Leggett & Platt Q4 2021 Earnings Call Transcript

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Provided by Quartr
February 8, 2022

There are 10 speakers on the call.

Operator

Greetings, and welcome to the Leggett and Platt 4Q 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session We'll follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms.

Operator

Suzanne McCoy, Senior Vice President of Investor Relations. Thank you. Ms. McCoy, you may begin.

Speaker 1

Good morning and thank you for taking part in Leggett's 4th quarter conference call. On the call today are Mitch Dollop, President and CEO Jeff Tate, Executive Vice President and CFO Steve Henderson, Executive Vice President and President of the Specialized Products in Furniture Flooring and Textile Products segments Tyson Hagel, Senior Vice President and President of the Bedding Products segment and Cassie Branscum, Senior Director of IR. The agenda for our call this morning is as follows. Mitch will start with a summary of the main points we made in yesterday's press release and discuss operating results and demand trends. Jeff will cover financial details and address our outlook for 2022 And the group will answer any questions that you have.

Speaker 1

This conference call is being recorded for Leggett and 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 Weggitt's website. We posted to the IR portion of the website yesterday's press release and a set of PowerPoint slides that contains summary financial information along with segment details. Those documents supplement the information we I need to remind you that remarks today concerning future expectations, events, Objectives, strategies, trends or results constitute forward looking statements.

Speaker 1

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. I'll now turn the call over to Mitch.

Speaker 2

Good morning, and thank you all for participating in our Q4 call. First, I'd like to welcome Tyson Hagel, President of our Betting Products segment. Tyson is joining us today to participate in Q and A and will be a regular participant on these calls. Tyson has been with the company for over 20 years and previously served in various In 2021, Leggett Platt achieved several milestones. We attained record sales and EPS.

Speaker 2

We increased our dividend for the 50th Consecutive year, we issued our inaugural sustainability report. We promoted Tyson Agel to lead our bedding product segment And Sonja Smith to lead our automotive business to outstanding long tenured employees and added newly created positions, including our First, Chief Human Resources Officer, our 1st Inclusion, Diversity and Equity Director and our 1st Sustainability Manager, all demonstrating our commitment to ESG. Those achievements would not be possible without our 20,000 employees who are dedicated to creating innovative, sustainable products for our customers, Ensuring a safe and inclusive workplace and driving value for our shareholders. I want to thank our employees for their tremendous contributions in another challenging year. Your collaboration, agility, dedication and commitment to our values drive our success.

Speaker 2

Yesterday, we reported record quarterly sales from continuing operations of 1,330,000,000 EBIT of $152,000,000 and earnings per share of $0.77 Sales in the quarter were up 13% versus Q4 of 2020 and reflect the pass through of significant inflation in 2021, partially offset by lower volume in several of our businesses. When comparing to the pre pandemic results of Q4 2019, Trade sales grew 16%, adjusted EBITDA increased 15% and adjusted EPS increased 31%. For the full year, 2021 sales increased 19% to $5,070,000,000 From a combination of raw material related price increases, volume gains and currency benefit, EBIT increased 46% and adjusted EBIT increased 25%, primarily from volume recovery from Full year EPS was $2.94 and adjusted EPS was 2 point 7 increase versus 2020 adjusted EPS of $2.16 When comparing to the pre pandemic results of 2019, Trade sales grew 7%, adjusted EBITDA increased 9% and adjusted EPS increased 16%. While we continue to navigate a number of macro market challenges, including supply chain constraints, inflation and a likely shift to tighter monetary policy, We expect to see improvements in 2022 as conditions stabilize and growth continues in our businesses most negatively impacted by the pandemic. Moving on to the segments.

Speaker 2

Sales in our Betting Products segment were up 18% versus the Q4 of 2020 That 22% versus the Q4 of 2019, primarily from raw material related selling price increases from inflation in steel, chemicals and nonwoven fabrics. Volume was down in both the 1 year and 2 year periods, primarily due to challenges with Supply of chemicals used in our specialty foam operations negatively impacted our production levels in October November, but improved in December. Despite softening in recent months, we still expect reasonable demand in 2022. EBITDA margins in the segment were lower versus Q4 2020, primarily from lower volume, investments to maintain labor and higher transportation costs. Adjusted EBITDA margins improved over Q4 2019, primarily from expanded metal margins in our steel rod business and fixed cost actions taken in 2020.

