Karl G. Glassman - President and CEO Matthew C. Flanigan - EVP and CFO David M. DeSonier - SVP, Strategy and IR Perry E. Davis - SVP, Residential Furnishings J. Mitchell Dolloff - SVP, President, Specialized Products Susan R. McCoy - VP of IR Wendy M. Watson - Director of IR.

Robert Majek - CJS Securities Robert Griffin - Raymond James Keith Hughes - SunTrust Robinson Humphrey Dillard Watt - Stifel.

Greetings, and welcome to the Leggett & Platt First Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference over to Dave DeSonier, Senior Vice President, Strategy and Investor Relations. Please go ahead, sir..

Good morning and thank you for taking part in Leggett & Platt’s first quarter conference call. With me this morning are the following.

Karl Glassman, who is President and CEO; Matt Flanigan, our Executive VP and CFO; Perry Davis, EVP and President of the Residential Products and Industrial Products segments; Mitch Dolloff who is EVP and President of the Furniture Products and Specialized Products segments; Susan McCoy, our VP of Investor Relations and Wendy Watson, our Director of Investor Relations.

The agenda for the call this morning is as follows. Karl will start with a summary of the major statements we made in yesterday’s press release and provide segment highlights. Matt will discuss financial details and address our outlook for 2017. And finally, the group will answer any questions that you have.

This conference call is being recorded for Leggett & Platt and is copyrighted material. This call may not be transcribed, recorded or broadcasted without our expressed permission. A replay is available from the IR portion of Leggett’s Web site.

We posted to the IR portion of the Web site, yesterday’s press release and a set of PowerPoint slides that contain summary financial information along with segment details. Those documents 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 Karl..

Good morning and thank you for participating in our first quarter call. We are pleased with our start to 2017. Sales growth improved as the quarter progressed and earnings were slightly ahead of our forecast. For the full year, we expect market improvement and Leggett initiatives to drive sales growth and strong earnings.

As we reported yesterday, first quarter sales increased 2% to $960 million despite a 3% reduction from prior year divestitures. Organic sales grew 4% primarily from continued strength in automotive. Acquisitions also added 1% to sales growth.

First quarter earnings per share from continuing operations were $0.62, down slightly from $0.63 in the first quarter last year. The benefit from higher volume and a lower effective tax rate was more than offset by higher steel costs and several smaller factors.

Steel costs began to inflate in late 2016 and we have implemented price increases to recover the higher costs. With our typical pricing lag, earnings and margins were compressed in the first quarter, as expected, but should improve over the remainder of the year.

We completed two acquisitions during the quarter that should add combined annual revenue of approximately $50 million. The first is a distributor and installer of geo-synthetic products and expands the geographic scope and capabilities of our Geo Components business.

The second is a manufacture of surface-critical bent tube components supporting the private-label finished seating strategy in our Work Furniture business. On April 10, we filed an 8-K discussing changes to our management structure and our segments that were effective January 1.

Under the new segment structure, the Home Furnishings group was move from Residential Products to Furniture Products and the Machinery group was moved from Specialized Products to Residential Products. In addition, LIFO impact will now be recognized within the segment to which it resides. We revised prior year data for comparison purposes.

In the Residential Product segment, first quarter total sales were flat with a 2% decrease in organic sales offset by acquisitions. Volume grew 2% with demand improving late in the quarter. However, this growth was offset by lower pass-through sales of adjustable beds which reduced segment sales by 4%.

We will begin to anniversary this headwind in the third quarter. U.S. spring component dollar sales were flat with 6% growth in ComfortCore units and other content gains offsetting declines in total unit volume. Total innerspring units decreased 4% and box spring unit volume was down 7% in the quarter.

International spring sales were strong with dollars up 10%. Machinery sales decreased significantly offsetting organic growth from the other parts of the segment. Segment EBIT increased and EBIT margin improved primarily due to the absence of last year’s FIFO inventory impact and a favorable sales mix in the current quarter.

In the first quarter last year, EBIT was negatively impacted as we reduced selling prices while we were still consuming higher cost inventory. In the Industrial Product segment, first quarter total sales decreased 14% largely from divestitures completed during 2016.

Organic sales were down 4% with lower volume partially offset by steel-related price increases. The segment’s EBIT and EBIT margin decreased due to the lag associated with recovering higher steel costs and lower volume in both rod and wire. In the Furniture Product segment, first quarter sales were essentially flat.

Adjustable bed sales grew 10% and Work Furniture sales also increased but these improvements were offset by lower sales in Fashion Bed and Home Furniture. Segment EBIT and EBIT margin decreased primarily from steel inflation, cost associated with new program launches and the non-reoccurrence of a prior year gain from a building sale of $2 million.

