Jul 24, 2009
Executives
David DeSonier – Vice President of Strategy and Investor Relations David Haffner – President and Chief Executive Officer Karl Glassman – Executive Vice President and Chief Operating Officer Matthew Flanigan – Senior Vice President and Chief Financial Officer Susan McCoy – Director of Investor Relations
Analysts
Budd Bugatch – Raymond James Mark Rupe – Longbow Research John Baugh – Stifel Nicolaus Joel Havard – Hilliard Lyons Keith Hughes – SunTrust Robinson Humphrey Michael Smith – Kansas City Capital [Misha Majeed] from [Sutton Brook] Ron Fisher – US Steel [Brian Derubio] – [Yield Capital Appreciation Partners]
Operator
Welcome to the Leggett and Platt second quarter 2009 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Dave DeSonier, Vice President of Strategy and Investor Relations for Leggett and Platt.
David DeSonier
I'm Dave DeSonier and with me today are the following Dave Haffner our CEO and President, Karl Glassman our Chief Operating Officer, Matt Flanigan, our CFO, and Susan McCoy our Director of Investor Relations. The agenda for our 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 operating highlights.
Dave will then address our outlook for the full year. And finally, the group will answer any questions 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. This quarter we're trying something new, yesterday we posted to the investor relations portion of Leggett's website a set of PowerPoint slides that contain summary financial information.
If you find these slides helpful or if you don't, please let Susan or me know. Your feedback will help determine if we continue to post such slides in the future.
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.
David Haffner
Yesterday we announced our second quarter results. To quickly recap, sales from continuing operations decreased 29% versus the second quarter of 2008.
Weak global markets, which led to significant unit volume declines and our decision to exit some specific sales volume with unacceptable margins, were the primary factors contributing to the sales decrease. Second quarter earnings from continuing operations were $0.12 per share.
In the second quarter 2008, earnings from continuing operations were $0.25 per share. The year-over-year decrease is primarily due to lower unit volumes and a write-down of a note accepted as partial payment in last year's aluminum divesture.
Late in the quarter we learned that the aluminum operations divested last summer needed a capital infusion from the buyer due to deterioration in business conditions. This led to a reduction in the estimated value of the note that we accepted as partial payment.
As an inducement to the capital infusion, we accepted a more subordinate position in the capital structure of the divested operations. As a reminder, when we sold the aluminum business we received $300 million of cash proceeds and also received non-cash proceeds in the form of a $25 million face amount note, which we recorded at $14 million in July of 2008, and a small amount of preferred shares of the acquiring entity.
The note write-down resulted in a $10.6 million non-cash reduction in pre-tax income for the quarter, but also will generate a $6.4 million cash flow benefit in the last half of the year due to lower taxes. Excluding this non-cash charge, second quarter earnings would have been $0.16 per share.
Earnings in both the first and second quarters of 2009 reflect a significant impact from consuming higher cost steel inventories, but this cost overhang is substantially behind us as we enter the second half of the year. Operationally much progress has been made over the past several quarters.
Despite the volume declines we're experiencing, second quarter gross margins were 19.4%, and for the full year should approach 20%. This is a significant improvement over recent years and reflects our aggressive cost containment efforts, headcount reduction, facility consolidations, and dispositions.
The company's primary objective is to consistently achieve total shareholder return within the top 1/3 of the S&P 500. From January 1, 2008 through July 22, 2009 we posted TSR of 1%, which ranks in the top 7% of the S&P 500.
We continue to believe that our TSR would have been much lower had we not implemented and made significant progress on our revised strategy. Leggett's already strong financial profile improved further during the second quarter and remains a notable differentiation.
We ended the quarter with net debt at 24% of net capital, which is well below the low end of our long-term targeted range of 30% to 40%. We have no commercial paper outstanding, but have $600 million available and nearly three years remaining on our bank facility.
