Leggett & Platt Q2 2021 Earnings Call Transcript

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August 3, 2021

There are 10 speakers on the call.

Operator

Greetings, and welcome to the Leggett and Platt Second Quarter 2021 Webcast and Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Susan McCoy, Senior Vice President of Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you, Daryl. Good morning, and thank you for taking part in Leggett and Platt's 2nd quarter conference call. We are conducting this call from different locations again this quarter. Please bear with us if you experience minor delays or mixed On the call today are Carl Wassman, Chairman and CEO Mitch Dollock, President and COO Jeff Tate, Executive Vice President and CFO Steve Henderson, EVP and President call, the Specialized Products and Furniture, Flooring and Textile Products segments Cassie Branscum, Senior Director of IR and Tara Sherwood, Director of IR. The agenda for our call this morning is as follows.

Speaker 1

Carl will start with a summary of the main points we made in yesterday's press release, Mitch will discuss operating results and demand trends, And Jeff will cover financial details and address our updated outlook for 2021. This conference call is being recorded for Leggett and Platt 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 Investor Relations 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.

Speaker 1

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 sections in our most recent 10 ks and subsequent 10 Q entitled Risk Factors and Forward Looking Statements. Time, I'll now turn the call over to Carl.

Speaker 2

Good morning, and thank you for participating in our Q2 call. Yesterday, we reported all time record quarterly sales from continuing operations EBIT was $172,000,000 and earnings per share were $0.82 all significantly higher then the Q2 of 2020. Excluding the real estate gain noted in yesterday's press release, Adjusted EBIT was $144,000,000 and adjusted EPS was $0.66 Strong year over year results reflect recovery in most of our businesses from the significant impacts related to the COVID-nineteen pandemic. When comparing to the pre pandemic results of Q2 2019, trade sales grew 5%, Adjusted EBITDA was up 9% and adjusted EBITDA margin improved 60 basis points And adjusted EPS increased 12%. During the quarter, we made 2 strategic acquisitions expanding our capabilities and product offerings in our work furniture and international bedding businesses.

Speaker 2

At the end of May, we acquired a small manufacturer of bent metal tubing used in office and residential On June 4, we acquired a leading provider of specialty foam and finished mattresses, primarily serving customers In the UK and Ireland, the company, K Foam, is located near Dublin and has 2 manufacturing facilities With combined annual sales of approximately $80,000,000 K Foam expands the capabilities of our European bedding business and establishes a platform in foam technology and finished mattress production. Similar to our U. S. Bedding business, this acquisition allows us to support our European bedding customers anywhere in the value chain From innerspring and foam components to finished products including private label mattresses, toppers, pillows and other bedding accessories. We increased our full year sales guidance as a result of continued material cost inflation and sales related to the acquisitions just mentioned.

Speaker 2

Increased EPS guidance is largely due to metal margin expansion in our Steel Rod Business. Jeff will provide more detail on updated guidance later in the call. With that, I'll turn the call over to Mitch.

Speaker 3

Thank you, Carl, and good morning, everyone. First, I would like to thank our employees We had strong operating performance in the 2nd quarter as sales have recovered to near or above pre pandemic levels in most of our businesses. Supply chain disruptions continued throughout the quarter, most notably in chemicals, semiconductors, labor and transportation, constraining volume growth. While we are seeing incremental improvements in many of these areas, they continue to create volatility in both supply Given the significant pandemic related impact to last year's Q2 results, my comments will Sales in our bedding products segment were up 7% versus the Q2 of 2019, primarily from raw material related selling time, we expect to see price increases from inflation in steel, chemicals and nonwoven fabrics. Volume was down in part due to exited business in Fashion Bed end drawn wire.

Speaker 3

Volume was also lower due to foam shortages and labor availability, which continued to constrain the U. S. Mattress constrained U. S. Mattress production negatively impacting component demand and our finished good production.

