Leggett & Platt, Incorporated (LEG) Q3 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the Leggett & Platt Third Quarter 2014 Conference Call. [Operator Instructions] As a reminder, this conference being recorded. It is now my pleasure to introduce your host, Mr. David DeSonier, Senior Vice President, Strategy and Investor Relations. Thank you. You may now begin.

Good morning and thank you for taking part in Leggett & Platt's Third Quarter Conference Call. With me this morning 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 Vice President 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 Flanagan will discuss financial details and address our outlook for the remainder of the year. And finally, the group will answer any questions that you have. Jack Crusa, who is Senior Vice President of the company and President of the Specialized Products segment, is also joining us this morning to participate in the Q&A. This conference is being recorded for Leggett & Platt and is copyrighted material. This call may not be transcribed, recorded or broadcast without our expressed permission. A replay is available from the IR portion of Leggett's website. We posted to 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.

Good morning, and thank you for participating in our call. For the last 2 quarters, we've seen strong broad-based sales growth across the bulk of the company. Sales growth within our continuing operations has improved as the year has progressed, from 2% in the first quarter to 9% in the second quarter to 14% in the third quarter. Importantly, nearly all of our key businesses are seeing positive sales momentum. Same-location sales from continuing operations grew 9% during the third quarter with strength in all of our residential businesses, automotive and machinery, partially offset by lower volume in Commercial Vehicle Products. On August 5, the Board of Directors authorized management to proceed with activities necessary to divest the Store Fixtures business or portions of that business. All of the criteria for discontinued operations have been met and we are now classifying that business as a discontinued operation. Third quarter adjusted earnings per share from continuing operations were a record $0.51, up 31% versus the adjusted $0.39 we earned in the prior year. This increase is primarily due to sales growth, a lower adjusted tax rate and reduced share count. From a reported GAAP earnings perspective, as announced on August 19, we recognized a $39.8 million pretax or $0.17 per share accrual for the settlement of the U.S. direct purchaser class portion of the polyurethane foam antitrust claims filed against the company and numerous other defendants. This charge reduced third quarter earnings from continuing operations by $0.14 per share and earnings from discontinued operations by $0.03 per share. In the third quarter last year, earnings benefited from an acquisition-related bargain purchase gain of $0.06 per share. Third quarter adjusted EBIT increased and adjusted EBIT margin improved to 10.7%, reflecting the strong sales growth. A major component of our strategy since 2007 has been the optimization of our portfolio of businesses. This year, we are making meaningful incremental investments in our already strong businesses. Examples of this include the acquisition of the 3 Sealy spring plants that we announced on July 1, investments in machinery to support the very significant growth we're seeing in Comfort Core innersprings, planned expansions in China to support rapid growth for our automotive business and a small acquisition in the third quarter of a German-based designer of motion furniture hardware, where we also remain committed to improving or exiting businesses that consistently underperform our margin and return expectations. As we announced in July, we have engaged an investment banker to help with the possible divestiture of the Store Fixtures business and are currently reviewing proposals from prospective buyers. We assess our overall performance by comparing our total shareholder return to that of peer companies on a rolling 3-year basis, and 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 12% to 15% per year. So far, for the 3-year period that will end on December 31 of 2014, we have generated TSR of 22% per year on average, which places us above the midpoint of the S&P 500, but shy of our top third goal. I'll now turn the call over to Karl Glassman, who will provide some additional segment comments.