Speaker 2

Sales in our Specialized Products segment were down 3% from the Q4 2020 due to lower volume in Automotive, partially offset by growth in Hydraulic Cylinders and Aerospace. Sales were down 2% from Q4 2019 due to lower volume in Automotive and Aerospace, partially offset by growth in Hydraulic Cylinders. In our automotive business, volume was down over the 1 year and 2 year periods. While industry production improved sequentially from the 3rd quarter, Semiconductor shortages negatively impacted vehicle production levels in the 4th quarter. Consumer demand remains strong Vehicle inventory remains at record low levels.

Speaker 2

As supply chains begin to stabilize, the industry should see improving production in the second half of twenty twenty two. Industry forecasts indicate recovery continuing through 2023. In our Aerospace business, We expect to see continued recovery in 2022. However, with the lingering impact from pandemic related disruption in the air travel, Resulting buildup of aircraft and supply chain inventories, the industry is not anticipated to return to 2020 sorry, 2019 demand levels until End market demand in hydraulic cylinders is strong and order backlogs in the industry remain high. However, global supply chain constraints and labor availability has hampered the ability of our OEM customers to ramp up production.

Speaker 2

We expect our sales to increase as OEM production increases. EBITDA margins in the segment declined over the 1 year 2 year period, primarily from lower volume, partially offset by fixed cost actions taken last year. Sales in our Furniture, Florida and Textiles Products segment were up 17% versus Q4 2020, primarily from raw Material related selling price increases and volume recovery in work furniture, partially offset by lower volume in flooring products and fabric converting. Sales were up 22% versus Q4 2019, primarily from raw material related selling price increases and volume growth in Geo Components in Home Furniture, partially offset by lower volume in flooring products. We expect continued strength in our home furniture business in 2022 as Customer backlogs remain elevated.

Speaker 2

So far this year, the Chinese market has slowed as most manufacturers are taking early and longer Chinese New Year holidays to avoid anticipated COVID related quarantines. Work furniture sales recovered at pre pandemic levels with steady demand for products sold for residential use and improving demand in the contract market. We expect modest growth in 2022 As residential and hybrid work products remain relatively strong and the contract market continues to gradually improve as employees return to the office. Volume in our fabric converting and geo components businesses have returned to more normalized level after experiencing pandemic related sales opportunities in the back half of twenty twenty. In Flooring Products, residential demand remains strong, while hospitality demand remains well below pre pandemic levels.

Speaker 2

Volume was down in the quarter due to limited labor availability and transportation disruptions. EBITDA margins in the segment improved over the 1 2 year periods, primarily from pricing discipline. For the company overall, the fixed cost actions we took in 2020 Reduced our 4th quarter cost by approximately $20,000,000 versus the Q4 of 2019. For the full year 2021, we maintained $80,000,000 of the approximately $90,000,000 of fixed cost actions taken in 2020. We remain focused on controlling our costs by only adding fixed costs as necessary to support future growth opportunities.

Speaker 2

Leggett remains well positioned both competitively and financially to capitalize on long term opportunities in our various end markets. Our enduring fundamentals give us confidence in our ability to continue creating long term value for our shareholders. Jeff will now discuss our 2021 financial details and full year guidance for 2022.

Speaker 3

Thank you, Mitch, and good morning, everyone. In 2021, we generated cash from operations of $271,000,000 versus a very strong $603,000,000 in 2020. This large 1 year decrease was primarily driven by inflationary impacts and planned working capital investments to rebuild inventory levels In our rod, wire and U. S. Spring businesses following severe depletion in 2020.

Speaker 3

With softening demand in the bedding market in the Quarter of 2021 along with our decision to postpone the reheat furnace replacement at our steel rod mill until Q1 of 2022, Inventory levels were higher at year end than previously anticipated. These were the main factors leading to the lower than previously expected operating cash flow for Full year 2021. We ended the year with adjusted working capital as a percentage of annualized sales of 13.4%. In addition, we brought back $247,000,000 of offshore cash in 2021. We expect cash from operations of approximately $600,000,000 in 2022, as this past year significant inflationary impacts Our net anticipated to recur and we work to right size our inventory levels.

