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

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

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

Analysts

Chad Bolen - Raymond James

Andrew White - Longbow Research LLC

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

Robert Kelly - Sidoti & Company, LLC

Keith Hughes - SunTrust Robinson Humphrey, Inc.

Karen Lamark - Federated Investors

Presentation

Question-and-Answer Session

Robert Kelly - Sidoti & Company, LLC

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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 sort of 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 - Monness, Crespi, Hardt & Co., Inc.

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 - Federated Investors

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 - Federated Investors

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.

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