Thank you, Dave, and good morning. As Dave mentioned, most of our businesses performed extremely well in the third quarter. In the Residential Furnishings segment, third quarter total sales increased 19%. Same-location sales increased 11%, with each of the major business units growing. Excluding acquisitions, U.S. Spring component dollar sales increased 12%. Innerspring unit volume grew 9% with the Comfort Core premium category up 85% during the quarter. Boxspring unit volume increased 2%. Sales grew 10% in International Spring, primarily from market share gains and increased Comfort Core sales in Europe. Furniture components sales increased 7% in the third quarter. Volume in our seating and sofa sleeper businesses grew 9% and motion hardware unit volume increased 6%. Adjustable Bed units grew 76% in the quarter from a combination of new programs that were fully ramped up by the end of the quarter and strength in our historic customer programs. Sales also increased meaningfully in fabric converting, geo components and carpet underlay. Third quarter segment EBIT was negatively impacted by $32 million of the foam litigation settlement. Excluding this charge, adjusted EBIT and EBIT margin increased versus third quarter of 2013, primarily from higher sales and a $2 million insurance gain related to a facility that was impacted by Hurricane Sandy. In the Commercial Fixturing & Components segment, same-location sales increased 2% in the third quarter. With the move of Store Fixtures into discontinued operations, the segment is now comprised entirely of our work furniture business, which was formerly named Office Furniture Components. Sales grew in the quarter, although at a slower rate than it was experienced in the first half of the year, largely from timing of programs and normal industry demand variation. EBIT was essentially flat and EBIT margin decreased slightly. Segment EBIT margin continues to be below our target level due to a number of factors, including underutilized capacity and operational challenges with a Chinese joint venture. With industry demands still depressed from lower business spending and last year's added contraction in government spending, our plants continue to operate well below of optimal utilization levels. While our cost reductions have been implemented over the past few years, we are working to identify more opportunities to improve efficiency. In addition, our business development activities are focused on identifying opportunities to improve our sales mix through higher-valued products. In the Industrial Materials segment, third quarter same-location sales increased 7%, primarily from higher unit volume from our rod mill and wire operations. EBIT increase and EBIT margin was essentially flat with the prior year. The dumping case, brought in early 2014 by major U.S. steel rod producers, has continued to advance through the process and final determination is set for late fourth quarter or early first quarter. Our aerospace business, which resided in the Industrial Materials segment, continues to perform very well domestically, and earnings should further benefit as we fully integrate our European acquisitions. In the Specialized Products segment, same-location sales grew 13% in the third quarter. Automotive sales increased 19% from a combination of expanded content, participation in new vehicle platforms and demand strength in each of the major geographic markets. Same-location sales increased 13% in machinery. These combined improvements were partially offset by a 9% sales decrease in Commercial Vehicle Products. The segment's EBIT and EBIT margin increased during the quarter, primarily from higher sales, partially offset by a $3 million litigation accrual. 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.

Thanks, Karl, and good morning, everyone. Operating cash flow was once again seasonally strong in the third quarter and grew to $132 million, which is up 14% versus the third quarter of last year. We ended the quarter with working capital at an unusually low 9.7% of annualized sales. The accrual from the foam litigation settlement caused a sizable increase in current liabilities. Excluding this accrual, working capital was 10.7% of annualized sales, still very notably better than our target of 15%. Based upon our current annual forecast and our normal seasonality, we expect to again generate operating cash of over $350 million for the full year. Dividends should require about $170 million of cash, and capital expenditures should approximate $100 million. As Dave mentioned, we continue to make investments to support growth in businesses and product lines, where sales are strong, and for efficiency improvement in maintenance. Our incentive plans emphasize returns on capital, which include fixed assets and working capital. This emphasis, we believe, helps ensure that we're efficiently utilizing our asset base and investing capital dollars, where the highest return potential exist. Returns should continue to improve as we expand EBIT margins while controlling invested capital. In August, we increased the quarterly dividend by $0.01 to $0.31 per share. As a result, 2014 marks our 43rd consecutive annual dividend increase at a compound annual growth rate of 13%. At yesterday's closing price of $35.40, the current yield is 3.5%, which is one of the highest among the 54 companies that comprise the S&P 500 dividend aristocrats. We repurchased 800,000 shares of our stock in the third quarter at an average price of $34.62 and issued 1.2 million shares, largely for the employee stock option exercises. Consistent with our stated priorities for the use of excess cash flow, we will prudently buy back our stock, bearing in mind our level of cash generation, other potential opportunities to strategically grow the company and the overall outlook for the general economy. 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, by year-end, we currently expect to have bought back approximately 5 million shares in 2014 and to have issued approximately 3 million shares to employee benefit plans. Accordingly, share repurchases and issuances in the fourth quarter may be relatively modest since target levels of both activities have already nearly been attained. 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 34.8%, a modest decrease versus last quarter and comfortably within our long-standing targeted range of 30% to 40%. Given our sales growth and strong year-to-date performance, we expect to again post record full year adjusted earnings per share from continuing operations. As we announced yesterday, we are raising the low-end of our prior guidance by $0.05 and now expect adjusted full year earnings per share of $1.75 to $1.85. This revised guidance includes operating results from discontinued operations, but excludes the $0.65 per share noncash impairment charge that was recognized in the second quarter and the $0.17 per share foam litigation settlement that was accrued here in the third quarter. Prior full year sales guidance has been adjusted to exclude Store Fixtures sales of approximately $185 million. Sales from continuing operations are still now expected to be $3.7 billion to $3.8 billion for the year. This represents a 6% to 9% increase versus continuing operations in 2013. This full year guidance implies fourth quarter sales from continuing operations of $871 million to $971 million, representing a range of 1% to 13% growth versus fourth quarter 2013. We expect fourth quarter earnings per share of $0.39 to $0.49 versus an adjusted $0.35 last year. With those comments, I'll now turn the call back over to Dave Haffner.