Speaker 3

Our long term priorities for use of cash are unchanged. They include an order priority, funding organic growth, paying dividends, funding strategic acquisitions and share repurchases with available cash. Total capital expenditures in 2021 were $107,000,000 Reflecting a balance of investing for the future while controlling our spending. In November, our Board of Directors declared a $0.42 4th quarter dividend, dollars 0.02 higher than the last year's 4th quarter dividend. At an annual indicated dividend of $1.68 The yield is 4.4% based upon Friday's closing price of $37.88 We raised our annual dividend for the 50th consecutive year in 2021, honoring our ongoing commitment to return value to our shareholders.

Speaker 3

As a result of this commitment over many decades, we are now a member of a select group of companies referred to as Dividend Kings. From a strategic acquisition perspective during 2021, we acquired 3 businesses. An aerospace business located in the UK that specializes in In Q2, we acquired K Foam, a leading provider of specialty foam and finished mattresses primarily serving customers in the UK and Ireland. And finally, we acquired a small manufacturer of bent metal tubing used in office and residential furniture located in Poland That has been an important supplier to our local work furniture operation. We also divested a small specialty wire operation in our drawn wire business with annual sales of approximately $12,000,000 Consistent with our deleveraging plan, Share repurchases were limited in 2021.

Speaker 3

In November, we issued $500,000,000 of 30 year 3.5 percent notes and use some of the proceeds to repay outstanding commercial paper. We ended 2021 with net debt to trailing 12 month adjusted EBITDA of 2.29 times. Our strong financial base along with our deleveraging efforts over the last 2 years Gives us flexibility when making capital and investment decisions. 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 acquisitions. Now moving to 2022 guidance.

Speaker 3

2022 sales are expected to be $5,300,000,000 to $5,600,000,000 or up 4% to 10% over 2021. This guidance reflects flat to mid single digit volume growth and continued inflationary impact primarily from raw material related Volume growth is expected from continued recovery in the businesses in the specialized product segment that were most negatively impacted by the effects of the pandemic. We also expect improved operating conditions and stabilized demand in bedding. 2022 earnings per share are expected to be in the range of $2.70 to $3 The midpoint reflects higher volume, Metal margins in our steel rod business to expand modestly, partially offset by increased transportation and labor costs And reduced overhead absorption as we right size our inventory levels. Based upon this guidance framework, Our 2022 full year adjusted EBIT margin range should be 10.5% to 11%.

Speaker 3

Earnings per share guidance assumes a full year effective tax rate of 23%, depreciation and amortization to approximate $200,000,000 Net interest expense of approximately $80,000,000 and fully diluted shares of 137,000,000. For the full year 2022, we expect capital expenditures of approximately $150,000,000 Dividends should approximate $230,000,000 and share repurchases to offset share issuances. In closing, I would also like to thank all of our employees around the world for your tremendous efforts this past year to safely deliver record 2021 results. 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. Mitch will direct our Q and A session as the group answers your questions. Operator, we're ready to begin the Q and A.

Operator

Thank you. We will now be conducting a question and answer session. One moment please while we poll for questions. The first question is from the line of Bobby Griffin with Raymond James. Please go ahead.

Speaker 4

Good morning, buddy. Thank you for taking my questions. And Mitch, congrats on your first call as CEO. And I'm sure Carl is listening. Just want to Carl, wish you the best of luck in the next chapter for you and your family retirement.

Speaker 2

Good morning, Bobby. Thank you very much.

Speaker 4

So I guess my first question more about the quarter and then I have one high level question as well. Just on the quarter itself, can we maybe dive into a little bit of the inner Spring and spring volumes for your businesses that were reported here in 4Q. I guess maybe elaborate a little on the supply chain challenges and how much that Awesome volume and then what did you expect the market did in the Q4 understanding it's hard to kind of get a great sense of that, but We're getting a few questions today on your share versus the market's performance during 4Q.

Speaker 2

Yes. Thanks, Bobby. We figured that would be an important topic for us this morning. When we talked on the call in the Q3, we mentioned that we were really expecting the 4th quarter to be unseasonably strong on the bedding side as there was backlogs and we were holding on to labor and our inventory to make sure that we Our customers and that kind of didn't prove out to be how it happened. So you're right, there's not A lot of information out there yet.