We also have no significant maturities of fixed term debt until 2013. In the quarter, we generated $174 million of cash from operations in part due to our ongoing priority on working capital reduction.
Operating cash for the first half of 2009 was $288 million. Our cash balance grew to $222 million at quarter end.
We repurchased approximately 800,000 shares of our stock during the quarter at an average price of $14.64 per share. We continue to be conservative with share repurchases.
We also declared a second quarter dividend of $0.25 per share. At yesterday's closing price of $16.55, the current dividend yield is 6.1%.
The dividend remains a key lever in achieving our TSR goal. With our strong second quarter cash generation, operating cash already exceeds the amount required to fund both dividends and capital expenditures for the full year.
We now expect to generate more than $400 million of operating cash in 2009. Capital expenditures should approximate $100 million and dividends will require about $155 million.
We've made significant progress on our strategic initiatives, including the completion of five divestitures for total after-tax proceeds exceeding $400 million. This strategic realignment of our business portfolio before the downturn accelerated positioned us much more favorably for the current economic challenges.
One area in which we fell short of our stated goals, however, was EBIT margin improvement. This remains a top priority and we believe represents the greatest opportunity for creating shareholder value over the next few years.
It is imperative that we aggressively pursue and deliver higher margins as a part of our effort to improve returns, and we are seeing some very good progress toward that objective. With those comments, I'll turn the call over to Karl Glassman who will provide some operating highlights.
Karl Glassman
I'd like to quickly discuss a few major topics. You will find segment highlights in yesterday's press release and in the slide presentation on our website that Dave DeSonier mentioned earlier.
Conditions remain challenging in the markets we serve. In the majority of our residential markets, we believe demand has stabilized.
We are forecasting a seasonal increase in sales, as typically occurs in the third quarter, but generally expects off residential demand for the balance of the year. The office furniture industry continued to soften through the first half of the year.
This business generally trails our other markets into a downturn and typically stabilizes and recovers somewhat later as well. Our store fixtures business continues to experience relatively solid demand, which reflects in part the fact that we are well placed with value oriented retailers.
In automotive, we anticipate second half improvement in production rates versus the first half of the year when the industry was significantly under producing sales in an effort to reduce vehicle inventories. The actions we've taken to reduce overhead cost and eliminate poorly performing operations are offsetting some of the impacts from lower sales.
Cost containment and working capital management remain top priorities. As Dave mentioned, evidence of this focus is reflected in our improving gross margins and strong cash flow.
We anticipate further benefits from ongoing activity in the back half of the year. We will experience significant variability in our quarterly earnings this year, as a result of steel related issues.
Market prices for steel began to decrease in late 2008 but with the fall in demand and our inability to cancel or return higher priced earlier purchases, we entered 2009 with high steel costs in inventory. Earnings in both first and second quarters reflected a significant FIFO inventory impact, as we consumed the higher cost material.
In the second half of the year, our cost of goods sold will reflect more contemporary market prices for steel. All of our segments use the FIFO method for valuing inventory.
An adjustment is made at the corporate level to convert about 60% of our inventories to the LIFO method. These are primarily the domestic steel related inventories.
Lower steel costs have resulted in an estimated full year 2009 LIFO benefit of $72 million. This benefit will be recognized over four quarters, and for the year will essentially offset the FIFO impact recognized in the first half of the year.
Since the LIFO benefit is not recorded at the segment level, 2009 segment EBIT margins will be unusually low. With those comments, I'll turn the call back over to Dave.
David Haffner
As we announced in yesterday's press release, sales from continuing operations for the full year are projected to be approximately $3 billion or about 25% lower than in 2008. Full year earnings from continuing operations are now expected to be in the range of $0.55 to $0.70 per share.
Reduction from prior guidance stems from two primary sources. First, sales are now projected to be in the lower portion of the prior guidance range.