Thanks, Matt. As we look ahead to the balance up 2014 and beyond, we continue to be very encouraged by the opportunities we are seeing in many of our markets. Enhancing our portfolio of businesses by identifying opportunities to grow competitively advantaged positions while reducing our exposure to businesses that don't provide long-term strategic value remains a top priority. We believe these actions are keys to our long-term success and consistent achievement of our top third TSR goal. And with that, I'll turn the call back over to you, Dave.

That concludes our prepared remarks. We thank you for your attention and we will be glad to answer any question. In order to allow everyone an opportunity to participate, we request that you ask your one best question and then yield to the next participant. If you have additional questions please re-enter the queue and we will answer those questions as well. David, we are ready to begin the Q&A.

[Operator Instructions] Our first question is from Josh Borstein of Longbow Research.

The first, on the sales guidance, the variance is $100 million. So pretty wide considering there's essentially 2 months left in the year. What's behind that? What pieces of the business are maybe more volatile than others right now to cause the wide variance in the sales guidance?

Josh, to start with the range of the guidance, as we've said before, we basically develop our current quarter and full year forecast and then build a range around that as we see appropriate, and hopefully, we've allowed for a necessary amount of conservatism with that. You might keep in mind that in the fourth quarter of last year, we did see a little bit of acceleration so where second -- or third quarter last year grew 1.5% or so, restated for continuing ops. Fourth quarter was actually up closer to 6%, so our comps get a little bit more difficult. That speaks, at least, marginally to the lower part of the guidance range. And obviously, we've had nice momentum in several of our businesses. So we feel pretty good about, I think, the strength that we're seeing. Dave or Karl, is there anything you want to add?

The other part of Josh's question had to do with which businesses may have higher volatility and quite honestly, with the businesses that we have in the portfolio now, there isn't a significant difference among business units relative to volatility. Seasonality also has been somewhat improved with the move of Store Fixtures to discontinued operations. Karl, anything to add?

Yes. The only thing that I'd add, the Commercial Vehicle Products continues be an area that's difficult to forecast just because of the fleet nature of that, but the residential businesses, the auto is strong, continues to be strong, and we're optimistic. We admit that, that guidance is wide, but we expect to be within that range and I would expect that we would be in the midpoint or the upper end of it. But we'll see.

Okay, great. And then just a question on the adjustable base is -- grew nicely and I realize much of that comes from recent product wins, but can you also speak to the organic demand trends out there, if you're seeing any meaningful uptick in demand patterns that would lead you to believe that attachment rates are increasing?

Josh, again this is Karl. I know that you participated in the conference call last night of Select Comfort. They mentioned that their flex bed or their adjustable base program has grown significantly. I think they're pleased with their attachment rates. We have 100% of that business, so we're the beneficiary by their focus growth. We continue to see growth in both OEM manufacturer programs and retail programs. So the category very much is being positioned to the consumer by a number of manufacturers and retailers as a lifestyle product. The category grows and we expect it to continue to grow.

And the EBIT on those bases, Karl, is from what I understand maybe not as good as the statement core but getting better. Is that the right way to think about it?

Yes. Yes, that as we ramp up that volume, that it's been a challenge for us. Our people deserve a tremendous credit for getting that much product out of our facilities and our distribution infrastructure. As time passes, we'll get better at that, but the margins are below the company average, but it is very, very good business.

And I heard over -- in parts of September, there were some supply issues with some of the bases. Not sure if that was Leggett bases or not. But did you experience anything like that in September?

We're very pleased with the fact that we kept up with demand during September.

Our next question is from Budd Bugatch from Raymond James. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Comfort Core's numbers are just fabulous, Karl, and maybe put us and give us a little color on what size it is today and what's the duration of that kind of comparison and how much of it is either sell-in or sell-through, and maybe put some color around that 85% unit growth.

