David DeSonier - Senior Vice President, Corporate Strategy and Investor Relations David Haffner - Chairman of the Board and Chief Executive Officer Karl Glassman - President and Chief Operating Officer Matthew Flanigan - Executive Vice President and Chief Financial Officer Susan McCoy - Vice President, Investor Relations

Keith Hughes - SunTrust Robinson Humphrey Bobby Griffin - Raymond James David MacGregor - Longbow Research John Baugh - Stifel Herb Hardt - Monness Crespi Hardt Daniel Moore - CJS Securities

Greetings, and welcome to the Leggett & Platt third quarter 2015 earnings conference call. [Operator Instructions] It is now my pleasure to introduce your host, David DeSonier, Senior Vice President of Strategy and Investor Relations. Please go ahead, sir.

Good morning and thank you for taking part in Leggett & Platt's third quarter conference call. I'm Dave DeSonier. 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 Vice President and CFO; and Susan McCoy, our 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; Karl Glassman will provide segment highlights; Matt Flanigan will discuss financial details, address our outlook for the remainder of 2015 and provide some general framework for 2016; 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'll now turn the call over to Dave Haffner.

Thanks, Dave. Good morning and thank you for participating in our call. We continue to be extremely pleased with our performance this year, and again reported strong quarterly results from continuing operations. During the third quarter we achieved record levels of sales, EBIT and earnings per share. Sales from continuing operations were $1.01 billion and increased 1% over the prior year. Higher unit volume and acquisitions added 7% to year-over-year sales growth. These gains were largely offset by raw material-related price decreases and currency impact, which combine to reduce sales by 6%. We continue to benefit from the shift in bedding to Comfort Core springs, strong growth of adjustable beds and ongoing content gains and new program awards in automotive. Importantly, nearly all of our businesses again experienced volume growth in the quarter versus strong prior-year comparisons, with sales having grown 14% in the third quarter of last year. Third quarter earnings per share were a record $0.67, up 31% from the $0.51 of adjusted EPS from continuing operations reported in the third quarter last year. Earnings grew primarily from higher unit volume and pricing discipline. EBIT increased 33% when compared to last year's adjusted EBIT and EBIT margin improved to 14%, up 330 basis points over third quarter last year. We assess our overall performance by comparing our total shareholder return to that of peer companies on 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. For the three-year period that will end on December 31, 2015, we have so far generated compound annual TSR of 23% per year, which places us in the top-29% of the S&P 500. I'll now turn the call over to Karl.

Thank you, Dave, and good morning. Operationally, we again performed very well there in the third quarter. Margins improved in all four segments and unit volumes grew in most of our major businesses. However, commodity deflation and currency impact continue to mask some of the sales growth. In the Residential Furnishings segment, third quarter total sales decreased 1%. Same location sales decreased 2% with 5% unit volume growth more than offset by raw material-related price decreases and currency impact. Sales trends for the major businesses and product categories, excluding acquisitions, deflation and currency, were as follows: U.S. Spring component dollar sales increased 7%. Innerspring unit volume grew 4%, with Comfort Core up 37% during the quarter. Box spring unit volume increased 3%. International Spring sales grew 6%. Furniture component sales increased 8%, with sales in the seating and sofa sleeper businesses up 15% and motion hardware unit volume up 6%. Sales also increased in Fabric Converting and Geo Components, while volume was down marginally in Carpet Cushion. Segment EBIT and EBIT margin increased in the quarter, due to the non-reoccurrence of last year's foam litigation expense. Excluding this prior year charge, EBIT improved slightly with the benefit from higher unit volume largely offset by FIFO impact and several smaller factors. EBIT margin in the segment is also affected by higher adjustable bed pass-through sales and lower-than-segment average margins. In the Commercial Product segment, third quarter total sales increased 26%. Same-location sales grew 15%, primarily from continued strong performance in our adjustable bed and fashion bed business. Adjustable bed unit volume increased 55% during the quarter. Work Furniture same-location sales were down slightly in the third quarter, primarily from currency impact. Unit volume in our North American Work Furniture business was up marginally. In early March, we acquired a European private-label manufacturer of high-end upholstered furniture for office, commercial and other settings. This business is complementary to our North American private-label operation and allows us to support our Work Furniture customers, as they expand globally. This acquisition added 11% to the segment sales growth during the third quarter. The commercial product segment EBIT and EBIT margin increased in the third quarter, primarily due to higher sales and improved operation efficiency. In the Industrial Materials segment, third quarter sales decreased 14%, largely from steel-related price reductions. Unit volume decreased slightly with growth in Drawn Wire more than offset by lower trade sales from our rod mill. EBIT and EBIT margin increased during the quarter, primarily due to cost reductions. In the Specialized Product segment, third quarter sales increased 5% with an approximate 10% volume improvement, partially offset by currency impact. Excluding currency changes, automotive sales increased 13%, aerospace grew 3%, machinery sales were up 8% and CVP grew 7%. The segment's EBIT and EBIT margin also improved primarily reflecting higher unit volume in the non-reoccurrence of last year's litigation accrual. I'll now turn the call over to Matt.