Speaker 2

Certainly, the ISP data is not available, but we have a pretty good perspective, we think, and we're happy to share that with So, Tyson, why don't you dig into that? I know there's a lot there.

Speaker 5

Yes. Sure thing, Mitch. And good morning, Bobby. Let me try to walk through this in a few pieces. And I'll start with just overall market demand.

Speaker 5

And like Mitch said, we don't have any directional data from And probably won't even for another week or so. But our expectation is that we'll see that 4th quarter will show Some declines year over year and we started to see that trend in the Q3 of this year and some of that probably due to some supply chain issues. But When you look at it in total, units being down in Q3 year over year almost 9% and U. S. Produced between 4% and 5%.

Speaker 5

Our expectation would be that we would see continued slowdown

Speaker 2

as we

Speaker 5

move through the Q4. And a number of Reasons that contribute to that. Not surprisingly just lower consumer sentiment, inflation and lack of stimulus Another round of COVID surge, all those things combining to create some headwinds. So it is hard to get a good read on We're exactly going to land, but I think we would say that we would expect overall probably high single digit year over year decline in the Q4. Not sure the combination between U.

Speaker 5

S. Produced Imports, but I do feel that the slowdown probably did occur as we move through the Q4. The second part that I'll move through is, As it relates to our sales and our difference or probably greater decline than the overall market, the first part just is our position within the supply chain And inventory positions, we believe we probably slowed down before the rest of the market. Thinking about as we move through the quarter, we did have Some constraints and our customers had some constraints related to chemicals and foam, but that improved as we move through the quarter, especially as we got towards The end of November December, but our business as we moved to the end of October and especially being in November is when we really started to see the slowdown The slowdown continued pretty consistently through the end of the year. The third part would be the share that you referenced And I'll go through this in a couple of parts.

Speaker 5

But first, in Inner Springs, we would say that we've seen some share declines in the mid single digit range And a couple of reasons for that. I think it's been talked about on a couple of the previous calls, but about a third of that decline coming From some lower margin business that we voluntarily exited and then 2 thirds being related to just supply disruptions that really Began in the early part of 2020 both from labor, but also our shortage of nonwovens that just forced our customers to make some sourcing decisions that we're still dealing with now. And on that part, we do feel good about regaining that business over time. A big part of that impact came from imports And we've been watching that closely and saw the trend of imports increase at the end of 2020 at the beginning of 2021. Really over the last 6 months or so, we've seen that trend start to decline as the cost and complexity of the imports has started to add up.

Speaker 5

As it relates to Specialty Foam, it's a similar story to the Innerspring business, but the timing is a little bit different. The constraints that we had with chemicals Came at a later date than it did in Innersprings and we had tougher comparisons at the end of 2020, really some outsized business that we had As demand was really pretty strong towards the end of 2020, we had chemicals and foam available. But as we move through the year, we had those constraints. And again, customers had to make some Decisions as it related to sourcing just because of our allocations and things that we had to deal with. So overall, as it relates to the share, we do think that we can regain it over time.

Speaker 5

It's going to take We feel good about our position being able to do that.

Speaker 4

Okay, that's helpful. Maybe one quick follow-up and I'll jump back in queue and just save my high level question. But When you unpack the guidance for 2022 and what's assumed in bedding, is does the guide assume that you gain back the and Innerspring that you're referencing or is that more you're just or does it more assume that there's just no further share bleed?

Speaker 5

At this point, no further share bleed. We overall for 2022 expect stabilizing demand. Things have been strong for the last couple of years and we still feel good about the All fundamentals of the business and the supply chain has improved. So we do feel as we move through the year that things will just generally get better at a pretty reasonable level, probably up Low single digits from 2021.

Speaker 2

Yes. And Hess, maybe just a couple of things to add there real quick. On the foam side too, remember that our bun production is down quite a bit, right, as we shifted Away from some of that business to try and service as much as we could on the bedding side. So that's impactful to us. And then on the inner spring side that most of the volume reduction right is on the open coil side on the lower end where we're pretty flat On the higher end products, the Comfort core products.

Speaker 2

So, that all flows into our expectations for next year as well, right?

Speaker 4

Very good. I'll jump back in queue and turn it over to somebody else. Thank you and best of luck here in 2022.

Speaker 2

Thank you, Bobby.