Budd, it's -- Comfort Core now is about 17% of our organic business. So I'm not including the 3 Sealy component plants. The Tempur Sealy, I would have to tell you what their mix of Comfort Core is, but it continues to grow as a category. We expect that it will continue to grow. It was about 11% of total sales a year or so ago, but I don't know that exact point in time but it continues to expand. And as you know, dollars go with it. We have no expectation of a slow-down. We continue to invest significant capital dollars. We believe that we own the most efficient Comfort Core productivity from a machinery perspective in the world and we're very proud of that. So as that category grows, we'll grow with it and our profitability will be enhanced. Budd Bugatch - Raymond James & Associates, Inc., Research Division: And that was just -- if I can -- one more area of that. What is the implication of that then to the open core and what's the cannibalization against the other parts of the business?

Yes, there is some cannibalization, but that's a good trade for us. And to give better answer to the question you asked earlier, if -- what's the capability of that category? Comfort Core in Europe is about 50% of total mattress cores. We expect that it may grow to that level. Certainly the growth of hybrid in this country, in Canada in particular, has helped that. So we'll take that cannibalization all day.

And Budd, this is Dave. The application of Comfort Core in furniture cushions really is -- and that has gained some momentum and that doesn't have any cannibalization for us involved. Budd Bugatch - Raymond James & Associates, Inc., Research Division: We didn't have marshalls units before in the seating?

No, we had some marshalls units in the seating, but nothing like it has happened in the last few months.

Budd, what's happening is there was marshalls in the deck of upholstered seating, but there is a growing application of the product in the cushion itself as a replacement for foam because of the durability and resilience characteristics, the lack of set that a Comfort Core provides versus foam. So that is all growth. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. I mean, I've seen marshalls inside units cushions for, well, while I was in the business so a long time but...

Not to the extent that they're in place today.

Our next question is from John Baugh of Stifel. John A. Baugh - Stifel, Nicolaus & Company, Incorporated, Research Division: I wanted to follow up on the Comfort Core. If you took 17% weighting in the top 85%, if that number is in your innerspring, which I think you put at plus 9%, it would imply a pretty significant negative number. But if there's some of that going in the furniture, then maybe not as negative. Can you help me with all that, Karl?

No, I don't have all that math, but your assumptions are correct.

And John, that's the reason -- one of the reasons I made my comment. John A. Baugh - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. Since we have Jack on the call, I'm curious on the automotive side. Just a couple of things: number one, what your visibility is, I don't know, 1 year, 2 years, 3 years out to that business. You've had sizable numbers now for several quarters. Maybe some kind of guide to what the spread might be in your rate of sales versus, say, global auto production?

Yes, John. A couple of quarters ago, Karl said that our growth rate would exceed the industry by about 10 points and still feel real good about that. And from a visibility standpoint, most of the orders that we book today don't start production for 18 to 24 months. So probably outward visibility in automotive business is as good as we got anywhere in the company. And so what we forecast out for the next 2 to 3 years, there are some years that it will be up a little and some that it will be down a little from that average, depending on when new programs start. But on average, we feel good about the -- at least the next 3 or 4 years of enduring 10 point above industry growth rates. John A. Baugh - Stifel, Nicolaus & Company, Incorporated, Research Division: Hey, Jack, are there sort of pricing contracts on that volume that you know is coming? And any comment on margin as it relates to the automotive business going forward versus where it's been?

There are contractual price adjustment obligations in most of those programs for at least for the first 2 or 3 years and we do build that into our estimates. But we have -- I think we do a really good job within that business unit of using the tools, Six Sigma, Continuous Improvement to drive cost down. We set targets every year and they've done a really good job of meeting those. So the expectation is that we'll match the pricing adjustments with cost adjustments. So relative to historical margins, we don't anticipate that -- or we do anticipate that we'll be able to maintain those historical margins in automotive going forward. John A. Baugh - Stifel, Nicolaus & Company, Incorporated, Research Division: Great. And if I could sneak one more quick one for Karl, is there any way in the adjustables to break out what are the program wins versus an organic growing number in adjustables?

John, yes, there's a way to break that out. We have that data and I'm not going to give it to you.

Our next question is from Herbert Hardt from Monness, Crespi, Hardt. Herbert A. Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division: Two questions. One is, there's been a lot of talk in the media regarding weakness in Europe, and I'm curious as to what you see?