Thanks, Karl, and good morning, everyone. Operating cash flow in the third quarter was $130 million. For the first nine months of 2015, operating cash flow was $257 million, an increase of $41 million or 19% of the prior year, primarily due to higher earnings. Adjusted working capital as a percentage of sales was 9.4% at the end of the third quarter. Excluding last year's foam litigation accruals, some of which are still on our balance sheet and included in current liabilities, working capital was a very low 10.5% of annualized sales. In August, we increased the quarterly dividend to $0.32 per share and 2015 marks our 44 consecutive annual dividend increase at a compound annual growth rate of 13%. At yesterday's closing price of $44.64, our current yield is 2.9%. We repurchased 900,000 shares of our stock in the third quarter at an average price of $45.61 and issued 200,000 shares, largely for employee benefit plans and option exercises. 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 at 36%, comfortably within our long-standing targeted range of 30% to 40%. We also monitor debt-to-EBITDA, and at the end of the third quarter our debt was 1.7x our trailing 12-months adjusted EBITDA. Given our strong third quarter results, we are raising our full year 2015 EPS guidance and now anticipate record earnings from continuing operations of $2.15 to $2.25 per share. Our prior EPS range was $2 to $2.15. With ongoing raw material-related price deflation and currency impact, we are lowering sales guidance to a range $3.92 billion to $3.98 billion. This revised sales range represents a 4% to 5% increase over 2014 and includes an approximate 5% negative impact from deflation and currency. Based upon this guidance, we now anticipate a full year EBIT margin between 11.9% and 12.3%, which would be our highest level since 1999. We expect operating cash flow to exceed $375 million in 2015. Dividend should require about $170 million of cash and capital expenditures should approximate $110 million for the year. As has been our practice, after funding dividends and capital expenditures, remaining cash flow will be prioritized towards competitively advantaged acquisitions. Potential acquisitions must meet stringent, strategic and financial criteria. Should no acquisitions come to fruition and if excess cash flow is available, we have a standing authorization from the Board to repurchase up to 10 million shares each year. No specific repurchase commitment or timetable has been established. However, we currently expect to repurchase about 4 million shares in 2015 and issue approximately 2.2 million shares, primarily for employee benefit plans and option exercises. Regarding 2016's outlook, sales growth excluding possible acquisitions or divestitures is expected to be in the mid-single digits next year. We anticipate continued strong unit volume growth in many of our product categories, but this will likely be partially offset by commodity related price deflation, since steel prices have continued to decline throughout 2015. Full year EBIT margin is expected to be roughly in line with 2015, as the margin benefit from higher unit volume next year is likely to be offset by the non-recurrence of the 2015 pricing lag. This framework assumes that commodity prices will stabilize near current levels. As is our typical practice, we will issue formal 2016 sales and EPS guidance, when we announce our fourth quarter results on February 1. With those comments, I'll now turn the call back over to Dave Haffner.