Speaker 3

While supply improved, chemical allocations could persist to some degree throughout the remainder of the year. In U. S. Spring, our planned Comfort Core capacity expansion is largely in place and we have built inventory of Comfort Core innersprings Fulfill customer requirements as foam becomes more readily available. Demand in our European bedding business was strong throughout the second quarter, But recently, we are seeing some signs of seasonal softening over the summer months.

Speaker 3

Long term, we anticipate more growth opportunities in Europe with the K Foam acquisition. Similar to the trends we've seen in the U. S. Bedding market over the past several years, European consumers are purchasing more mattresses online In compressed form, increasing demand for specialty foam and hybrid mattresses. Adjusted EBITDA margins in the segment improved over the 2 year period primarily from pricing discipline, expanded metal margins in our steel rod business and fixed cost actions taken last year.

Speaker 3

Sales in our Specialized Products segment were down 9% for Q2 2019 due to lower volume across the segment. In our automotive business, volume was down over the 2 year period, primarily from recent semiconductor shortages. Industry production was heavily impacted in April May with many OEMs reducing or completely shutting down production of some models. Supply is expected to slowly improve, but we anticipate these shortages to continue through at least the first half of twenty twenty two. In our Aerospace business, demand for fabricated duct assemblies is near Q2 2019 levels, But demand for welded and seamless tube products is still well below pre pandemic levels.

Speaker 3

With the lingering impact from pandemic related disruption End market demand in hydraulic cylinders is very strong with a surge in lift truck orders. However, global supply chain constraints and labor availability have hampered the OEMs ability to ramp up production. We expect our sales to increase as OEM production increases, but supply chain constraints in this business could persist into early 2022. EBITDA margins in the segment declined over the 2 year period, primarily from lower volume, partially offset by fixed cost actions taken last year. Sales in our Furniture, Flooring and Textiles Products segment were up 11% versus the Q2 of 20 '19, driven by demand strength in Home Furniture and Geo Components.

Speaker 3

We expect strong market demand in our Home financial products business for the remainder of the year and into 2022. In our geo components business, Private construction and retail market demand is strong. Demand in our fabric converting business softened due to the foam constraints that are impacting bedding Fisher Manufacturers. As film availability improves, we anticipate sales to rebound. In Flooring Products, Residential end market demand is above pre pandemic levels, whereas hospitality demand remains well below 2019 levels.

Speaker 3

And while Recovery in Work Furniture lagged the other businesses in this segment over the 2 year comparison period, we continue to see strong demand for product sold for residential use and are beginning to see some improved demand in the contract market. Adjusted EBITDA margin in the segment increased over the 2 year period, primarily from improvement in our home furniture business and fixed cost taken last year. Overall, the fixed cost actions we took last year reduced our 2nd quarter cost by approximately $20,000,000 versus the Q2 of 2019. Across all of our businesses, we are focused on controlling costs by keeping our variable cost structure aligned with demand levels and only adding fixed costs as necessary to support higher volumes and future growth We have planned to increase production in our steel rod, drawn wire and U. S.

Speaker 3

Spring businesses through the 2nd and third quarter to allow U. S. Spring to build inventory in order to meet anticipated customer demand as foam and Labor availability improves across the industry. In the Q4, we will also take our rod mill out of operation for 3 weeks to replace the reheat furnace. As a result, higher levels of inventory in these businesses are expected through the remainder of the year.

Speaker 3

The inventory build and sales will likely alter our normal seasonal cash flow cycle to some degree. I'll now turn the call over to Jeff.

Speaker 4

Thank you, Mitch, and good morning, everyone. In the 2nd quarter, cash from operations was $41,000,000 Higher earnings were partially offset by planned working capital investments to build and maintain the higher inventory levels that Mitch just discussed, as well as inflation in the cost of those inventories. With the expectation of carrying higher levels of inventory through the end of the year, We have lowered our full year operating cash estimate. We now anticipate cash flow from operations to approximate $450,000,000 in

Speaker 5

2021. At the

Speaker 4

end of the quarter, adjusted working capital as a percentage of annualized sales was 12.8%. During the first half of the year, we brought back $187,000,000 of offshore cash and currently expect to return at least $200,000,000 of cash for the full year. In May, we increased the quarterly dividend by $0.02 to $0.42 per share. At an annual indicated dividend of $1.68 the yield is 3.5% based upon Friday's closing price of $48.03 one of the higher yields among the S and P 500 Dividend Aristocrats. This year marks our 50th consecutive year of annual increases.

