Leggett & Platt, Incorporated (LEG)

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Leggett & Platt Inc. (LEG)

Q3 2009 Earnings Call

October 23, 2009 9:00 am ET

Executives

David DeSonier – Vice President of Strategy and Investor Relations

David Haffner – President, Chief Executive Officer

Matthew Flanigan – Chief Financial Officer

Karl Glassman – Chief Operating Officer

Susan McCoy – Director Investor Relations

Analysts

Budd Bugatch – Raymond James

Keith Hughes – Suntrust Robinson Humphrey

John Baugh – Stifel Nicolaus

Mark Rupe – Longbow Research

Michael Smith – Kansas City Capital

[Justin Marr – Lord Abbott]

[Brian DeRubio – Yield Capital Appreciation Partners]

Presentation

Operator

Welcome to the Leggitt & Platt third quarter 2009 earnings. (Operator Instructions) It is now my pleasure to introduce your host, Dave DeSonier, Vice President of Strategy and Investor Relations for Leggitt & Platt.

David DeSonier

Good morning and thank you for joining us. With me today are the following; Dave Haffner, our CEO and President, Karl Glassman, our Chief Operating Officer, Matt Flanigan, our CFO and Susan McCoy, our Director of Investor Relations.

The agenda for the call is as follows; Dave Haffner will start with a summary of the major statements we made in yesterday’s press release. Karl Glassman will provide operating highlights, 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 Leggitt & Platt and is copywrited material. This call may not be transcribed or recorded or broadcast without our express permission. A reply is available from the IR portion of Leggett’s website.

Yesterday we posted to the investor relations 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 in our 10-K entitled Forward-looking statements.

I’ll now turn the call over to Dave Haffner

David Haffner

Good morning and thank you for participating in our call. We are pleased with the third quarter results we reported yesterday in what continues to be a very challenging operating environment. Sales from continuing operations decreased 28% versus the third quarter of 2008 reflecting weak global markets, steel related price deflation and our decision to exit some specific customer programs with unacceptable margins.

Despite this significant sales decline, third quarter earnings per share from continuing operations increased by $0.05 to $0.34 per share versus $0.29 in the third quarter of 2008. This improvement reflects several factors including ongoing benefits from the past year’s cost reduction initiatives, pricing discipline, a net LIFO benefit and the absence of last year’s unusual tax items.

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 1, 2008 through October 21, 2009 we posted TSR of 23% which ranks in the top 3% of the S&P 500.

Last year we made significant progress on the first phase of our strategic plan. We have completed six of the seven targeted divestitures and received proceeds in excess of our expectations. We have returned more cash to investors through a combination of higher dividends and share repurchases and we have implemented a rigorous strategic planning process to help guide future investment decisions.

Our primary focus this year has been on margin improvement which we believe represents a substantial opportunity for creating shareholder value over the next few years.

We continued to show margin progress in the third quarter despite weak markets. Third quarter gross margin excluding the net LIFO benefit was 21.8%. For the full year we expect gross margins to approximate 20%, a level we have not achieved since 2001.

Third quarter EBIT margin excluding the net LIFO benefit was 10.4%. Since fourth quarter margins are seasonally lower than third quarter, we expect EBIT margins for the last half of 2009 to be roughly 8.5% to 9% after adjusting for that LIFO impact.

Throughout this year we discussed the quarterly mismatch in the recognition of LIFO benefits versus the FIFO impact associated with consumption of higher steel costs that we have in inventory or on order at the beginning of 2009. In the first and second quarter, we consumed the majority of the higher cost steel, but recognized only half of the offsetting LIFO benefit.

Therefore, first half reported earnings were unusually low. In contrast, second half reported earnings will be unusually high. In the third quarter we consumed the remainder of the higher cost steel inventory which was approximately $5 million and recognized a LIFO benefit of $60 million. This resulted in a net $11 million benefit to third quarter earnings.

In the fourth quarter, we expect to recognize an additional $17 million LIFO benefit with no offsetting FIFO impact. We continue to discuss this issue because it’s critical in understanding the quarterly pattern and variability in this year’s operating margins.

However, full year margins require no special consideration for these items. For the full year we expect the LIFO and the FIFO impacts to roughly offset.

The margin improvements we are reporting reflect substantial operational progress through a combination of aggressive cost containment efforts, head count reductions, facility consolidations and dispositions that we’ve made over the past several quarters in an environment where our sales for the year are expected to be down approximately 25%.

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