operational quarter last year. Gross margin percentages for the quarter were diluted, as typically occurs during inflationary periods when we raise selling prices to recover significant cost increases. EBIT decreased year-over-year as a result of unusually high selling and administrative expense. Several items led to the increase in SG&A cost. Some of those included

[Karl Glassman:]

Thank you, Dave. Good morning. In my comments, I'll discuss a few segment highlights. You will find segment details in yesterday's press release and in the slide presentation on our website. Second quarter sales in the Residential Furnishings segment grew 2%. Unit sales -- unit volume declined in nearly all of the segment's business units, but this contraction was more than offset by raw material-related price increases and changes in currency exchange rates. The only business within the segment that had meaningful unit growth was Power Foundations. Those operations were up 46% during the quarter. In our U.S. Spring business, innerspring unit volumes decreased 5% and boxspring units were down 3% during the quarter. In our Furniture Hardware business, second quarter unit volume decreased 12% versus the prior year. Prior year comparisons continue to be difficult during the second quarter in both bedding and furniture, as demand was relatively strong in 2010 through mid-year, and then weakened substantially in the back half of the year. EBIT and EBIT margins in the Residential Furnishings segment decreased versus the prior year, primarily from lower unit volume. In the Commercial Fixturing & Components segment, second quarter sales decreased 2%, as lower fixture and display sales were partially offset by continued growth in Office Furniture Components. Sales in our Fixture and Display business decreased approximately 10% versus a very strong second quarter of 2010, which include a significant remodeling activity by some of our large value-oriented customers. We continue to be very pleased with the performance of our Office Furniture Components business, as that industry continues to show convincing signs of recovery. Our second quarter sales in the business unit grew approximately 15%, which is notable since we posted 20% growth in the second quarter of 2010. Comparisons in this business become more difficult in the coming quarters. EBIT and EBIT margins in the Commercial Fixturing & Components segment decreased versus second quarter of 2010, primarily from lower sales. Second quarter sales in our Industrial Materials segment increased 18%, reflecting steel-related price inflation and a higher trade sales from our steel mill. Unit volumes decreased in both wire and tubing, reflecting weakness in bedding furniture demand and also the second quarter disruption in Automotive production. EBIT and EBIT margins decreased versus second quarter of 2010, primarily due to lower unit volume in wire and tubing and higher raw material and transportation cost. In the Specialized Products segment, we posted 20% sales growth in the second quarter, primarily reflecting continued strength in global automotive demand, as well as growth in machinery and Commercial Vehicle Products. Changes in currency exchange rates also added to our year-over-year sales growth during the quarter. Higher sales led to increase EBIT during the quarter, but EBIT margins contracted slightly as these gains were partially offset by higher raw material costs and currency impacts. Automotive industry forecasts continue to anticipate meaningful global production growth in 2011, even with the impact from the Japanese earthquake and tsunami. The current 2011 production forecast in North America and Europe has increased by approximately 1 million units in total, compared to the forecast issued at the start of the year and the forecast for Asia has been reduced by roughly 1 million units since the earthquake. With those comments, I'll turn the call back over to Dave.

[David Haffner:]

Thanks, Karl. In light of the second quarter demand weaknesses, we reduced the top end of our full year guidance and now expect sales of approximately $3.5 billion to $3.7 billion. This represents an increase of 4% to 10% versus 2010 and includes approximately 4% sales growth from inflation. Based on this forecast, we now project 2011 earnings of between $1.25 and $1.40 per share. We expect continued recovery in the economy and our end markets. However, we recognize that recovery can be choppy and has allowed for the potential with this revised guidance range. And with those comments, I'll turn the call back over to Dave DeSonier.

[David DeSonier:]

That concludes our prepared remarks. We appreciate your attention, and we will be glad to try to answer your questions. In order to allow everyone an opportunity to participate, we request that you ask your single best question and then voluntarily yield to the next participant. If you have additional questions, please reenter the queue and we'll try to answer all the questions you've got. Diego, we're ready to begin the Q&A.

[Operator:]

[Operator Instructions] Our first question comes from Mark Rupe with Longbow Research.

[Andrew White:]

This is actually Andy standing in for Rupe today. My question is in terms of the demand in pricing throughout the quarter, were there any surprises there, kind of relative to what's in your internal expectations were for the quarter?

[Karl Glassman:]

Andy, I don't think that there were any surprises as it relates to pricing. We implemented those price increases across our businesses at various rates in the first quarter. There weren't any surprises there. I would say that the real surprise to us was demand softening. We were more optimistic in April, when we last publicly spoke. Everything softened. We were surprised. We expect continued recovery. We didn't expect the choppiness that we experienced from a macro perspective in the second quarter.

[Operator:]

Our next question comes from Budd Bugatch with Raymond James.