Operator

Thank you. The next question is from the line of Suzanne Maklari with Goldman Sachs. Please go ahead.

Speaker 6

Thank you. Good morning, everyone. And Mitch, let me add my congratulations to you and Karl as well, who I'm sure is listening, like Bobby said. My first question is kind of just continuing on the betting side of things. You've obviously talked to the fact that you expect To incrementally regain some of that share over time.

Speaker 6

Can you talk to some of the efforts that you're taking on and how we should be thinking about those coming together? Anything specific that you would highlight there as you do look to regain that?

Speaker 2

Yes. And Tyson, I'll let you take this one. But remember too, a lot of the impact here has been Volatility in the market overall, certainly there's some share contribution to us, but I don't think that's the biggest impact of it. But I think it's probably worth digging into a little bit of the dynamics with our some of our contracts versus non contract

Speaker 5

Yes, sure. Thanks, Mitch. And part of it is some of the things that have been talked about in some of the previous calls. I mean, we've invested heavily, especially in our Comfort Core production. Mitch mentioned that.

Speaker 5

We've rebuilt not only our capacity, but also our labor force and trained up to be more efficient to be able to produce at a good level And suit the needs of our customers here domestically in the U. S. That was a big part of it. And we continue to see demand for those products in the U. S.

Speaker 5

It's a bigger and bigger part of our business. And so we feel like we're well positioned For that part especially. So it's something that we'll take some time to work through. Like I mentioned, there's inventory in the system. Demand being slower is going to take some time to work through that part of it.

Speaker 5

And on top of it, we've also been dealing at a period of time when there's been a tremendous amount of inflation all the way through to retail. So that's something we're going To work through, but we feel like we're well positioned to do that. Yes.

Speaker 2

I mean, we were hit first, right, when we had the nonwoven shortages and supply Earnings and demand surged back. And so we're struggling to keep up. We added capacity and nobody expected the chemical shortages and labor That market overall. So we've made, I think, very thoughtful decisions about maintaining our capacity. And some of those decisions to secure supply elsewhere because frankly some of our customers had to as they were on allocation It took a while to come in place and that inventory is it kind of hit primarily in early 20 21, right.

Speaker 2

And so it's taken a little bit of time to work through that. But remember the cost and the difficulty of importing, especially right now, I think that helps our position as well.

Speaker 6

Okay. That's very helpful color. And then, my next question is, you obviously benefited this Past year from the metal margins and those moves in the underlying commodity market. As you look Forward to 2022, can you talk about how you're thinking of that dynamic for this year? Anything that is changing as we come into 'twenty two?

Speaker 6

And Obviously, there's been a lot of movement in the broader sort of steel industry, especially rolled products as it relates to imports and some of those things. Anything that you're seeing that's impacting you for the year ahead?

Speaker 2

Yes. Thanks, Susan. So I think we're starting the year with this Spread at a very high position. And we don't really see any sort of rapid decline. But Tyson, I'll let you talk to a little bit more.

Speaker 2

I think that the market dynamics there are probably pretty favorable

Speaker 5

Yes, that's right, Mitch. I mean, really we saw like a lot of things in inflation moving through as we got through 2021. And a big part of it is just the overall conditions from supply and demand. Demand was extremely high, both for just the use of products, but also to rebuild inventory and supply was constrained just with overall capacity and then also some outages that existed. And so really even as we got into the late part of the year and early part of this year, we've continued to see that holding.

Speaker 5

So It's really going to be difficult to predict to see how those things unwind. I mean, we do expect that at some point supply and demand will become more balanced. But at this point, like said we don't see any rapid changes in that and actually as we have it for the full year because of the timing of the increases, we actually have 2022 Slightly higher on average than 2021.

Speaker 2

Yes. So maybe just a little more color on that. So it's in an elevated position today. We think it maintains stays I mean, our guess is, stays strong at least through the first half of the year and just kind of estimating well maybe there's a little bit of a return down to normal in the second half of the year. Hard to know.

Speaker 2

Really, that's just an estimate that it declines to some degree over time, but still on average ahead of as you said, ahead of 'twenty one.