Second, two significant and previously unanticipated unusual items, bad debt expense associated with a customer bankruptcy, and the divestiture note write-down that I mentioned before require an $0.08 adjustment to our previous guidance range. In 2009, our quarterly earnings are expected to be more variable than normal due to the expected mismatch in steel impacts that Karl mentioned.
As a result, second half 2009 earnings should be higher than first half earnings. We discussed operating cash expectations earlier.
For the year, we intend to use a portion of our excess cash, after funding dividends and capital expenditures, to repurchase shares. Our 2009 guidance assumes we repurchase 4 million shares for the year and realize a 2 million share net reduction, including shares issued for employee benefit plans.
And I'll close by saying that Leggett has long maintained a very conservative financial position, but with the implementation of crucial strategic changes, we are especially well positioned to not only weather an extended downturn, but benefit significantly when markets begin to improve. And with those comments, I'll turn the call back over to Dave DeSonier.
David DeSonier
That concludes our prepared remarks. We appreciate your attention and we'll be glad to try to answer any questions.
In order to allow everyone an opportunity to participate, we request that you ask your single best question and then voluntarily yield to the next participant. If you have additional questions, please reenter the queue and we'll answer all the questions you have.
Operator
(Operator instructions) Your first question comes from Budd Bugatch – Raymond James.
[Chad] for Budd Bugatch – Raymond James
This is actually [Chad] filling in for Budd who's traveling this morning. But before I ask my first question, let me just say, Dave and Susan, the slides, I thought, were extremely helpful so consider one vote in favor of continuing that.
My first question, David, you mentioned EBIT margin improvement as being a top priority. Assuming sales in 2010 are sort of flat to maybe up modestly and given all the cost actions that you've taken, the divestitures, more disciplined pricing, etc, could you give us maybe a peak at what type of EBIT improvement we might expect either in dollar terms or in margin terms?
David Haffner
[Chad], it's going to take some volume to get us all the way to our 11% goal, but the changes that we have made, the restructuring of the businesses, eliminating some of those with extraordinarily or I'll say under average EBITs, will allow us next year to approach or exceed slightly double-digit EBIT.
[Chad] for Budd Bugatch – Raymond James
And just, I guess, a quick follow-up. You've now anniversaried some of the new customer wins that have helped the company kind of gain market share.
Could you give us some color or feel for other market share opportunities maybe over the next year either versus imports or new products ramping up, or any other potential deverticalizations?
Karl Glassman
[Chad], this is Karl. You're right we've anniversaried most of those first half of last year wins.
There continues to be some small wins ala the deverticalization of Sealy's box spring business that we're getting the benefit of. We continue to talk with others about other opportunities.
As you well know, the uncertainty of the financial position of some of our customers right now makes that conversation a little difficult at this time until things all sort themselves out. We certainly have picked up some share in store fixtures, a share of business that we really like, well performing business.
So, the extraordinary, we continue to work it everyday, but it would be premature to announce anything, but suffice to say that our people are aggressively pursuing all opportunities. We understand the benefit that volume through this cost structure, this most efficient, lower cost cost structure would inure to us at this point, which would be significant.
Operator
Your next question comes from Mark Rupe - Longbow Research.
Mark Rupe – Longbow Research
On the bedding side, obviously it looks like, according to the slides that your U.S. spring dollars are down in that 18% to 20% range, units are down as well, and you cited that you think that things have stabilized.
Just curious to get an idea if you've caught up to the industry now that some of those one-time benefits that happened last year, have you caught up to the industry? And then two, just your thoughts on, obviously things have stabilized, but do things get better as we go forward and as we look into 2010?
Karl Glassman
Mark, this is Karl again. We do believe that things have stabilized and, yes, we've anniversaried most of that one-time benefit, so we should run the rest of the year really kind of parallel to the industry.
Expect us to continue to pick up some shares as we do, especially with the new product induction of our Verticoil, which continues to be extremely well received. We expect that there will be and we have forecasted the normal seasonal up-tick with the third quarter typically being the strongest in bedding.