Herb, this is Karl. We're very pleased. Our European business tends to be heavy weighted to auto. There's been significant growth in European auto year-to-date. That continues. Certainly continued in the third quarter. The second largest part of Leggett's business in Europe is bedding. Units were up 3%. Dollars up much greater than that because we're dealing with that same Comfort Core growth. So Europe, as we speak, continues to perform extremely well in both of those 2 key product categories. Herbert A. Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division: The other question is since you're not in the top third on the TSR, what is the difference in percent in terms of what's received in the bonus pool?

The TSR program, if we're at midpoint of the S&P 500, it pays out about 75% of the target payout. And then if you're below the 50 percentile, it decreases 2% for every 1% of ranking. If you're above 50%, it's geared more strongly to encourage that, but it's a 4% gain in payout for every 1% of ranking. Herb, does that make sense? Did you follow that? Herbert A. Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division: Yes. Yes. Yes, I got it.

Our next question is from Daniel Moore from CJS Securities.

I wanted to focus a little bit on cash flow. Obviously, you've done a tremendous job in terms of working capital management. You're down well below off the long-term target. Talk about as we look out to '15 and beyond, the potential to bring working capital down further as a percentage of revenue or should we expect that to maybe trend a little bit higher? And is the 15% just too conservative as we look out?

Dan, this is Matt. I'll jump in first. It's a good question. Certainly, a point of conversation we've had routinely. It will be -- first of all, we're very proud of how well the operating teams have done to drive that working capital performance to the level that you saw, again reflected here in the third quarter. And again, it's all 3 big pieces of working capital that we really pay such close attention to: Receivables, inventories and then on the liabilities side, the payables. As Store Fixtures moves to discontinued status, the working capital profile of the company will change a bit and probably -- and will require less working capital as typically been on average use in that business unit. So that will naturally also cause us to revisit, I think, that 15% target that we've had for quite some time. And again, a lot of detailed activities in each one of those asset and liability categories that are both operational in nature, as well as at the corporate level, things we're trying to do to assist our various business units. Karl, I guess, I'd hand it to you for whatever else you would add to that focus.

No, it's -- I agree with what Matt said. It continues to be an area of significant focus. I don't know how low that number can go. Mix of businesses changes that pretty significantly. Store Fixtures isn't as working capital efficient as the other businesses, so it's a high area of focus.

Yes, and I think that having a critical element in our overall bonus program has really assisted -- I know I'm repeating what was said earlier, Matt, but all of the people have given a very high priority on reining in inventories and receivables and expanding payables where practical, and we'll continue to do that. 15% maybe too conservative for the product mix that we currently have. And if so, we'll adjust that down appropriately.

That's helpful, and maybe just moving down to cash flow statement, still targeting $100 million CapEx this year. Just talk about, I know you're not looking to give guidance yet for '15, but directionally, the types of projects that you're looking out at over the next 12 months and whether that's a reasonable number for next year or you think that can move higher or lower?

Yes, I expect that number to be a larger number in 2015 because of the investment in our automotive programs, as Jack spoke to, that we're adding capacity. So that's one big area. The other is there's continued investment in Comfort Core and especially with the acquisition of those 3 Sealy component plants, we need to invest in the capability and capacity of those machines. The third area, as we continue to invest in efficiency and quality improvements in our steel mill, that facility in Sterling performs extremely well, but it is one that's pretty capital-intensive. So I don't have a number for you for 2015, but the bias is certainly up from that $100 million that we're forecasting in '14.

That's helpful. And lastly, just maybe talk a little bit about the acquisition pipeline. If there's anything -- obviously, you can't divulge until it's there, but whether it will be more active and maybe some of the areas that you're more focused on.

Dan, this is -- it's Dave. It's about what it's been as far as activity for the last few quarters, several interesting potentials that we're looking at and doing some preliminary diligence on. I know I've mentioned somewhat cryptically earlier in a previous conference call that some of those were foreign and what I had in mind, of course, was that German-based acquisition we recently did. And indeed some of the other businesses that we are looking at right now fall outside of North America. But it hasn’t gotten a lot frothier, but there are several targets in there that we're looking at as we speak.

Our next question is from Allen Zwickler from First Manhattan.