[Chad Bolen:]

This is actually Chad filling in for Budd. David, your balance sheet remains under levered relative to your target capital structure and you have signaled a greater willingness to make acquisitions, but we have yet to see any real movement. I mean, should we read that as perhaps there's a lack of opportunities that fit the fundamental operating criteria you're looking for? Or have there been businesses that maybe match the fundamental criteria but maybe not at the price that you'd like? And then I guess, kind of a follow-on to that, does the softening macro environment make you more hesitant to make a deal in the short term?

[David Haffner:]

Good question, Chad. There has been a bit more activity in the M&A department. There have been a couple -- so we continue to look for acquisitions. There have been a couple of opportunities where expectations were higher than what we felt our shareholders should pay for, and therefore, did not go to closure. There are some continued businesses that we are likely to acquire, nothing of significant size at this point to report. And as you know, we comment on those after we make the acquisitions. But I guess, what I want to leave you, Chad, and you can relay this to Budd, is that is we still believe that there are some good acquisitions to be had for the company. And even though the market does tend to put a bit of a bias or more conservatism into our valuations, I think that you should expect to see some acquisitions of between here and the end of the year.

[Operator:]

Next, we have Keith Hughes from SunTrust Robinson Humphrey.

[Keith Hughes:]

I have a couple of questions. On the Office Furniture business, you referred to the tougher comparisons in the second half of the year, looks like you're up 20% in the second half of '10. What kind of growth rate are you looking at for the second half of '11 on top of that?

[Karl Glassman:]

Keith, we would expect 10% to 15% growth because of the difficult comps that we feel like we're extremely well-placed. There continues to be buoyancy in that market, and we really feel good about our position.

[Keith Hughes:]

Okay. And then moving over to the acquisition, the answer to the last question. With the types of deals that you're in the ballpark for now, are they more in a bolt-on size? Or would they be larger than that or potentially larger than that?

[David Haffner:]

Keith, this is Dave again. The ones that we are in diligence on are ones that we would include into existing businesses.

[Keith Hughes:]

So there wouldn't be like a new segment or anything like that?

[David Haffner:]

Yes, that's correct. But as you know, when we've spoken about it before, we're absolutely open to the idea of buying a completely new business group or theoretically a segment.

[Keith Hughes:]

Now if you were to find something that big, wouldn't that offset the mantra you've had for several years now of the dividend and share repurchase being the primary vehicles of cash flow usage?

[David Haffner:]

We would have -- it would have some bearing on the way we assess that, but because of the borrowing capacity that we've got and the cash generation that we have and that would be included with the acquisition, it isn't absolute that it would force us into some other dividend protocol.

[Matthew Flanigan:]

Keith, this is Matt. Certainly, make no mistake, our passion for the dividend and that growth record remains intact, for sure. And then relative to share repurchase activity, if we have better places we can allocate our shareholders' capital that will create significant value, that's what we're in business will try to do on our shareholders' behalf, and we'll look for those opportunities.

[Keith Hughes:]

Okay. Final question in mattress and furniture sales within Residential. As you look at July, any real change in trend from what you saw in the second quarter?

[Karl Glassman:]

Keith, we're seeing the normal seasonal uptick in units. In terms of comps to last year, it gets a little easier. So I would say it will probably finish the July in the flattish range, which certainly is an improvement over the second quarter.

[Operator:]

Our next question comes from Robert Kelly with Sidoti & Company.

[Robert Kelly:]

Just a point of clarification, I guess, on the guidance reduction on the top end. Was the shortfall relative to your internal plans during 2Q that caused it? Or are you just kind of below plan or expecting to be a little bit below plan in the second half of the year?

[David Haffner:]

Bob, this is Dave. I'll start. As Karl mentioned earlier, the thing that surprised us a bit is the relative softness in this past quarter. So the demand was lower than what we had expected previously. And that has had some affect. That, coupled with the fact that there isn't any absolute, clear, positive signal that says things are going to get meaningfully better and then, I guess, coupled with the fact that we're relatively conservative, it just seemed prudent for us to go ahead and bring that top end down a bit. We'd love to do better than that, but it's a combination of what we experienced and no clear signal that things are going to get meaningfully better in the back half.

[Robert Kelly:]

Right, understood. You talked for a couple quarters about relatively easier comps in the second half of the year. I was just trying to get a sense of if you no longer think they're easy in 2H '11.

[David Haffner:]

Well, they're easier for sure because of the sort of lopsided business demand that we had in 2010. So they are easier in the back half, for sure.

[Robert Kelly:]

Great. And then just one final one. You put through successfully a bunch of price increases to try and cover the raw material inflation. It sounds like the softer-than-expected demand in 2Q negated a lot of that cost price mismatch. But are you expecting -- if demand is close to trend or close to your expectations in the second half of the year, do you expect to catch up with your margins? I'm sorry, you were talking about 120 basis point improvement sequentially in 2Q compared to 1Q. Is that the kind of expectation built into the second half of the year?