Speaker 6

Got you. Okay. And then can I just sneak one more in here, a higher level question? There's been a lot of talk on the And especially at lower price points, their ability to continue to spend as they just face a lot of inflation across Myriad of things, energy, food, all those types of things. When you look across your business and your consumer related Areas that are exposed to the consumer, the bedding, the furniture, those kinds of things.

Speaker 6

Can you talk in general to how you're thinking about overall levels of demand? Anything you're hearing from your various customers as we think about some of your more mid priced bedding products maybe or some of your higher priced products on the foam side and Even within Furniture, just any color, any sense of the consumers' health and how they're feeling today and the ability to continue to spend this year?

Speaker 2

Yes, that's a great question. And I think it's kind of early on, right? We're starting to see it emerging. But I think probably that's seen some impact On the betting side more than anywhere else, and it kind of makes sense if you think about particularly at lower wage levels where All suddenly faced with this really high inflation with some of the stimulus now, with that rating and lower household savings rates. I think That logically makes sense to me that that would impact particularly those mid to lower range products.

Speaker 2

And I think that we're starting to see some of that emerging on the bedding side. On the home furniture, the work your side, we still really haven't seen that yet today or in our other markets. So I think we'll continue to see what happens. Of course, there's likely to be tighter monetary policy going forward and we'll see what that does to inflation. So, we're not anticipating that there's a big pullback from the consumer by any means, but I think there'll be a little bit of instability Certainly, as we go through the Q1 and maybe the first part of the year.

Speaker 6

Yes. Okay. Thanks for the color, Mitch. Appreciate it and good luck.

Speaker 2

Thank you very

Operator

much. Thank you. The next question is from Keith Hughes with Truist, please go ahead.

Speaker 7

Thank you. In your guidance, you talk about flat to mid single digit Volume growth. Just want to talk more on how the specialized business, is that do you anticipate that to be the leader Of all the segments and volume growth and specifically in Specialists, can you talk about how you're viewing the year shaping up? I think I heard something 2nd half is improving. Is it going to be more second half weighted?

Speaker 2

Yes. Good morning, Keith. Thanks. That's a great question. Yes, we definitely see continued recovery in automotive aerospace and hydraulic cylinders, the businesses within specialized products.

Speaker 2

Let me talk a little bit about automotive first. So we think that there's really been constrained Consumer demand for a while the consumer demand is really strong. Inventory is very low down to something like 23 days in the U. S. We think.

Speaker 2

And so, it's just all a result of the semiconductor shortage, of course. And so, We saw the low point really in the Q3 of this year of production overall in the industry recovered a little bit in this Q4. Probably still pretty tough Q1 of next year, but we do see it improving as we go through the rest of this year. And so That will have a really positive impact on our business and the impact of that volume on margins in automotive is very, Very large. So we do expect that to help us over as we go into the back half of the year.

Speaker 2

And in hydraulic cylinders and aerospace, Steve, I'll let you comment on this, but I think hydraulic cylinders backlog is very strong the lift truck market and we expect to see the aerospace market improve a little bit. Steve, I'll let you add any other color there that you'd like.

Speaker 8

Yes. I would say the high demand for from our customers in 2022 leads us to believe We'll certainly continue to see the sales growth recovery. But as Mitch said, the OEMs are still struggling to increase their output A little bit and we've seen a couple of them push out into the later years, but the backlog is sitting And the U. S. Had a record 13 consecutive months of growth.

Speaker 8

So the demand is definitely there once they're able to produce. In Aerospace, basically all of the new build, if you will, aerospace segments are improving. Obviously, it will take a little bit longer. Assembly business is nearly recovered with market recovery plus our content wins. And we are now finally Seeing the tube supply recovery starts mainly in Europe at this point in time, so that's positive.

Speaker 8

But as we mentioned, that's I'm going to take through 2024 to fully play out, Bill.

Speaker 7

So it sounds like specialized is going to particularly with automotive is going to start out negative and they get better as year goes long, is that right? And again, back to my question, is this going to be the best growth division in units for 'twenty two from where you sit today?

Speaker 2

Yes, Keith, I think that that is probably right. I think we see the volume ticking down a little bit in the Q1, still fighting through Some inflation and transportation issues and then we'll see it sequentially recover is our expectation through the rest And I think you're right that probably the biggest growth opportunity is in specialized It was the most negatively impacted and it's starting to recover now finally.

Speaker 3

Okay. Thank you.