Thanks, Matt. Before I turn the call back over to Dave DeSonier for questions-and-answers, and because this would be my last conference call, I'd like to make a few personal comments. I want to express my appreciation to all of the analysts, portfolio managers, external shareholders and other interested parties for your efforts to best understand Leggett and Platt and its various business units. It's a great company, and is in the best shape it's been in for many years. To our customers, I am forever grateful for the business with which you favor us. Without you, we would have no mission. To our vendors, I'd like to thank you for the long lasting commitment and support that you've provided to us. And to our employee partners, both past and present, I want to sincerely thank all of you for everything you've done to make Leggett & Platt the enterprise we all care so much about. It's been an honor to be your coworker and your leader. I will miss you. Thanks to all for participating in the discussion today. And 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. Kevin, we are ready to begin the Q&A.

[Operator Instructions] Our first question today is coming from Keith Hughes from SunTrust Robinson Humphrey.

The question I had was on automotive, another good quarter from automotive, and the problems in China and things of that nature. Could you just sort of state what your exposure there and what's your outlook for the automotive market is in the near term?

Our exposure to automotive in China and Greater Asia is certainly is broad based. We have large shares. There is a lot of productive capacity that exists in China for components that are then shipped to North America and to Europe. But we remain very, very bullish on automotive in general and Automotive Asia, that the current IHS expectation is that production in China will grow 1.3% this year and 4% next. Global major market growth for next year is forecasted to be 2.8%, and really if you run it out over the next three to four years, it aggregates to an average of 3%. So with our position from a market perspective, our ability to sell our componentry into other applications in the vehicle and our continued content gains in seating, we feel very, very strong. And as we said, units were up 13% in the quarter and we expect that to continue.

And what is your percentage exposure in China for that domestic market of your automotive?

I don't know off the top of my head. It doesn't vary that much in China as compared to the other markets. I just don't know.

Our next question is coming from Budd Bugatch from Raymond James.

This is Bobby actually filling in for Budd. And I guess, first off, Dave congratulations on your strong success and your tenure there. It's been great getting to work with you and more importantly getting to know you over the last 2.5 years here that I've been with Budd. And then my question really is just kind of more of a high level question. We've heard some commentary from other companies this earning season about industry growth and kind of demand taking a pause in September and October. I mean, I was just curious when you look at your end markets today versus maybe how you view them six months ago, what's kind of change and what's kind of your outlook on end-market demand?

Bobby, if you look at it at a macro level that from a unit demand perspective it hasn't changed much. We knew that we were up against some very, very difficult comps in the back half of this year. That continues. We continue to be bullish. Certainly, we've had some impact from deflationary perspective, but from a unit perspective, we really feel good about our share in the market and the way the markets are positioned. The consumer continues to be pretty confident. The confidence statistics are a little choppy. Housing same thing, you know that we continue to see housing growth. Again, month to month might be a little choppy, but the trends are positive in both ways. So we feel pretty darn good, as evidenced by the commentary from Matt on the kind of the first glance at 2016. We're forecasting 5%-ish unit growth. So things are good.

And maybe I could sneak one more. And Karl, can you give us a little detail on the innerspring breakout as you typically do on a monthly cadence?

Again, it softened a little bit purely from a comp perspective, but in July units were up 11%, August 3%, September down about 1%. And again, September of last year was a very, very strong month, if you remember. So from a ISPA reporting perspective, they have not issued the report for September. I suspect that they will after all the public companies release at the end of next week. Their August number was, I believe units, was flattish and mattresses is up three-tenth of a percent, so we exceeded their summary of market. We expect to continue to do so in the future.

Our next question today is coming from David MacGregor from Longbow Research.

Congratulations on good quarter, and David, congratulations to you on your retirement. It was pleasure working with over the years. You're leaving the company in great shape. I guess a few questions. Let me on ask my one and get back in the queue, I guess. But you talked, at least some preliminary terms about 2016 and mid-single digit growth. I guess clarification. Does that mid single-digits include the FX and deflation? And then secondly, I guess just when do we anniversary easier compares with respect to the deflation in currency, in which quarter of '16?

David, that's a forecast of 5% unit growth. From a currency perspective, we'll anniversary most of that by the end of this year. From a deflationary perspective, we will not anniversary it in calendar '16. And you know the steel markets very, very well. Scrap rated off in October. We expect that there will be some selling price deflation in the remainder the fourth quarter and from a component perspective into the first quarter of next year. So from a comp perspective, we'll be dealing with it virtually all of next year.

