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Edited Transcript of LEG earnings conference call or presentation 28-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Leggett & Platt Inc Earnings Call

CARTHAGE May 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Leggett & Platt Inc earnings conference call or presentation Friday, April 28, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David M. DeSonier

Leggett & Platt, Incorporated - SVP of Strategy & IR

* J. Mitchell Dolloff

Leggett & Platt, Incorporated - EVP and President of Specialized Products & Furniture Products

* Karl G. Glassman

Leggett & Platt, Incorporated - CEO, President and Director

* Matthew C. Flanigan

Leggett & Platt, Incorporated - CFO, EVP and Director

* Perry E. Davis

Leggett & Platt, Incorporated - EVP and President of Residential Products & Industrial Products

* Susan R. McCoy

Leggett & Platt, Incorporated - VP of IR

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Conference Call Participants

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* Bobby Griffin

Raymond James - Analyst

* Dillard Watt

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Keith Brian Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Robert S. Majek

CJS Securities, Inc. - Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Leggett & Platt First Quarter 2017 Earnings Call. (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.

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David M. DeSonier, Leggett & Platt, Incorporated - SVP of Strategy & IR [2]

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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 Dollof, who is EVP and President of the Furniture Products and Specialized Products segments; Susan McCoy, our VP of Investor Relations; and the Wendy Watson, Director of Investor Relations. The agenda for the call this morning as 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 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, 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.

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Karl G. Glassman, Leggett & Platt, Incorporated - CEO, President and Director [3]

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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 of 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 cost began to inflate in late 2016, and we have implemented price increases to recover the higher cost. 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 2 acquisitions during the quarter that should add combined annual revenue of approximately $50 million. The first is a distributor and installer of geosynthetic products and expands the geographic scope and capabilities of our Geo Components business. The second is a manufacturer 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 moved 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 Products 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 Comfort Core 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 Products 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 cost and lower volume in both Rod and Wire.

In the Furniture Products 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, costs associated with new program launches and the nonreoccurrence of a prior year gain from a building sale of $2 million.

In the Specialized Products 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 costs 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.

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Matthew C. Flanigan, Leggett & Platt, Incorporated - CFO, EVP and Director [4]

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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 receivables from strengthening sales late in the quarter and the inflation impact of both -- 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 1 of the higher yields among the 51 companies that comprise the S&P 500's 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 3 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 long-standing targeted range of 30% to 40%, reflecting working capital investment, our typically strong first quarter stock repurchases and increased acquisition activity. We also monitor debt-to-EBITDA and ended the quarter with debt at 1.9x our trailing 12 months adjusted EBITDA.

We assess our overall performance by comparing our total shareholder return to that of peer companies on a rolling 3-year basis. Our target is to achieve TSR in the top 1/3 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 3-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 experience 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 dividends 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 stock pile 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.

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David M. DeSonier, Leggett & Platt, Incorporated - SVP of Strategy & IR [5]

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That concludes our prepared remarks. We thank you for your attention, and we will be glad to answer your questions. (Operator Instructions)

Rob, we're ready to begin the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Robert Majek with CJS.

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Robert S. Majek, CJS Securities, Inc. - Research Analyst [2]

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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. Is it just conservatism or are there other offsetting factors we should be thinking about?

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Susan R. McCoy, Leggett & Platt, Incorporated - VP of IR [3]

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

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Robert S. Majek, CJS Securities, Inc. - Research Analyst [4]

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And just 1 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?

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J. Mitchell Dolloff, Leggett & Platt, Incorporated - EVP and President of Specialized Products & Furniture Products [5]

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Sure. This is Mitch Dolloff. Yes, I mean, we continue to be very optimistic about our opportunities in Automotive. We've said that we expect to grow that business 1,000 point 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 at 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 that 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 that 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.

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Operator [6]

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

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Bobby Griffin, Raymond James - Analyst [7]

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This is Bobby filling in for Budd. I was just curious, are you guys hearing from 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?

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Perry E. Davis, Leggett & Platt, Incorporated - EVP and President of Residential Products & Industrial Products [8]

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Bobby, this is Perry. We did see a pretty good pick up after kind of a sluggish start at the beginning of the year. March was a good month for us. A lot of that 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 in to the market now with floor samples being placed in readiness for the upcoming memorial selling, which typically is the -- is kickoff to our busier season on the Bedding side.

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Bobby Griffin, Raymond James - Analyst [9]

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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. Is that -- do you believe that's still the case?

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Perry E. Davis, Leggett & Platt, Incorporated - EVP and President of Residential Products & Industrial Products [10]

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We do. Given all the turmoil in the industry over the last 3 months, it -- 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 few years. Remains to be seen yet, but -- and that generally bodes well for the industry overall and for us.

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Bobby Griffin, Raymond James - Analyst [11]

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Okay. And I'm going to try to sneak 1 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?