Operator

Thank you. Thank you. The next question is from the line of Peter Keith with Piper Sandler. Please go ahead.

Speaker 9

Hi, thanks. Good morning. Mitch, congratulations. And I'm not going to be as articulate as Bobby and Susan, But hope that the team is doing very well there. Maybe, Mitch, just with you moving into the CEO chair, big picture, could we expect any Adjustments to strategy or company positioning?

Speaker 2

Good morning, Peter, and thank I'm really grateful that over the last 3 years or so to have worked with Carlin the way we did, we have Planning for this transition and I think in the pretty rare opportunity that he gave me to start making the changes that I felt that we Needed to do to position the company for the future. And those are still underway, but I'm very grateful to have them underway rather than day 1 Now what do I want to do? So you've already seen it. It's really our continued investment in talent and infrastructure to be able To be prepared to drive growth and to manage it properly, to really make sure that we're maintaining a global viewpoint and that Really sort of market facing outlook and also really Honing in our focus on innovation around consumer and customer insights and driving that into our product development. So I think it's the things that the activities that you've already seen taking place over the last several years, the changes in we view some of our businesses that really expand our addressable markets and give us more growth opportunities.

Speaker 2

So no big shift. Our commitment to our capital allocation remains the same, right, focused on organic growth, on increasing the dividend, on Strategic acquisitions and with excess cash share repurchases. So I don't think we see any major shift, but Hopefully, continued and accelerated progress.

Speaker 9

Okay. That's a good summary. The one thing you didn't mention Would be the targeted total shareholder return. So you guys laid this out in late 2019 to be at 11% to 14%. So 2 part question on this.

Speaker 9

Is that still the targeted TSR? And then secondarily, just looking at the 2022 outlook, The EPS guidance calls for kind of low single digit EPS growth. It seems like there's some nuance margin pressure. Maybe Jeff could unpack that a little bit with regard to the labor transportation and then this inventory absorption.

Speaker 2

Yes. Let me give some high level comments, Jeff, then I'll turn it over to you. But yes, that's still our target. I mean, We thought that when we set that goal out there, we thought 11% to 14% would put us in the top of the S and P top third of the S and P 500 And the dynamics have changed a little bit, but we haven't moved away from that target. I mean, we've certainly had a lot of Volatility around demand, around inflation, around spike chain constraints, all those things over the last couple of years have had an impact.

Speaker 2

I think the critical elements for us to do that is to drive to continue to pass on raw material inflation. We've done that. We will have some wage inflation and continued investment in labor as we expect markets to continue to be a little bit dynamic. And But we've learned that we want to most importantly be able to service our customers and that labor is in short supply. And so we need to make some investments to hold on to that, we'll do it.

Speaker 2

Of course, transportation costs are up. And as we look at this year, in 20 2021, we were rebuilding short inventories after the issues that we went through In the betting market primarily, as well as the inflationary impact on that inventory. As we look Forward into this year, we'll be taking some of that down. So we will certainly have some impact from overhead recovery as we switch from building inventory to taking it down a little think those are probably the main drivers in my mind. But Jeff, let me turn it over to you.

Speaker 2

Anything that you would add or clean me up on?

Speaker 3

Thanks, Mitch. I think you covered it well. Good morning, Peter. I would say, as we look at the labor and transportation costs that we're assuming in our guidance, Peter, I mean, that's obviously going to be pretty volatile and tough to predict throughout the year, but we do expect there to be those to be sizable as we look at year over year from a labor and transportation perspective and as Mitch mentioned, we were very intentional in 2021 around knowing we needed to replenish our inventory levels. We will be therefore very intentional as we work to lower our inventory levels throughout the year, which will have some level of We choose recovery on the overhead absorption because we're going to obviously ship out of that existing inventory versus increasing our production at certain points For certain products.

Speaker 3

And so that will have an impact on what you're seeing in our guidance for 2022 as you mentioned earlier.

Speaker 9

Okay, that's helpful. And maybe if you don't mind if I just ask one other question on the volume outlook. Certainly, I think the improvement in automotive makes a lot of sense. I guess on the bedding side, I think The phrasing that you used was a stabilized betting environment. Yet we're going into the year, Were you also citing units are down negative high single digit and weakness at the low end?