Secondly, typically there's a lag, I mean, I'm going back too long, between housing starts and your residential business. Is that part of what you're seeing now? I mean, that's somewhat of a macro question, but it would seem like over time that's been the trend, that housing starts start to pick up and then you start to see some increase in volume. Is that true to form, I mean? Or is there something else going on relative to the residential side?

Allen, this is Karl. You are correct. There is a lag. The lag is shortest in our corporate underlay business. That's why you've seen some strength there. There are some market share gains there as well. But our best guess of the lag is a year. So as those housing statistics continue to gradually improve, that theoretically and most probably, the strength in our -- first, our second quarter then third quarter this year is based on the housing numbers that we started to see improve mid-last year. So if that theory holds that this -- the continued growth that we see and the results that have been published in the last few days should bode well for 2015.

Okay. And just one other is on the auto side. Is it that you're getting more content? I'm just trying to ascertain what it is about the auto business. Is it more content? Is it just more cars? I'm just trying to understand what it is that's driving that business at this point, if you can differentiate between the 2.

Yes, Allen, this is Jack. It is a combination of content and when we would really talk about content, we would look at a lumbar support mechanism that might be a 2-way manual, which could moved to a 2-way power, which could move to a 4-way power with massage. And we see that migration in the market to higher and higher specifications. In addition, we are growing our motor, cable and actuator business very well. And the beauty of that is that in those markets, we're a fairly small player, so we see a lot of runway. So in Asia, as that market grows production, we will follow. In the more mature markets, it truly is an improving content and an expansion in some of those product categories, like motors and cables and actuators.

One thing that's also been very helpful is the marketing efforts by the OEMs to use many of the comfort features, which Leggett provides, as a standard now, in competing with their peer OEM. Where a particular maybe a 4-way lumbar in the past was an upcharge, it's now part of a standard package, which they use to compete one against the other. So that's been [indiscernible].

Our next question is from Keith Hughes from SunTrust.

Actually this is Judy Merrick on for Keith Hughes. And I was just wondering, if you -- just a follow-up on an earlier question on residential. In the innerspring units, you mentioned last quarter it was kind of uneven month to month. Can you talk a little bit more about what you saw kind of organically in that to get to your 9% kind of aside from Comfort Core? The difference in this quarter.

Yes, Judy, this is Karl. The numbers that I'm going to give you this, the sequence of sales change during the third quarter by month, but it will include Comfort Core, okay? And I do want to make clear that all of the Comfort Core statistics that we're giving you, that 85% growth is all bedding. So the commentary on furniture is aside from that growth. But in July, units were up 9%; August, up 6%; and September, up 12%. So there is the 9% in aggregate. Probably, the next natural question is what are we experiencing in October to-date? On purely organic, it looks like sales will be up about 3% in units. It will be greater than that in dollars because of the Comfort Core mix. The reason -- the first week of October was pretty darn soft, actually. And then what we experienced to be a little bit more forthcoming is we were really surprised at the strength of our bedding sales post-Labor Day. Usually, there is a little bit of a cliff the week after Labor Day. The follow-through post-Labor Day was really, really strong. And then there was a little step function back the first week of October. And then, where we've seen 5% growth rate, those next 2 weeks. So today, yes, I would expect October to come in at about 3%.

Our next question is a follow-up from Josh Borstein from Longbow Research.

Just another question on auto. Looking at the incremental margins there, if I try to back out CVP and machinery, it looks like the business already teens or better. Where do you think that goes from here?

I would just -- I don't have any reason to believe that it's going to change significantly, up or down. Most of the new programs have been won with consistent quoting philosophies. And we do really, I think we do a really good job of delivering more functionality, generally at a lower cost and at a lighter weight. And all of those things are just really darn important to the auto industry and investing in innovation to drive that. So that requires a return on investment that, I mean, you would expect. So I expect that we will continue to be consistent in the range that we've been experiencing.

And Josh, not that everything that we sell through the automotive group is patented, but a large percentage of it indeed is protected by intellectual property and makes it somewhat unique. It doesn't mean it can't be substituted for, but that's part of that upfront cost that Jack is implying there.

Okay. And then, Karl, just a point of clarification, you said in Europe, 50%, I think, is the spring sold there Comfort, and that compares to the U.S., which is 17%. Is that right?

Yes. Yes, directionally, Josh. It's -- the macro Europe number is approximately 50%. Just as a point of clarity. In the U.S., that 17% is a percentage of Leggett's total volume, historically, from an organic standpoint. So you have to take the Tempur Sealy mix and the Simmons mix on top of that. Both of those would index to a higher percentage of Comfort Core than the rest of the industry. So I don't know what the total U.S. market is. It's nowhere near that 50% in Europe.