Our next question today is coming from John Baugh from Stifel.

My first question pertains to adjustables. When do we start lapping some of the program gains there, or maybe asking it in a different way, any kind of sense of where comps, if there were such a thing, on adjustables are and where you expect them to go over the next four or some quarters?

We have anniversaried the pick up of those programs. Interestingly enough, we actually did that July 1, so to experience that strong 55% unit growth in the third quarter is notable. We believe based on industry statistics, as you'll remember that ISPA published adjustable bed information for last year and forecasted the industry or indicated the industry was growing just over 30%. We expect that growth going forward. And we expect with our market leading position and our innovation that we'll continue to lead that market.

And on that product line, I understand the pass-through, so the residential that dilutes margin. But when we think about the overall margin to that consolidated company, is that a trade down in line with the average trade up?

It would be just slightly aggregate everything together, just slightly below the corporate average. It is very, very good business.

And then my last question, quickly just elaborate a little bit. I understand the price lag, but maybe just talk us through the quarters this year and the benefits this year and kind of how that plays out into '16?

Think in terms of about a 90-day lag. So as steel has continued to deflate through the year, really started in the fourth quarter of '14, that there is at the rod and wire level, there is a shorter than 90-day lag. At the component level it averages about 90 days. So based on what we know today and forecasting steel pricing is a guess at this point, but we expect that some time in first quarter of next year that everything will levelize. I keep thinking that steel can't get any further deeper and scrap cost can't fall anymore, and you heard what I said about October deflation. But at some point, you've read a lot of information out of China. Even the Chinese admit that they're not making money in the steel industry. It's a tough business right now. If it wasn't for our connectivity to value-added products, it would be challenging for us. So it will all true-up, we think sometime in the first or second quarter of next year, John, but I just frankly don't know.

So does that mean to be clear, we have tailwinds still from this event Q1, Q2, but then we face kind of a year-over-year headwind in the back half of the year? Is that a right way to think about it?

If pricing stabilizes in the fourth quarter, we will actually kind of rectify to a means sometime at the end of the first quarter of next year, but again, I don't know that time.

Our next question is coming from Herb Hardt from Monness Crespi Hardt.

David, I'll echo the comments of the others, and thank you for all the great work and good luck on the next venture. My question has to do with operating rates. If you could give us some sense of either the company as a whole or by segment, what level of capacity, because with no acquisitions 5% unit volume that should totally get close to maximum capability?

It varies, as you know, by segment. If we aggregate everything together, the way that we currently measure capacity utilization, which is based on a seven-day week, 24-hour day, which probably isn't typical to most, were about 65%, where probably 80% is at max. So in every quarter in the last five quarters, our utilization rates have increased in every segment. They have increased most probably in commercial as we picked up some volume, but we're underutilized in commercials, particularly Work Furniture, but the trends are probably more positive there than any place else. And then we have to start to separate the segments and that we're probably fully utilized in bedding components right now. If you think in terms of the investment that we've made in Comfort Core, but we're underutilized in some of the open coil products, because there is switch out. We don't expect to be utilized in those open core. So it's variable. The trend is positive in all the segments. I don't feel a significant need to add capacity in most of our business units with the exception of automotive, where we're dealing with significant growth rate and specifically comfort core, as it relates to bedding. Adjustables, we've added a lot of capacity during the year. I think that we're in really good shape there at the end of the quarter, where now a forth facility coming online in Florida. So we feel pretty good about things, where we're positioned.

Herb, 13 of the 17 units saw meaningful improvement in their capacity utilization.

Our next question is a follow-up from Keith Hughes from SunTrust Robinson Humphrey.

Just turning back in to the adjustables. Again, fantastic numbers this quarter, particularly given you've anniversaried the big program. I guess my question is with the strong growth. Is most of that being driven by new programs, new customer wins or is that just positives from existing customers?

Today, Keith, in the third quarter it was market growth that we're selling the right people. At the same time, the category is growing significantly.