Speaker 9

So maybe frame up the year for us with your betting outlook. Do you Back that units are going to be down in the first half and then there's improvement in the second half to get to kind of a normalized backdrop?

Speaker 2

Yes. Tycho, I'll let you take that one. But I mean, I think what we see during the Q1, we would expect the 1st part of the year to be a little bit softer. Go ahead. Yes, that's right, Mitch.

Speaker 5

I mean, we see some of the carryover already in the early part of the year just from the softness that existed in the 4th quarter. And we do right now just our expectations are that things stabilize that will improve through the year and the Q3 It's seasonally the high point and we feel like we're getting back a little bit more on track kind of with the normal cycle of business. And so we do expect half to be a little weaker than the second as things kind of rebuild, but then getting back to

Speaker 7

a little bit more normal.

Speaker 2

Yes. And I mean, the underlying big picture factors remain still healthy at this point, right?

Speaker 5

Yes, that's right. I mean with some of the housing trends are still good, younger home buyers, there's been a big focus on health and wellness and people Using mattresses and sleep and bedding is part of that too. So we do feel like some of the fundamental drivers are still in a good place, even despite some of the short term uncertainty around Immersion Spending.

Speaker 9

Okay, very good. Thanks so much.

Operator

Thank you, Peter. Thank you. The next question is from the line of Bobby Griffin with Raymond James. Please go ahead.

Speaker 4

Hey, Mitch. Maybe just to come at Peter's first question a little bit different, but on a high level. When you look at the business today and the mix of revenue with about 50 And embedding or so and then specialized in furniture making up the rest. When you think about 2, 3, 4 years for Leggett and Platt, do you see a Changing mix of revenue to further diversify the revenue base, or do you see something roughly about the same today?

Speaker 2

Bobby, that's a really interesting and great question. I think as we look at Those markets, particularly if I think about bedding and the sort of shift that we've had with ECS to really be able to Have a larger addressable market and then similarly with K Foam in Europe, we think that we do have significant Opportunities to grow that business whether it's in components or private label finished goods and that's a great thing for us. But we also have really strong growth opportunities in automotive and certainly that industry has been really disrupted Through the pandemic and of course the semiconductor issues, but in the long term, there's a lot of tailwind there. And so you can think that we'll be able to continue To have those as our primary growth drivers, but we also have some other businesses that have really come back and turn around Home Furniture, if you think about it after we went through the restructuring, came from a very difficult place to today performing very well and growing. Probably not the same kind of growth opportunities that we have embedded in automotive, but still very strong.

Speaker 2

And then some of our smaller newer businesses Around hydraulic cylinders and aerospace, we see hydraulic cylinders, the market growth coming back. We still have room To invest in those businesses and get them up to some scale, you've seen our textiles business growing as well. So I don't see any major shift in the mix, but I do think that we have opportunities across multiple businesses to continue to grow. And I think we'll see it in this year, Bobby. That diversification is helpful and important for us, right, as we see maybe More normalized betting growth for the market overall, but we should have the tailwinds from the specialized product businesses.

Speaker 2

So we look to maintain that.

Speaker 4

Okay. And then with leverage starting to come down as you and the team have worked on, would you look at adding another adjacent Business unit or is it more just tuck in as we've seen with K Foam and some of the other acquisitions?

Speaker 2

Yes, that's a great question. I think that for now, I think we would see more add on acquisitions that Build out our footprint or our capabilities, but in the long term, we're dedicated to growth. And so that means that We need to be thoughtful about our portfolio management and also about new opportunities that are good fits with us. I feel Lucky and grateful that I don't feel pressure that we have to go run out and do anything right away and I don't think that we will. We are recovering our leverage As you said, but over the long run, we'll continue to look at opportunities that are good fit for us Knowing that the world doesn't say the same and that ongoing portfolio management is critical for us.

Speaker 4

All right. That's very helpful. I appreciate Mitch you taking these high level ones first call as CEO. So thanks, Frank.

Speaker 2

Yes. Thank you, Bobby.

Operator

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

Speaker 2

Susan, are you there?

Speaker 1

I'm sorry. My phone was on mute. Thank you for joining us today. We appreciate your time. We will talk to you again on May 3 after we report our Q1 results.

Operator

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

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Earnings Conference Call
Leggett & Platt Q4 2021
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