Speaker 4

We're proud of our dividend record and we plan to extend it. Our strong financial base along with our deleveraging efforts over the last 2 years give us flexibility when making capital and investment decisions. We ended the quarter with net debt to trailing 12 month EBITDA of 2.32 times and $1,300,000,000 of total liquidity. Our long term priorities for use of cash are unchanged. They include in order of priority, funding organic growth, paying dividends, funding strategic acquisitions and share repurchases with available cash.

Speaker 4

For the full year 2021, we expect capital expenditures of approximately $140,000,000 Dividends should approximate $215,000,000 and acquisition spending of approximately $150,000,000 We do not expect any significant share repurchases as we continue to focus on deleveraging. As announced yesterday, we are again increasing our 2021 sales and earnings per share guidance. 2021 sales are now expected to be $4,900,000,000 to $5,100,000,000 or up 14% to 19% over 2020, Resulting from mid to high single digit volume growth, raw material related price increases, currency benefits and approximately 1% growth from acquisitions net of divestitures. The increase versus prior guidance of $4,800,000,000 to $5,000,000,000 reflects a combination of higher raw material related price increases and acquisition sales. We expect continued strong consumer demand for home related products and global automotive along with some improvements in supply chain constraints as we move through the remainder of this year.

Speaker 4

2021 earnings per share are now expected to be in the range of $2.86 to $3.06 including $0.16 per share from the real estate gain recognized in the 2nd quarter. Full year adjusted earnings per share is now expected to be $2.70 to $2.90 with increased versus prior guidance of $2.55 to $2.75 primarily due to higher metal margin. This guidance also assumes fixed cost savings as a result of actions taken in 2020 to be approximately $70,000,000 Based upon this guidance framework, our 2021 full year adjusted EBIT margin range should be 11.4% to 11.6%. Earnings per share guidance assumes a full year effective tax rate of 23%, depreciation and amortization to approximate time, we will be conducting a $195,000,000 net interest expense of approximately $75,000,000 and fully diluted shares of 137,000,000 In closing, we remain focused on cash generation, while reducing debt and deploying capital in a balanced and disciplined manner that positions us to capture near and long term growth opportunities, both organically and through strategic acquisitions. With those comments, I'll turn the call back over to Susan.

Speaker 1

That concludes our prepared remarks, we thank you for your attention and we'll be glad to answer your questions. Carl will direct our Q and A session and the group we'll answer your questions. Daryl, we're ready to start Q and A.

Operator

Thank you. We will now be conducting a question and answer Our first questions come from the line of Bobby Griffin with Raymond James. Please proceed with your questions.

Speaker 6

Good morning, everybody. Thanks for taking my questions. I hope everyone is doing well.

Speaker 2

Good morning, Bobby.

Speaker 3

I guess, first, I want to touch on

Speaker 6

the international betting segment. I know that's been actually a very spot of good growth for you guys over the last couple of years. So now with the acquisition, Karl or Mitch, can you maybe frame up your for us your international bedding business and kind of the go to market strategy where you participate in there that might be a little different than the U. S? And then importantly with K Foam, what does that acquisition give you in terms of capabilities?

Speaker 6

Is that a springboard to launch in the more foam business in Continental Europe? Or how do we think about the 2 to 3 year opportunity now with this addition to your capabilities over there?

Speaker 2

Yes. Thanks for the question, Bobby. Mitch, do you want to unravel that?

Speaker 3

Yes, sure. Good morning, Bobby. And you're right, the international betting Group for us, particularly in Europe, has been really strong over the last couple of years and including this year coming out of the pandemic. So really, I mean, we see that it's a different market than the U. S.