[Karl Glassman:]

Yes, Bob. We expect to continue to improve our margins. We're so volume-sensitive right now, we just need the volume. We have an expectation at this point that our flat steel cost will soften in the back half. That should, in itself, help our margins slightly, but we need the volume to be able to run through the assets to get that yield.

[Operator:]

Our next question comes from Herb Hardt with Monness, Crespi.

[Herbert Hardt:]

Given the level of your shares, is there any thought towards accelerating the buyback so you won't be paying $30 a share in a year or 2?

[Matthew Flanigan:]

Herb, this is Matt. We certainly are always mindful of an accelerated buyback scenario. If at some point we feel it's compelling, we don't believe that's the case right now, we'll certainly continue to get excess cash, free cash flow back to our shareholders, if we don't have better places to put it. For the full year, as you read in our press release, we do anticipate to use our full authorization from the board, which is 10 million shares. And at least at this point in time, we don't have a different expectation.

[David Haffner:]

Herb, this is Dave. I'd reiterate what Matt said, and I'd also say that I would have been disappointed if you hadn't asked.

[Operator:]

Our next question comes from Karen Lamark with Federated Investors.

[Karen Lamark:]

I wanted to go back to the dividends. I appreciate that you have that capacity and the dividend is very important. But your payout ratio is still running about twice your target. And with the continued challenges in the business momentum and the tough macro environment, especially if 2012 is another sort of subdued year of recovery, at what point do you have to revisit your dividend policy?

[Matthew Flanigan:]

Karen, this is Matt, I'll start. First of all, I'm not sure of your twice our stated payout ratio. We have 50% to 60% is what we put out there for a long time, is where we intend to navigate back toward. If you just look at the second quarter, I know that's not a real good metric, but if you look at the $0.37 we just earned and we paid out $0.27 on July 15, that's about a 73% payout ratio. Certainly not particularly proud of that, but we're certainly making some headway. And for the full year, at the midpoint of our guidance, if we're going to pay something around $0.27, $0.28 sort of range for this year in those quarters, that continues to have us below 90% as a payout ratio. We are very mindful that the fact that our earnings continue to be well south of $2 right now and we're paying more than $1 every year. So until that math lines up, we're going to out of field on our payout ratio. But having said all of that, our free cash flow continues to strongly support our current rate of dividend payouts and expected growth. And again, from my perspective, I don't see our mindset on that changing with what we're seeing currently for sure.

[David Haffner:]

Yes, and to underscore that point and also going back to Keith's question about the effect on dividends that major acquisitions might make, there's really nothing that we see that would cause us to want to change our dividend protocol. We're proud of that history. The cash generation of the company is awfully good. The key is just exactly what Matt said, is increasing the EPS. And that is directly tied to increased unit demand and capacity utilization, Karen. So feel comfortable with the dividend as the signal.

[Karen Lamark:]

Okay. And if I could follow up with one separate question. You indicated that higher SG&A was in part due to professional fees related in part to some growth projects. Can you just give us a little bit color on what all you were considering, as well as whether or not this is a planned activity or expense at the beginning of the year?

[David Haffner:]

Yes, Karen, good question. We believe that it's really important to periodically get some extra and independent sets of eyes to help us investigate ways that we might either penetrate existing markets more deeply or participate in markets that we don't currently participate in. And on an ongoing basis, we'll periodically do that. We think it's healthy. We've had some good experiences in the past. So it was something that we had contemplated, although, this particular quarter had a larger amount of expense than what an average quarter would have in it. And we're also not limiting -- I should say, we're not limiting those investigations to just here in North America, we're looking globally. So expect to have some ongoing service expense associated with consultants or other research organizations, but not at the quarterly rate that we just experienced.

[Operator:]

[Operator Instructions] Our next question comes from Mark Rupe with Longbow Research.

[Andrew White:]

Hey, guys, this is Andy in for Mark again. Just quickly, on innerspring units being down 5%, do you feel that's a pretty fair reflection of what you've seen just from the market as a whole over there? Any changes, maybe company-specific changes, or changes in your customer base that sort of played on that number?

[Karl Glassman:]

No, Andy. I believe that we're trending with the market. Certainly, non-innerspring is taking some shares from innerspring in the full market. Our participation in non-innerspring is very small, of the dual mattress market. But I think that our numbers replicate the full industry, maybe not the ISPA statistics. Remembering the ISPA statistics, cover the large manufacturers that make up only 65% of the universe. So when you see that data, it may not correlate with our comments or are being off 5% in the quarter but we believe the industry from an innerspring perspective was off that, close to that 5%. We have not lost share.

[Operator:]

Ladies and gentlemen, there are no further questions at this time. I'll turn the conference back over to management for closing remarks.

[David DeSonier:]

We thank you for your participation, and we'll talk to you again next quarter.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. All parties may now disconnect. Have a great day.