We expect that and we're experiencing that in the first few weeks of July. Extraordinary, we don't see a lot of change.
Our forecast very much is based on the same basic delta to last year admitting, though, that our comps get a heck of a lot easier about midway through September and certainly into the fourth quarter.
Mark Rupe – Longbow Research
And then is there anything going on with your customer base, some of your larger customers doing better than others, or anything moving around with your customer base?
Karl Glassman
Well, there certainly is a mix shift in that the promotional price points certainly are picking up some momentum, that continues. So even, there's mix shift within the same customer, not so much customer-to-customer, but this down pricing of the consumer, the affordability, the constraint on consumer credit, all those issues we're continuing to see that, which isn't necessarily bad for us, but it's alive and real.
The other is, as the Spring Air volume is moved around, certainly the Spring Air licensee is a much smaller business today than it was when we spoke last quarter. So our customers are continuing to subdivide and at the end of the day we feel like we'll be the beneficiary of all of that, it certainly wouldn't be negative to us.
But that's the biggest issue in the industry is who gets the Spring Air volume.
Operator
Our next question comes from the John Baugh – Stifel Nicolaus.
John Baugh – Stifel Nicolaus
Maybe a different way to comment on a previous question, is there a way to think about a contribution margin for an incremental dollar of sales. Your breakevens come down dramatically I assume.
I know there's some funkiness going on with the steel, and I want to get back to that in a second. How do we think about two, three, four years out, one year out maybe when volumes recover how that will impact EBIT on an incremental dollar of sales.
Susan McCoy
John, our standard as we've talked about for quite some time, contribution margins about 30%. It varies from business to business.
That's the rule of thumb that we typically use, and there's not really been any changes in that for some time, so that's where we would start.
David DeSonier
Yes, and at a reasonably normal tax rate, about $2.5 million worth of EBIT brings a penny home.
John Baugh – Stifel Nicolaus
Okay, and then on the FIFO, LIFO, and trying to understand all that as we look at earnings per share or I guess gross margin year-over-year, the $72 million is the benefit LIFO spread evenly throughout the year. Do I understand that correct?
Then the FIFO hit, roughly what was it in the first half, I guess most of that's gone in the second half. Can you quantify that and that alone is an impact on gross margin, which I think you said approaches 20% the second half.
Susan McCoy
Yes, John your first question LIFO is going to be spread fairly evenly. As you'll remember we had $17 million in the first quarter.
We revised our annual estimate a little bit. We took $19 million, a bit of a catch up in the second quarter, are expecting $18 million in each of the third and fourth.
First quarter impact from the steel overhang that we estimated was in the ball park of $40 million to $50 million, in the second quarter roughly $20 million to $30 million. So that is essentially behind us going forward in the last half.
That's a substantial burden that we don't think was there.
John Baugh – Stifel Nicolaus
So when we look at year-over-year we get the $18 million LIFO benefit Q3 and Q4 year-over-year and a kind of a zero on LIFO as opposed to these drags in the first and second quarter.
Susan McCoy
That's right, and it's important as you, this isn't exactly your question, but as you're going into 2010 to realize that that last half LIFO benefit isn't there, but also for the full year realize that LIFO and FIFO we think pretty much off set.
Operator
Our next question comes from Joel Havard – Hilliard Lyons.
Joel Havard – Hilliard Lyons
I guess for Matt, the comment in the release this morning about the I guess tax recovery from the note charge, does that not mean there's an income statement sort of rebalancing where we get to a more normal let's call it upper 30s rate for '09. And while I'm at it, not a follow up question, but while I'm at it, what should we start to think about as a fiscal '10, '11 tax rate?
Matthew Flanigan
The back half of this year, we would estimate the tax rate to be around 36% or in that neighborhood, 36%, 36.5% relative to just the note and the cash benefit associated with that tax implication. It was at a 34% rate that that tax benefit was calculated because that's the appropriate rate to associate it with.