Speaker 3

It's more segmented across different regions with different product time. But we do see that as a meaningful growth opportunity for us. And the K Foam acquisition really sets us up Similarly, to take advantage of the trends that were happening here in the U. S. And we see them taking place in the U.

Speaker 3

K. And other parts of Europe. So First off, it's a K Foam is a provider of specialty foam and finished mattresses. We're Technologies for over a decade and really utilizing that specialty foam expertise. So it gives us not only that capability of specialty foam, but also scale and production of finished mattresses, similar to what we got through ECS.

Speaker 3

And really just like in the U. S. Betting value chain, it allows us to support our customers really anywhere along value chain from components of innersprings to specialty foam all the way to private label finished mattresses or other accessories. So we feel like it sets us up really well to continue to grow our business in Europe. This is primarily focused in the U.

Speaker 3

K. And Ireland, but we'll explore the possibilities of similar opportunities as we look through broader European market.

Speaker 6

Okay. I appreciate that. That's helpful. And then I guess lastly for me before I jump back in the queue. Just on the auto supply chain, I understand the chip shortages and what's going on there.

Speaker 6

Is the catch up going to start in 3Q and 4Q of this year? Or is this really when we think about in our models, the 2022 type catch up where things will be impacted pretty much for the rest of the year and then there'll be a big catch up in 2022 from getting inventories back in normal levels?

Speaker 2

Yes, Bobby, that's a really good question that we are trying to work through those answers ourselves. But Steve, why don't you, based on the most contemporary information we have, try to answer that question?

Speaker 7

All right. Good morning, Fadi. Yes. So the way that we see it right now and Again, the caveat that it is pretty opaque to us and a number of other players in the value chain. What we think we are going to see is that Q2 was really the peak of the issue.

Speaker 7

So we lost about 1 point 4,000,000 units in Q1, about 2,600,000 units were lost in Q2. Q3 right now is sitting at about 1,000,000 lost units, but probably looking more like the Q1. And then we would see Q4 being somewhat lower impact in Q3, but the recovery continuing into Q1 and probably into Q2. And at that point, really being able to start to build up the inventories in earnest. And the inventories right now are sitting in the U.

Speaker 7

S. Are sitting at 23 days, year on year and probably somewhere between $1,500,000 to $1,800,000 from where they really should be. So it will take probably 6 to 12 months to rebuild all that inventory once we get to parity again.

Speaker 6

Thank you. That's very helpful. I'll jump back in the queue, but best of luck here in the second half.

Speaker 8

Thank you.

Speaker 5

Thank you.

Operator

Thank you. Our next questions come from the line of Keith Hughes with Truist Securities. Please proceed with your questions.

Speaker 5

Thank you. I guess my question is on the metal margins. What's your kind of outlook in this guidance for that coming in the 3rd and the 4th quarter?

Speaker 2

Keith, the middle margin story certainly has been a good one over the last few years. And really middle margin is defined as the difference between the input cost or in our case scrap and then the sales price, which in our case is either rod or wire. And There is kind of 2 different dynamics in that scraps inflated pretty dramatically this year with ups and downs each month, but aggregate up $145 a ton. The sell price of rod and wire has increased at a faster rate, that's because of the lack of capacity in the U. S.

Speaker 2

Versus the demand That exists. So over the last few years, there was a lot of capacity taken offline. I mean, heck, we shut one of our wire mills down. And post COVID, there has been really strong demand and many mills like us need to take some downtime in the back half of the year for just routine maintenance. So kind of the outlook is An expectation that scrap will probably trade down slightly in August.

Speaker 2

It will settle here sometime next week, but the forecast is down $20 There is some expectation that rod and wire pricing will spite the scrap reduction, inflate again because there's it's just really hard to buy rod and wire In this country, there's just no availability. But in any way, the spreads long winded answer to tell you the spread is in good shape Yes, and we'll continue to be for the forecastable future.

