Leggett & Platt, Incorporated (LEG)

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Leggett & Platt, Incorporated (LEG)

Q2 2011 Earnings Call

July 29, 2011 9:00 am ET

Executives

David DeSonier - Senior Vice President of Strategy & Investor Relations

Matthew Flanigan - Chief Financial Officer, Senior Vice President, Director and Chairman of Enterprise Risk Management Committee

Karl Glassman - Chief Operating Officer, Executive Vice President and Director

David Haffner - Chief Executive Officer, President, Director and Member of Executive Committee

Analysts

Chad Bolen - Raymond James

Herbert Hardt - Monness, Crespi, Hardt & Co., Inc.

Robert Kelly - Sidoti & Company, LLC

Andrew White - Longbow Research LLC

Karen Lamark - Federated Investors

Keith Hughes - SunTrust Robinson Humphrey, Inc.

Presentation

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: our CEO and President, Dave Haffner; the Chief Operating Officer, Karl Glassman; our CFO, Matt Flanigan; and our Staff VP of Investor Relations, Susan McCoy. The agenda for this morning's call is as follows. Dave Haffner will start with a summary of the major statements we've made in today's press release. Karl Glassman will then provide operating highlights. Dave will 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 has 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 supplement the information we discuss on this call, including non-GAAP reconciliations. 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

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: the pledge we made towards Joplin tornado relief efforts; professional fees, including consulting services associated with growth projects; and trade show expense related to a biannual show that many of our businesses attend in Germany. We continue to strive for annualize SG&A costs at 10% of sales or less. As expected, earnings improved sequentially as a result of price increases we implemented late in the first quarter to recover high material costs.

Raw material costs have stabilized since the first quarter, which has allowed pricing to catch up with the higher cost in most of our businesses. During the quarter, we bought back 2 million shares of our stock, bringing our year-to-date repurchases to 7.4 million shares. Under the current authorization, we can purchase up to 10 million shares annually. We also issued 900,000 shares during the quarter, through various employee benefit and stock purchase programs. Year-to-date issuance for these programs are at 2.7 million shares.

In May, we declared a quarterly dividend of $0.27 per share. 2011 marks our 40th consecutive year of annual dividend increases. Out of all the S&P 500, there are only 11 companies that have a longer string of annual increases than Leggett. At yesterday's closing price of $22.10, the current dividend yield is 4.9%. We ended the second quarter with net debt to net capital at 28.3%, which is below our long-term targeted range of 30% to 40%.

Our operating folks continue to closely monitor working capital levels. We ended the quarter with working capital at 14.3% of annualized sales, below our 15% target. For the quarter, we generated operating cash of $54 million. We expect operating cash for the full year of over $300 million, which should once again, comfortably exceed the amount required to fund capital expenditures and dividends. Capital expenditures should approximate $85 million this year and dividends should require about $155 million. We assess our overall performance by comparing our total shareholder return on a rolling 3-year basis to that of peer companies. We target TSR in the top 1/3 of the S&P 500 over the long term, which we believe will require an average TSR of 12% to 15% per year.

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