Leggett & Platt, Incorporated (LEG)

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Leggett & Platt Inc. (LEG)

Q2 2014 Earnings Conference Call

July 25, 2014, 9:00 AM ET

Executives

Dave DeSonier - SVP of Strategy & Investor Relations

Dave Haffner - Chairman & CEO

Karl Glassman - President & COO

Matt Flanigan - EVP & CFO

Susan McCoy - Staff VP of Investor Relations

Analysts

Josh Borstein - Longbow Research

John Baugh - Stifel

Budd Bugatch - Raymond James

Daniel Moore - CJS Securities

Keith Hughes - SunTrust

Herb Hardt - Monness, Crespi, Hardt

Presentation

Operator

Greetings, and welcome to the Leggett & Platt's Second Quarter 2014 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Dave DeSonier. Thank you, sir. You may begin.

Dave DeSonier

Good morning, and thank you for taking part in Leggett & Platt's second quarter conference call. I’m Dave DeSonier, the Senior Vice President of Strategy and Investor Relations, and with me today are the following; Dave Haffner, our Board Chair and CEO; Karl Glassman, who is President and Chief Operating Officer; Matt Flanigan, our Executive VP and CFO; and Susan McCoy, our Staff VP of Investor Relations.

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; Matt Flanigan will discuss financial details and address our outlook for the remainder of 2014; Karl Glassman will provide segment highlights; and finally, the group will answer any questions that 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.

We posted to the IR portion of the website a set of PowerPoint slides that contain summary financial information along with segment details. 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 will now turn the call over to Dave Haffner.

Dave Haffner

Thanks, Dave. Good morning, and thank you all for participating in our call. We’re very pleased with second performance in the majority of our operations and are seeing improved sales momentum in nearly all of our key businesses.

Same-location sales grew 4% during the quarter with strength in all of our residential markets, Office Furniture Components and Automotive, partially offset by lower volume in Store Fixtures and Commercial Vehicle Products. Excluding the weak performance in Store Fixtures and CVP, growth during the second quarter was strong with sales up 10%.

From a reported GAAP earnings perspective, as announced on July 14, we recognized a $108 million or $0.65 per share non-cash charge for the complete write-off of the goodwill associated with the Store Fixtures Group. Excluding this charge, second quarter earnings per share were $0.48, a 9% increase versus continuing operations earnings per share of $0.44 in the second quarter last year. This increase is primarily due to sales growth, reduced share count, and a lower adjusted tax rate.

Second quarter adjusted EBIT improved slightly versus second quarter last year with the benefit from broad-based sales growth, largely offset by weak performance in Store Fixtures and the non-recurrence of prior-year gains from asset sales. Adjusted EBIT margin for the quarter was 10.1%.

As we announced last week, we have engaged an investment banker to help explore strategic alternatives for the Store Fixtures business, including the possible divestiture of that unit. In a very positive long-term development, on July 1, we jointly announced with Tempur Sealy, the purchase of their three U.S. innerspring component production facilities.

In conjunction with this purchase, we also expanded and extended our supply relationship and became the exclusive long-term provider in the U.S. and Canada of wire-based innersprings for Tempur Sealy and boxsprings for Sealy. We are very pleased to have completed this transaction and we look forward to the expanded long-term strategic partnership.

The additional production should enhance economies of scale, benefit from our vertical integration in steel rod and wire and allow manufacturing optimization across a broad asset base. We expect this agreement to add approximately 2% to sales and be neutral to EPS over the first year as we execute our integration plan.

We assess our overall performance by comparing our total shareholder return to that of peer companies on a rolling three-year basis. Our target is to achieve TSR in the top one-third of the S&P 500 over the long-term, which we believe will require an average TSR of 12% to 15% per year. So far, for the three-year period that will end on December 31, 2014, we’ve generated TSR of 20% per year on average, which places us just below the midpoint of the S&P 500 over that same time frame.

I’ll now turn the call over to Matt Flanigan who will discuss some additional financial details along with our outlook for the remainder of 2014. Matt?

Matt Flanigan

Thanks, Dave, and good morning, everyone. Well, as expected, operating cash flow returned to strong positive territory in the second quarter and grew to $103 million, up 4% versus the same quarter last year.

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