Okay, great. And then just last, could you update us on the wire rod pricing, where we are now and what the expectations are for margins going forward?

Yes, yes, Josh. On the pricing side, it's been relatively flat so far this year. What's helped us is that scrap costs have reduced -- you remember that we've spoken in the past about the spread or the margin squeeze that we started to experience in November, most acute in December of last year, continued to be an issue in January and February. Most of that pricing pressure brought on by the dumping of Chinese-produced, primarily low-carbon rods. That has been mitigated to a great degree, so the spreads have recovered. So that is a year-on-year benefit that we'll experience in 4Q and first Q of next year.

Okay. So rod prices are stable, whereas before they were being depressed because of the dumping that's no longer taking place. At the same time, scrap prices are going a little bit lower, so the spread is getting better. Is that right?

Yes, that's correct. To be more exact is, the selling price should have inflated at the end of the fourth quarter and the early part of the first quarter this year because of scrap inflation. And that pricing inflation did not take place, because of the dumping. But now that the scrap is normalized, that spread has improved without a significant move in top line pricing.

Okay. And is there an expectation that with the dumped rod now being cleared, all that inventory gone, that rod prices might actually increase. So the spread would widen even further?

Josh, probably not. It's somewhat dependent on what happens with scrap. And with scrap pulling back slightly, that there's not a real opportunity to increase selling price. So that correlation exists.

[Operator Instructions] Our next question is a follow-up from Budd Bugatch of Raymond James. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Let me try to go on John's question a little bit differently, Karl. I know you won't give us the numbers on the program versus continuing business in adjustable. But can you rank the importance perhaps between programs and the continuing business, just which is more important in that top 76%?

Every order is important. The historic volume, while it grew significantly did not grow at that 75% rate. So it's heavy weighted, to bifurcate the way that you asked the question, it's the rolling on of the new year-on-year programs. And those new programs were really falling in place by the 1st of July, so that we won't anniversary that until July of next year and -- but I still believe, because of the growth in the category on both the new programs and an expectation of continued growth in the historic programs, that we'll see significant, probably double-digit growth in the category after we anniversary those new programs. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. And just on a couple of other issues, the Chinese joint venture gave you some operational challenges. How are you -- how is that progressing now?

It continues to be a management challenge in that, that joint venture partner has too much control of that particular facility, and we continue to try to work through that. Budd Bugatch - Raymond James & Associates, Inc., Research Division: And any idea of the time frame as to when that might get resolved?

I would have told you last quarter, next quarter. Everything moves slowly in China. We continue to be optimistic, but I can't put a date on it. We -- I want to tell you that it's -- we think it's soon, but we've thought it's soon for way too long. Budd Bugatch - Raymond James & Associates, Inc., Research Division: And the French acquisition, the acquisition of the aerospace business in France, I think that had some issues that had to get resolved as well. How are you doing on the management of that and the progress there?

Budd, very, very well that we now have anniversary-ed the acquisition day, that things are progressing. Our quality systems are in place. The management teams are embracing some structural changes. We're very pleased with the progression of that business. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. And finally for me, CVP has been an issue. I thought it was improving. Increasing sales, 9% brought me up a little bit. Is -- Am I wrong in my view or is it profitable? What does it say about it?

Budd, this is Jack. It is improving, relatively. Some of the -- well, a majority of that sales decline represents a shift in the business model. You may recall that we talked about Ford moving their production from Ohio to Kansas City. For some period of time, they didn't have vehicles available. And in the Kansas City model, we are not an exclusive Ford-directed upfitter with a free program that goes to the dealer. So those dynamics caused some of the dealers to order vans without an interior and then use a local distributor perhaps. And given that it's not exclusive, we hadn't expected and budgeted for Kansas City to share the volume of the Transit, Ford Transit, with 2 other providers that are there in Kansas City. So we've been driving that business to adjust to an expected 20% to 25% decrease in sales to be profitable at that level. This year, we will be profitable, but it will be low single digits in that group. And then next year, we expect that to normalize and move up.

There are no further questions at this time. I'd like to turn the floor back to management for closing comments.

We'll just say thank you for your participation and we'll talk to you again in January. Bye.

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