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Susan R. McCoy, Leggett & Platt, Incorporated - VP of IR [12]

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It's really just rounding, Bobby. I wouldn't attribute too much to it. I mean, we were -- we before would've 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 in the range that we have out there.

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Operator [13]

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Our next question comes from the line of Keith Hughes with SunTrust.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [14]

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Questions on overall margin. Given where you sit now with pricing and volume, will margins in the second quarter still be down year-over-year? Or we'd be able to sneak them up as prices come in?

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Susan R. McCoy, Leggett & Platt, Incorporated - VP of IR [15]

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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 second quarter, we would not anticipate that they would increase enough to surpass last year's second quarter margin.

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Matthew C. Flanigan, Leggett & Platt, Incorporated - CFO, EVP and Director [16]

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Yes, 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 and the second quarter certainly being part of that positive trend.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [17]

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And the -- on the -- part of that is going to be price increases, can you give us some sort of idea on how much price increases are going up in the -- some of your bigger industries, Mattresses, Furniture, Automotive, things like that?

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Karl G. Glassman, Leggett & Platt, Incorporated - CEO, President and Director [18]

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Well, it -- Keith, it's Karl. It varies by industry, and the timing varies by closeness to the raw material. So in Industrial, we would've seen some price increases that were implemented and passed through in 1Q. Residential markets are seeing more of that in 2Q. The Bedding increases range from 5% to 10%, that's probably a good number on Home Furnitures, especially in Asia. The steel industrial markets would be experiencing similar trend. And to Susan's earlier point, we don't know what's going to happen to steel going forward. That steel is 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 settle until middle of May. We don't know what scrap is 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.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [19]

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Okay. And the final question, a little surprised at the weakness in the Furniture sales, in Fashion Bed. Can you give any comments about anything? And what happened in the quarter there?

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J. Mitchell Dolloff, Leggett & Platt, Incorporated - EVP and President of Specialized Products & Furniture Products [20]

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I think, just -- this is Mitch, sorry. Just generally we saw weakness at retail. I mean, that's as simple as that.

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Operator [21]

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Our next -- (Operator Instructions) The next question is from the line of Dillard Watt with Stifel.

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Dillard Watt, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [22]

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Wanted to talk a little bit about Adjustables. I think that, that pace of growth accelerated a little bit from the fourth quarter to the first. And I -- admittedly, I don't have that -- the comparisons from the 2 prior years in front of me. So anything going on there? That you're seeing a pick up? Or is it just some of the year-over-year issues?

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J. Mitchell Dolloff, Leggett & Platt, Incorporated - EVP and President of Specialized Products & Furniture Products [23]

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No. I think we continue to win new programs. Some major new programs are launching -- launched early in the first quarter. In fact, earlier than we 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.

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Dillard Watt, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [24]

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Okay. And then we're still seeing the meaningful outperformance in Comfort Core 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 Comfort Core products?

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Perry E. Davis, Leggett & Platt, Incorporated - EVP and President of Residential Products & Industrial Products [25]

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Dillard, this is Perry. The -- we would expect to continue to see growth in Comfort Core 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 that not only in terms of pieces do we believe that there's a continuing transition from open coil to a Comfort Core type of 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 formerly had been some foam content.

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Dillard Watt, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [26]

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Great. 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 TempurMattress Firm -- may have changed things for you guys. And if you've seen anything, sort of an impact, I guess, through April here? And if you expect anything differently to play out through the second part of the year?

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Perry E. Davis, Leggett & Platt, Incorporated - EVP and President of Residential Products & Industrial Products [27]

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Yes. We -- things have still yet to settle out. There's a lot of commotion going on with reflooring a product, changes to lines. We're working to establish those forecasts 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 1 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.

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Karl G. Glassman, Leggett & Platt, Incorporated - CEO, President and Director [28]

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And Dillard, this is Karl. That -- to Bobby's earlier question, the fact that we do anticipate a significant increase in 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, kicked off by Memorial Day, the floors are set. They're ready to go. We just need the holiday to get here.

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Operator [29]

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(Operator Instructions) Our next question is a follow-up from the line of Robert Majek with CJS.

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Robert S. Majek, CJS Securities, Inc. - Research Analyst [30]

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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?

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Susan R. McCoy, Leggett & Platt, Incorporated - VP of IR [31]

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Robert, it's -- yes, it's a good question, and as you might imagine, a number that's difficult to pin down really precisely. We have grown organically a lot over the last, call it 5, 6 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. And 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. But 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. Still good, but not probably at quite that high of a range.

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Operator [32]

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At this time, I'll return the floor back to management for closing remarks.

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David M. DeSonier, Leggett & Platt, Incorporated - SVP of Strategy & IR [33]

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We appreciate your time and your attention, and we'll talk to you again next quarter.

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Operator [34]

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