In the Specialized Product segment, first quarter organic sales increased 9% with continued strength in automotive and improvements in aerospace partially offset by currency impact and lower volume in CVP. The prior year divestiture offset part of the organic sales growth.

Excluding currency changes, automotive sales grew 14% and aerospace organic sales increased 6% in the quarter. The segment’s EBIT was essentially flat and EBIT margin decreased with the benefit from higher volume offset by cost associated with growth in automotive, absence of earnings from a prior year divestiture and other smaller items.

I’ll now turn the call over to Matt..

Thanks, Karl, and good morning, everyone. Cash from operations was 58 million in the first quarter, a decrease of 54 million versus the first quarter last year, primarily due to increased working capital.

This increase resulted primarily from higher inventory to support sales growth and new programs, increased accounts receivable from strengthening sales late in the quarter and the inflation impact on both inventory and receivables.

We ended the quarter with adjusted working capital as a percentage of sales at 11.2% in line with the first quarter of last year. We continue to expect our full year operating cash to exceed 450 million. In February, we declared a quarterly dividend of $0.34 per share and extended our record of consecutive annual increases to 46 years.

The dividend payout as a percentage of adjusted earnings is within our targeted range of 50% to 60%. Therefore, we expect future dividend growth to approximate earnings growth. At yesterday’s closing price of $53.59, the current yield is 2.5% which is one of the higher yields among the 51 companies that comprise the S&P 500 Dividend Aristocrats.

We repurchased 2.2 million shares of our stock in the first quarter at an average price of $48.82 and issued 1 million shares largely for employee benefit plans and option exercises. As you may recall, for the past few years, we have typically bought more shares of our stock in the first quarter than in each of the other three quarters of the year.

For all of 2017, we now expect to repurchase a total of 3 million to 4 million shares and issue about 2 million primarily for employee benefit plans. Our financial base remains very strong and this gives us considerable flexibility when making capital and investment decisions.

We ended the quarter with net debt to net capital of 40% at the high end of our longstanding targeted range of 30% to 40%, reflecting working capital investment are typically strong, first quarter stock repurchases and increased acquisition activity.

We also monitor debt to EBITDA and ended the quarter with debt at 1.9 times our trailing 12 months adjusted EBITDA. We access 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 11% to 14% per year.

For the three-year period that will end on December 31, 2017, we have so far generated compound annual TSR of 14% per year, and that performance currently places us within the top 29% of the S&P 500. Our guidance for 2017 is unchanged. Full year sales are anticipated to be 3.95 billion to 4.05 billion, up 5% to 8% versus 2016.

We expect mid-single digit volume growth from strength in Automotive, Bedding, Adjustable Bed, Work Furniture and Geo Components. Raw material-related price increases should also add to sales growth. The sales impact from divestitures completed during 2016 should be offset by acquisitions.

We expect full year earnings per share of $2.55 to $2.75 versus adjusted EPS of $2.49 in 2016. This guidance assumes that the benefit from higher volume will be partially offset by the pricing lag we experienced in recovering higher raw material costs, most of which occurred in the first quarter.

Based upon this guidance range, we anticipate a 2017 EBIT margin between 12.7% and 13.3%. As previously mentioned, operating cash flow should exceed 450 million in 2017 with both working capital investments supporting sales growth and inflation expected to be a use of cash.

Capital expenditures should approximate 150 million and dividend should require about 185 million of cash for the year. Our top priorities for use of cash are organic growth, dividends and strategic acquisitions.

After funding these priorities, if there is still cash available, we generally intend to repurchase stock rather than repay debt early or stockpile cash. We have a standing authorization from the Board to repurchase up to 10 million shares each year. However, no specific repurchase commitment or timetable has been established.

With those comments, I’ll now turn the call back over to Dave DeSonier..

That concludes our prepared remarks. We thank you for your attention and we will be glad to answer your questions. In order to allow everyone an opportunity to participate, we request that you ask only one question and then yield to the next participant.

If you have additional questions, you are welcome to reenter the queue and we will answer those questions as well. Rob, we are ready to begin the Q&A..

Thank you. [Operator Instructions]. Our first question comes from the line of Robert Majek with CJS. Please go ahead with your question..

Good morning..

Hi, Robert..

Given the recent steel price increases over the past few months which should prove accretive to margins and earnings for the year and perhaps incrementally positive to guidance, which has been left unchanged.

It is just conservatism or are there other offsetting factors we should be thinking about?.