And then looking to 2010 and 2011, I really think you ought to look around 34%, 35% as a bit of a steady state tax rate in your modeling. As earnings come back, and we certainly believe they will, there will be a general inclination to push what we've seen this year as a tax rate down.
That's assuming the current administration in Washington doesn't do things too dramatic to cause it to go the other direction.
Joel Havard – Hilliard Lyons
Okay, to make sure I understand that the front part of this, the note recovery that is strictly a balance sheet recovery issue – I'm sorry, a cash flow recovery issue.
Matthew Flanigan
That's correct.
Operator
Our next question comes from Keith Hughes – SunTrust Robinson Humphrey
Keith Hughes – SunTrust Robinson Humphrey
With CIT in the news another big supplier of credit to a lot of the small furniture companies, we don't know the resolution there and I'm not asking that, but I guess can you give us any kind of boots on the ground view of what they're doing with their customers. And if the situation gets more dire over the next couple months, would you be willing to step in and provide credit, or at least short-term trade credit, because there's really not another financing alternative that I can see for many of these small customers.
Any sort of general view on that I would appreciate it.
Matthew Flanigan
Keith, this is Matt. We have definitely run some [traps] and practically we've heard from some other of our customers what they're hearing out in the market, and a bit surprisingly most folks have done a lot of planning as best we can tell.
If CIT continues to struggle and if they were to go into bankruptcy for example, if there are other resources of liquidity and back up arrangements that a lot of those retailers, if you will, have already tried to put together or have in place. So our sense is that that's not going to be a significant event, certainly to Leggett and Platt and even as best we can tell, to our retailer space.
Relative to your question would we want to go in and basically supplement people with additional trade credit, the short answer to that is really no. That's not our core competency to provide lending and credit unless there's a really good business reason to cause that to be the case.
As you know, our whole working capital improvement some of that is directly correlated to the fact that we're doing a much better job on receivables, collections, and the other pieces of the working capital picture. So we do not intend to go provide significant levels of trade credit to folks that are being supported by CIT and haven't found other alternatives.
But I will quickly, again, reiterate that we don't think that's a significant situation at all as it relates to Leggett.
Keith Hughes – SunTrust Robinson Humphrey
Okay, and just real quickly, can you give me some sort of estimate for the first half of the year, how much the business that you effectively exited voluntarily from the specific commercial and other segments, how much that hurt in the first half of the year?
Susan McCoy
Keith, for the full year we're looking at about $175 million or so down first pass to think of that split maybe not quite equally, because you've got a lot of that coming out in commercial and you've got the seasonality issue of that.
Karl Glassman
We have our little bit our continuing operations divestitures that some of those took place in the third quarter, so I would think its back half weighted, Keith, and I'm like Susan. I don't know that exact split.
Operator
(Operator Instructions again) Your next question comes from Michael Smith – Kansas City Capital.
Michael Smith – Kansas City Capital
My question I guess surrounds – it's the one I always ask. I know that you guys are committed to maintaining your dividends and I see that you've reduced your current assets considerably to provide you with cash, how much further do you think you can reduce those current assets and is that a focus?
David Haffner
It's a focus. It's not directly correlated to our plan to pay dividends, although indirectly it's associated Mike.
Karl and the segment presidents, in fact all the operating team have done an extraordinary job in reducing working capital. We're I think what 16.5% or so roughly in sales right now, there's a lot of head shaking around here, and I think that we may be able to continue to drive that down modestly, Mike.
But we've got to be careful that we don't get into a situation where our inventories are inadequate to accommodate the immediacy of some of our customer needs. So we can drive it down some more, and I'll let Karl try to quantify that for you in a minute, but I do want to point out that that's not what's driving our intention for our dividend policy.