Speaker 5

Okay. Usually, when prices are coming down, you actually make some extra margin. Sounds like it's on the way up now. I guess, could you get a double positive? I mean, prices will eventually fall.

Speaker 5

Could you see really nice margins in that in a downturn environment as well on scrap prices?

Speaker 2

That's the near term expectation, Keith.

Speaker 5

Yes. Okay. And I guess final question, in the excuse me, more your mattress supply business, particularly foam, Is there when do you anticipate the industry will be caught up, if you will, in terms of getting what the producers need To meet some pretty strong demand in mattresses.

Speaker 2

Mitch, you want to grab that one? I answer the easy questions.

Speaker 3

Good morning, Keith. Yes, I'll take a shot at that. I mean, it's certainly been very, very dynamic, right? And every time that we think We have thought over the last several quarters that chemical constraints that translate into foam are getting resolved, something else seems to happen. So I don't want to jinx us here.

Speaker 3

But they have improved somewhat over the Q2. We expect them to continue to improve incrementally as we look in the Q3 and 4th The short answer is we really don't know, but we are planning for and we expect that capacity we will continue to expand as we move through the 3rd Q4. And we want to be ready, frankly, in case there's a surge, If something happens and the foam and labor constraints are resolved very quickly, we want to be able to respond, which is in part why we're Building inventory as we go through this time frame. But they will hopefully see it be resolved as we go through the end of the year, maybe carry over a little bit into year, but that's all going to depend on primarily on that chemical availability.

Speaker 5

Okay. And with your demand and trying to build a little bit inventory is easiest, basically sold out right now.

Speaker 3

I'm sorry, what was that?

Speaker 5

Given the demand level and the fact that it sounds like Try to build some inventory in the off season, is ECS sold out for the foreseeable future?

Speaker 3

Yes. At ECS, so it's kind of a secondary impact for us On our spring components, right, we have capacity plenty of capacity and can immediately respond In our foam production and our finished mattress production through ECS, there are we are constrained by the foam there. So we're Basically making and selling everything we can at this point.

Speaker 5

Okay. Thank you very much.

Speaker 6

Thank you.

Operator

Thank you. Our next questions come from the line of Susan Maklari with Goldman Sachs. Please proceed with your questions.

Speaker 9

Thank you. Good morning, everyone.

Speaker 2

Good morning, Susan.

Speaker 9

My first question is around the bedding capacity side of things. Can you talk us talk through where you are in terms of adding some of that incremental capacity that you're working on this year? And then I guess with that You mentioned Carl or I think it was Carl in your comments about increasing production at the rod mill. Can you talk through how much you're increasing there? How to think about that coming online and how that sizes to this capacity that's coming with it?

Speaker 2

Yes, Mitch, why don't you take the first part as regards Comfort Core Capacity?

Speaker 3

Yes. Okay, sure. So good morning, Susan. Yes, we As we've talked about over the last several quarters, adding machine capacity as well as staffing capacity, and we're largely through that. As we said, we've got a little bit more machinery coming online, most of the operations that we plan to bring up to 4 shifts, they are they're not fully staffed, frankly, because we don't need all of that capacity But we're in a very, very good place from our Comfort Core planned capacity expansion largely through it, As I said.

Speaker 3

And then, Karl, do you want me to talk about the reheat furnace or do you want to take that?

Speaker 2

Yes, please do. No, go ahead.

Speaker 3

And then maybe a slight clarification there. So the reheat furnace is really not a capacity expansion, it's really a replacement. Due to the dynamics of that production, it essentially It really takes a toll on the reheat furnace over time and you essentially just need to replace it and now is the time for us to do that. So It'll put us in a stable place and with a brand new reheat furnace and will allow us to make sure we don't have outages going But it is not a capacity expansion for us. And so we'll build some inventory ahead of taking that taking the rod mill down so that we'll have plenty Inventory on hand as it comes back up.

Speaker 9

Got you. Okay, that's helpful. I'm sorry for that. I thought that you were increasing the production there, but that was my mistake. No problem.