And are you seeing your price point there? I mean your dollars are well ahead of units, clearly in the numbers that you've given earlier. As we go into '16, this trend seems to be continuing. Do you think that will ever level out as some lower end items start to move up or will this price units just remain in place?

I think that we'll continue to see growth at the premium price points. The high end bedding business is very, very strong, but we'll also see some growth in adjustables at more promotional price points. That's what we've seen in calendar 2015. We think that the market is probably only 5% penetrated from an attachment rate of all mattresses produced, but there's probably a 50% attachment rate currently at the ultra premium price points. I know those producers expect that they don't grow that. But the middle price points, the promotional price points will probably never have an adjustable bed associated with them. But the high price points, we'll continue to see growth. Virtually everything mattress sold above $599 is now adjustable-friendly, giving the consumer much more choice. That's a pretty significant change in the last 24 months.

But still most of your growth currently is being at the premium end, is that correct?

Yes. At a rated growth, it would probably be highest in the middle price points.

Our next question is coming from Daniel Moore with CJS Securities.

I wanted to just kind of revisit the guidance again for '16 -- not guidance, but the initial framework. I think you said that volumes will be up mid-single digits, but again some headwind from input cost. So does that indicate more of a low-single digit kind of overall revenue or how should we think about that?

At this point, Dan, I would kind of look at the middle of our current 2015 guidance, put 5% sales growth on top of it, so we're assuming that steel levelizes. So use 5% on top of the mid-point of our guidance, that's the best we can do at this point.

That's good. I wanted to make sure that the answer to the prior question, I wasn't reading incorrectly. That's fine. I wanted to turn the attention to cash flow a little bit. I think you said at least $375 million cash from ops and that includes some significant litigation, so you're probably approaching $425 million, $450 million in sort of adjusted. As long as you're feeling generous and giving outlooks for '16, maybe talk a little bit about CapEx and working capital. Is that a good run rate for cash generation when we think about '16?

I think, yes, the answer to that question is yes, so something north of $400 million. We would certainly anticipate to be embodied in the guidance and the framework we just gave for 2016. In terms of capital spending, something maybe around a $120 million might be a good estimate, but again, we'll freshen that up as we get to February 1 when we provide our full year best guess at that point in time. And in terms of working capital trends, you shouldn't see anything any differently than what has been a very good management of those categories. I will mention one thing that litigation accrual, we've talked a lot about. At the end of last year, we had about $90 million approximately on our balance sheet. By the end of this year, we'll have about $40 million, and they'll probably still be on our balance sheet. So the timing of when that rolls off as a current liability is just a notable phenomenon, if you will, in our cash flow, both this year and next year. Said another way, we expect the $40 million, that again is approximately estimated to be on our balance sheet at the end of the year will be paid out in cash during the first half of 2016.

And then just longer term, the margin growth and expansion we've seen, really exceptional over the last couple of years, 14% margin this quarter and up to 12% for the full year. I know we're flat next year. We've got some tough headwinds. Just help us think about the operating leverage and where you think margins can go over the mid-term, maybe the next two to three years?

With the current businesses that we own, 12.5% is probably a good number. If we execute on a divestitures that we have queued up right now, we should pick up about 50 basis points. So we're sniffing 13%, and we feel really pretty good about that, so I don't think we need to give you guidance on February 1. It seems like we just did that, but yes, that's our math, 12% to 12.5% on what we own today.

Give them an inch, they will take a mile. What can I tell you?

You're never going to get a thing if you don't ask for it, Dan.

Our next question today is coming from David MacGregor from Longbow Research.

You've got pretty strong cash flow characteristics. You talked earlier about the acquisition queue and your stringent criteria. I'm just wondering if there's anything that looks like it may soon clear that, if there's anything imminent. And how 2016 might shape up as an acquisition growth year?

We expect that we will close on some relatively small, but important acquisitions in the coming months. In terms of sizeable, there is nothing in the queue. But I don't at all want to telegraph that -- we're always going through analysis. We feel really good about the acquisition pipeline right now, but there is nothing really in line.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments. End of Q&A

We appreciate your attention and we'll talk to you again, I guess, February 1, February 2. Thank you.

That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for participation today.