We strongly believe that the way to feel good about paying a dividend at $1 a share or something north of $1 a share, is to earn significantly more than $1 a share, and obviously that's where we're driving. So, yes, we'll take the cash that we can drive out of our inventories and our receivables and payables, but that's not the direct correlation to dividend payments.
Karl Glassman
Mike, I agree with Dave's basic premise. There's more working capital to be taken out of the company.
Appropriately, based on the sales level that we're experiencing now there's a little bit of inflation deflation element to that, but we won't be satisfied until more working capital comes out. Our payables are increasing.
In terms of days, there's a lot real good work being done there that's appropriate So in terms of, easily another $25 million can come out. We need to see what demand looks like.
We will reinvest in working capital at some point when demand recovers. But there will, based on our current guidance our current forecast, there will be continued pressure to reduce our working capital.
David Haffner
Mike, this is Dave Haffner again. I'm sure that you know that one of the changes that we made in our compensational structure for our people was to take a significant part of their potential and tie it to return on assets.
And that's really been helpful in getting the teams to prioritize what they can control or influence, and it's one of the main reason that the segment presidents and their teams have been able to maintain that focus, and it will continue to be a focus.
Michael Smith – Kansas City Capital
And I know you guys are top of this, but in terms of your receivables, you took one write-down this year. Are your others all pretty current?
Matthew Flanigan
Yes, Mike. This is Matt.
We feel very, very good about the stability and nature of our portfolio right now. Certainly it was disappointing in the first quarter with the consolidated bedding situation, but yes, as we sit here today, we feel very comfortable with our reserve, which if you don't see it in the press release here you will in the 10-Q.
But our total bad debt reserve is about $34 million and we feel very, very comfortable that that's in really good shape, given what we see throughout the portfolio.
Operator
Your next question comes of [Misha Majeed] from [Sutton Brook].
[Misha Majeed] – [Sutton Brook]
I guess it's somewhat of a related question, just looking at the cash from operating activities it looks like roughly half came from the working capital liquidation. So I don't when demand recovers, but when it does how should we be thinking about the cash need to start building those accounts back up?
I guess my question is in light of also paying $1 a share dividend while you do that.
David Haffner
[Misha], a quick and potentially easy way to look at that, if we're at 16.5% of sales now and we can continue to improve it a bit, I think if you looked at working capital needs on incremental volume at around 15% of sales would get you very close to what we'll experience.
[Misha Majeed] – [Sutton Brook]
So you think you can get those accounts back up and, at the same time, maintain $150 million for the dividend?
David Haffner
Yes. We're working on continuing to improve our S&OP capabilities in all of the operations and, of course, Karl and all the segment heads, in fact all the operating team, are dedicated to continuing to improve their working capital efficiency.
I'm not suggesting that 15%, we're always going to be able to be right at 15%, but on incremental volume going up, I would like to think that we could be somewhere in that range.
Operator
Your next question comes from Ron Fisher – US Steel.
Ron Fisher – US Steel
In the auto area there have been, obviously, the big bankruptcies, also some of the tier ones, there have been some bankruptcies there as well. I'm wondering, in terms of your position with these guys, pricing, your sales levels, things like that, you mentioned you were getting paid, but with respect to everything else, do you still have similar terms?
Have you had a chance to improve them or have any of your contracts been rewritten in such a way that you're making less or –
Matthew Flanigan
Ron, this is Matt. No, we haven't adjusted our terms and I will tell that our experience with GM and Chrysler is just as you read in the papers, that we got a hundred cents on the dollar already, on that activity.
Lear, which is the headliner right now in bankruptcy, we are significantly reserved on that exposure, although much of what we're reading and in our recent conversations and conference calls, with that restructuring leads to believe there's probably a hundred cent repayment on our exposure there, which we fell good about if that takes place. But relative to the other parts of the portfolio, no, we haven't adjusted terms.