Robert, you need to bear in mind that we do have a lag. When costs go up, it typically takes us a quarter or so to have our pricing adjusted in order to recover the increase in costs. So that’s part of the consideration.

But the sales growth we factored in and the early kind of start to the year impact from steel was about what we would have anticipated that it would have been. So we think everything has been appropriately allowed for..

Thank you. And just one quick follow up from me. Pretty solid growth in automotive.

Can you just kind of help us understand the drivers there and perhaps your view on the growth rate going forward given what some see as a potential plateau in industry auto sales?.

Sure. This is Mitch Dolloff. We continue to be very optimistic about our opportunities in automotive. We have said that we expect to grow that business 1,000 points stronger than the market overall. And remember this is truly a global business for us.

So while we have significant operations in North America, we also have operations throughout Europe and the developed markets in Asia. So we really look at this as what the total market is going to do. So for our major markets that growth is estimated to be about 2% for 2017.

So we feel good about our ability to continue to deliver the double-digit kind of growth that we have been. It’s really based on the strength of our products, the strength of our relationships from a technology standpoint with our customers, meaning our engagement with them early in programs.

And we have good visibility of those programs because we typically win them a year or two ahead of production. So we remain optimistic about that business..

Thank you. I’ll hop back into queue..

Our next question comes from the line of Budd Bugatch with Raymond James. Please proceed with your question..

Good morning, everybody. This is Bobby filling in for Budd. Thank you for taking my questions and congrats on a good start to the year..

Thank you, Bobby..

Are you guys hearing for your customers that the pickup in demand within Residential that you experienced in March, is it sticking or was it more just a function of the timing shift and tax refunds?.

Hi, Bobby. This is Perry. We did see a pretty good pickup after kind of a sluggish start at the beginning of the year. March was a good month for us. A lot of you can attribute to the tax refunds which by the way were a little bit delayed from the prior year. Right now in Bedding, the shipments in April are back under last year about mid-single digits.

April and October historically over the last few years are a couple of the weaker months. We are seeing some positive developments though with regards to some of those introductions we saw early in the year at Las Vegas.

Those are beginning to filter into the market now with four samples being placed in readiness for the upcoming Memorial selling which typically is the kickoff to our busier season on the Bedding side..

Okay.

And the industry should still expect at least from a Bedding perspective a pretty big increase in advertising at least from how we understand it starting at Memorial Day? Do you believe that’s still the case?.

We do. Given all the turmoil in the industry over the last three months, we do expect that promotion and advertising will ramp up pretty heavily. I would think it would be heavier this year than in past years – for the last years. Remains to be seen yet. And that generally bodes well for the industry overall and for us..

Okay. And I’m going to try to sneak one more in just on the slight change in the EBIT margin guidance for the full year. I think the midpoint priorly was 13.2 and now it’s around 13.

Is it just more of a function of the acquisitions and some recent price movement in steel?.

It’s really just rounding, Bobby. I wouldn’t attribute too much to it. We before would have considered 13-ish to be kind of midpoint of guidance and that’s about where we still are right now. So that full range, it could be a little higher than that, it could be a little lower. The steel headwinds obviously is an issue in the first quarter.

It’s unpredictable what will happen in the steel market. So if costs were to continue to increase, we would potentially have to deal with an additional lag at some point and we need to allow for that latitude and the range that we have out there..

Okay. I appreciate all the detail. I’ll jump back in the queue. Best of luck going forward..

Our next question comes from the line of Keith Hughes with SunTrust. Please proceed with your questions..

Thank you. Questions on overall margin. You know what you said now is pricing of volume.

Will margins in the second quarter still be down year-over-year or would be able to sneak them up as the prices come in?.

No. Keith, they’ll probably still be down. If you remember in the second quarter last year we were still pretty strong with a bit of the sort of lag tailwind that related to the deflation that had been going on last year in the second quarter. Our adjusted margin was almost 14%.

So while we’d expect our margins to increase sequentially from 12.1 in the first quarter, we would not anticipate that they would increase enough to surpass last year’s second quarter margins..

Keith, this is Matt. I’d just add that you should expect which I know you’re modeling to do so that sales meanwhile will be picking up we anticipate further as the year goes along. In the second quarter certainly being part of that positive trend..

Part of that’s going to be the price increases, can you give us some sort of idea on how much price increases are going up in some of your bigger industries that matches furniture, automotive, things like that?.

Keith, it’s Karl. It varies by industry. And the timing varies by closeness to the raw materials. So in the industrial we would have seen some price increases that were implemented and passed through in 1Q. Residential markets are seeing more of that in second Q. The Bedding increases range from 5% to 10%.