Speaker 9

My other question is, you did these 2 acquisitions this quarter. Can you talk through What you're seeing in terms of the M and A pipeline, the potential for maybe some more of these smaller deals over the next couple of quarters, What's going on there?

Speaker 2

Yes, Susan, we continue to look. We're always trying to fine, strong strategic fits and capabilities that kind of fill gaps, so to speak, or to continue to build out existing platform. So everything that we're looking at and would consider near term would be considered small bolt on. Don't expect anything large. Deleveraging and the focus on deleveraging continues to be important to us, Walt.

Speaker 2

Our teams have done a great job of deleveraging. We continue to want

Speaker 5

to work pull that lever.

Speaker 9

Got you. Okay. Thanks, Carl. Good luck.

Speaker 2

Yes. Thank you, Susan.

Operator

Thank you. Our next questions come from the line of Peter Keith with Piper Sandler. Please proceed with your questions.

Speaker 8

Hi, thank you. Good morning, everyone. Thanks for taking the questions. You had mentioned some capacity constraints across your various segments due to labor shortages. I was I guess curious what you're seeing at your own factories, however.

Speaker 8

Are you seeing any wage inflation? Are there any pockets where you're having trouble getting fully staffed just given the labor backdrop right now?

Speaker 5

Yes. Mitch, do you want to grab that one?

Speaker 3

Yes, sure. I think just like for us and I think probably everybody in the world, labor is a bit of a challenge, but we're not really seeing any place where at this point where we're so severely impacted. We're probably struggling a little bit in a couple of our ECS operations that are marginally constraining our But we'll get those tackled. But it's just it's a I think an ongoing challenge as the workforce is just smaller coming out of the pandemic, we are seeing a bit of wage inflation, and I think that's not unique to us either.

Speaker 8

Okay. Pivoting over now to betting, we've got a couple of investor questions on this. And it really goes to The volume growth on a 2 year basis, my math would say sort of back of the envelope, looks like the volumes are down somewhere about 8% to 10% on a 2 year basis from 2019. And I was wondering if you could address that. You specifically called out you've exited Fashion Bed and drawn wire.

Speaker 8

Maybe quantify what the volume impact was from those Or if you think there's been some headwind from just your general customer mix?

Speaker 2

The biggest issue, Peter, for sure is the constraint from the foam impacts. But, Susan, we've never quantified the exit of those businesses. Is that correct?

Speaker 1

Not at the segment level. We have, we've quantified it at the company wide level, but gosh, I haven't done that 'nineteen to 'twenty one math. Year over year in 'twenty though, we were looking at about a 3% Reduction company wide, which would mean, I don't know, just double that roughly for the relative size Of the segment, maybe that's closer to 6%, 7% or so, but that's Very rough math. We can follow-up with you after the call, if you'd like.

Speaker 8

Okay. That sounds good. And then nice job with the beat and raise. And I guess you've articulated the sales guidance raise Certainly passing through Q2, but then it looks like you've got the acquisitions and the raw material price increases. When we look at the EPS raise here, arguably, there's much of the Q2 flow through as well.

Speaker 8

Are there is there anything on the margin front, however, that you're in your back half of your outlook that allows for the EPS bump up?

Speaker 1

You're right about what the cause for that increase is. It's largely metal margin. And no, there's not anything that we're adjusting for in the back half. So We would anticipate as we move through the second half of the year, so 3rd quarter, 4th quarter To see sequential improvement, quarterly improvements in sales and EBIT margin and in EPS Following through with the expectations we've talked about already relative to supply chain constraints And our ability to recover raw material costs and so forth. But no, no special adjustments.

Speaker 8

Okay. Thanks for the overview and good luck.

Speaker 2

Thank you.

Operator

Thank you. There are no further questions at this time, I would like to turn the floor back over to Susan McCoy for any closing comments.

Speaker 1

We appreciate you joining us today,

Operator

thank you. That does conclude this morning's teleconference. Thank you for your participation. You may disconnect your lines at this time.

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