We have been well aware that this sector's under trauma for quite some time so, as you would expect, we've been working very hard to make sure people were complying with terms, getting those collections in aggressively, and certainly that's part of the working capital improvement you've seen over the last nine months as part of that focus.
Ron Fisher – US Steel
And going forward, you have the same terms with these guys?
Matthew Flanigan
Yes.
Operator
Your next question comes from [Brian Derubio] – [Yield Capital Appreciation Partners].
[Brian Derubio] – [Yield Capital Appreciation Partners]
I was wondering if you an just give me a sense of what actions have you taken this year to reduce costs that really realistically aren't sustainable over the long term, such as pay deferrals and things along those lines?
David Haffner
That are not sustainable?
[Brian Derubio] – [Yield Capital Appreciation Partners]
That are not sustainable, yes.
Karl Glassman
We haven't reduced our cost structure enough yet, so I don't know of costs that we would have to layer back on if we saw 10% to 15% increase in volume.
David DeSonier
[Brian], that's a good question but I can't think, pardon me. Well, yes, that's a good point.
Matt just pointed out to me that we have frozen our salaries this year, we thought that was prudent. And it'll depend upon the back half, which we're feeling very good about.
But assuming that we get back to a position where we're increasing pay for our people, the annual cost of $3.5 about $5 million. About $5 million, so that is one big one that is not sustainable over the long haul.
[Brian Derubio] – [Yield Capital Appreciation Partners]
And the second question is, I hate to beat a dead horse, but on the dividend, Dave, you said in the fourth quarter conference call that your intendance to increase EPS where the dollar represents between 50% and 60% of our earnings. As you look at your current level of sales and the EBIT margins that you have, and let's just use a quasi objective measurement out there, if you look at the EPS estimates that are out there on the street, you're not making the dollar for a couple of years.
So how long do you expect to be able to pay it, if you can't earn back at least $1 within the next two or three years, or more importantly the $1.50 plus to hit the measurement that you gave us two quarters ago?
David Haffner
Yes, [Brian], I respectfully disagree with the forecasts out there and I realize we've got, we're closer to the gears and the levers here. This year, we won't earn the dollar.
It isn't at all clear that we will be two years before we exceed $1. And so I apologize for saying I don't believe what's out there, but we just don't think its right and we're very comfortable with the gearing on the incremental volume.
You heard what I said earlier about improved margins even at the current revenue level, so I would say that we just don't agree with what's out there. That said, you don't have to be a mathematician to understand that you can't pay out $0.25 or $0.26 per share if you don't make $0.25 or $0.26 per share on an ongoing basis.
And you are absolutely correct, our goal is not to at 100% payout, our goal is to be at 50% to 60% payout and, therefore, we've got our sights on $2 per share not $1 per share. And we have some plans by which to get there, [Brian].
[Brian Derubio] – [Yield Capital Appreciation Partners]
And you think that's achievable with, I'm not trying to corner you to make a call on what you think earnings are, but you believe that's achievable within the median term?
David Haffner
Certainly within the next two to three years, yes.
Operator
Your next question comes from Keith Hughes – SunTrust.
Keith Hughes – SunTrust Robinson Humphrey
Yes, just one follow-up. You had referred to a 20% gross margin in your commentary.
Was that for the full year or a run rate in the second half? I was unclear.
David Haffner
Full year.
Keith Hughes – SunTrust Robinson Humphrey
And you talked about 10% or so or a little higher next year that was on kind of a tepid growth scenario is that correct?
David Haffner
Yes, that's right, Keith. It's going to be a stretch to get there and to get to our target, which is over 10%, we're going to need some volume.
We're going to need some incremental volume.
Operator
Thank you, ladies and gentlemen. There are no further questions at this time.
I will turn the conference back over to Mr. DeSonier for any closing comments.
David DeSonier
I'll just say we appreciate your interest and your participant and we'll talk to you again next quarter. Thank you.
Operator
Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time.
Thank you all for your participation.