That’s probably a good number on Home Furniture, especially in Asia. The industrial markets would be experiencing a similar trend. And to Susan’s earlier point, we don’t know what’s going to happen to steel going forward. Steel’s inherently choppy. It’s almost impossible to make an intelligent forecast as to what steel will do.

As an example, we sit here late April as you know scrap in May won’t sell until middle of May. We don’t know what scrap’s going to do. We think it might pull up in the $10 range. But we just frankly don’t know. But we have been successful at passing through the price increases as our people typically are..

Okay.

And final question, I’m a little surprised that the weakness in the furniture sales and Fashion Bed and giving comments of anything – what happened in the quarter there?.

This is Mitch. Generally, we saw weakness at retail. This is simple as that..

Okay. Thank you..

Thank you. [Operator Instructions]. The next question is from the line of Dillard Watt with Stifel. Please proceed with your question..

Thanks. Good morning..

Hi, Dillard..

I wanted to talk a little bit about adjustables. I think that pace of growth accelerated a little bit from the fourth quarter to the first and I admittedly I don’t have the comparisons from the two prior years in front of me.

So anything going on there that you’re seeing a pickup or is it just some of the year-over-year issues?.

No. I think we continue to win new programs. Some major new programs are launched early in the first quarter. In fact, earlier they were expected. So that’s really what helped drive some of the strong growth in the first quarter and has us well positioned for the balance of the year..

Okay, great. And then we’re still seeing the meaningful outperformance in ComfortCore relative to the rest of the spring business. Pretty well known the content gains you’re getting there.

Does that continue through the year in terms of that wide of a spread or how should we think about the underlying trends in the Bedding business versus what you’re doing with Nano and some of the other ComfortCore products?.

Hi, Dillard. This is Perry. We would expect to continue to see growth in ComfortCore as we go through the year. As those programs launch and as programs ramp up, we’ll see it at least through the second and third quarter I believe.

And part of that, you’re right, is the fact not only in terms of pieces that we believe that there’s a continuing transition from open coil to ComfortCore type products but we also anticipate seeing those content gains relative to some of the innovation we’ve had surrounding Quantum Edge products that have built-in edge support that replace what formally had been some foam content..

Great. Thanks.

And then finally still on the Bedding, I don’t know the best way to ask the question here but just kind of any thoughts you may have on how temporary mattress may have changed things for you guys, and if you’ve seen anything of an impact I guess through April here and if you expect anything differently to play out through the second part of the year?.

Things have still yet to settle out. There’s a lot of commotion going on with re-flooring of product, changes to lines. We’re working to establish those forecast going forward but we believe overall that we’re in a good position.

We obviously are a major supplier to the industry and there are – when you step on one balloon sometimes another one pops up. But we think overall that we’re well positioned to take advantage of any growth that would be seen in the marketplace. And plus with the innovation I talked about earlier, I think our content gains have us in a good spot..

Dillard, this is Karl. To Bobby’s earlier question, the fact that we do anticipate a significant increased investment in advertising is historically good for us as the consumer becomes more aware of that bedding innovation. So we remain very bullish on the remainder of the year, to Perry’s point kickoff by Memorial Day. The floors are set.

They’re ready to go. We just need the holiday to get here..

Great. Thank you, guys, and good luck..

Thank you..

[Operator Instructions]. Our next question is a follow up from the line of Robert Majek with CJS. Please go ahead..

Thank you. Just one more from me. You previously mentioned 25% to 35% incremental margins on volume growth while utilizing spare capacity.

How much more room is there for revenue growth at these incremental margins until we kind of hit full capacity?.

Hi, Robert. Yes, it’s a good question and you might imagine a number that’s difficult to pin down really precisely. We have grown organically a lot over the last call it five, six years. We used to have a number we would share that was pretty high and today that number is far lower than it used to be.

Our best guess is it’s under 100 million and it is widely variable by business. There are businesses, as you know, that have grown more and we’re investing today to support all of the growth that they’re getting out as an example of that.

But there’s others too in bedding and parts of bedding where we’re growing, we’re putting investments in place to support that. So many businesses do still have spare capacity available when volume does come back into those places. We see a nice benefit from incremental margins more broadly across the company.

You’re going to see relatively lower incrementals because of the costs that are being invested to support the growth. It’s still good but not probably as quite that high as a range..

Thank you..

Thank you. At this time, I’ll turn the floor back to management for closing remarks..

We appreciate your time and your attention and we’ll talk to you again next quarter. Thank you..

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation..